The EU finds itself at a critical juncture. While its leaders state at the COP28 in Dubai how important the financial sector is in fighting the climate crisis, they risk missing a chance to harness the sector’s strength: the outcome of the 13 December trilogue on the EU Corporate Sustainability Due Diligence Directive (CSDDD) will decide the future of global sustainable finance, and the EU’s status as a leader in this debate.
Two key issues in the negotiations are whether to exclude the financial sector from due diligence requirements and which implementation requirements companies will face for transition plans. If due diligence for the financial sector is not included in the CSDDD, financial actors will simply be exempt from assessing and addressing their role in human rights violations and environmental degradation. The decision is in the hands of negotiators for the European Parliament and national finance ministers.
The international debate on CSDDD is heating up. Many policy makers, including President Emmanuel Macron, rightly called for the financial sector to join the global transition as part of the ongoing COP28 negotiations in Dubai. The decisions made during the CSDDD political trilogue on 13 December and COP28 will significantly affect the ability of the EU to finance its green transition, and ultimately its competitiveness.
A multistakeholder coalition is calling for the financial sector inclusion into the CSDDD.
Including the financial sector in the CSDDD brings with it real benefits. With an approach tailored to the specificities of the sector, this inclusion could lead to responsible investment practices, standardisation, and prevent fragmentation of the European single market.
Influential voices, including the European Central Bank (ECB), argue that the financial sector “should not be treated differently from other companies under the CSDDD”. Many financial players, including the entire Dutch financial sector, are publicly supporting the inclusion of the financial sector in the CSDDD. Leading actors in the real economy support this ask, with 131 EU companies calling for substantive due diligence rules to apply to all sectors, financial included, to properly manage climate change risks and impacts across the whole economy. Several financial actors are already conducting voluntary due diligence to reduce their environmental risks in line with existing OECD guidelines.
A comprehensive CSDDD, including the financial sector, is key to establishing a resilient investment market in the EU.
During COP28, President Emmanuel Macron highlighted that the EU’s private market and investment system is dysfunctional: “Today, when we look at our investments, we are not taking into consideration that we are continuing to finance assets which will depreciate in a few years. We do not include climate risks at all”.
This position, together with the above-mentioned examples, suggests that a comprehensive CSDDD covering the financial sector, is a necessary reform for a more resilient investment market in the EU.
Unfortunately, despite support for ambitious financial sector reforms from policy-makers, the private sector, and the public, and a track record of companies already utilising the OECD guidelines, political opposition remains. According to the press and experts following the negotiations, lobbying efforts against the inclusion of the financial sector in the CSDDD have in fact been prominently led by France and its financial sector. This stands in stark contrast with the public address delivered by President Macron at COP28.
The role of the financial sector, its transition pathways, as well as related due diligence activities are among the most crucial topics discussed at COP28. One example is the launch of the Taskforce on Net Zero Policies under the UN Secretary General’s High-Level Expert Group (HLEG) on Net-Zero Emissions Commitments of Non-State Entities. The Taskforce comprised of leading international agencies will aim to further improve the credibility and accountability of transition plans. Meanwhile, in the UK’s Transition Plan Taskforce (TPT) technical work is ongoing for developing dedicated sectoral guidance for banks, asset managers and owners. The European Commission itself presented its international collaboration efforts and progress on transition finance through the International Platform on Sustainable Finance (IPSF).
Finalising the CSDDD and applying it to all sectors, including the financial one, will be a crucial step in following suit on EU’s commitments within Europe and its alignment and cooperation internationally.
The CSDDD and upcoming EU regulatory credibility
If well designed, the CSDDD would positively impact European companies’ business models and risk management throughout the value chain. On the other hand, a poorly designed CSDDD – where real economy is in and the financial sector is out – could have adverse effects on EU regulatory credibility and overall competitiveness. This is the last call for the EU to embark on the next political phase with ambition and credibility.
