Banks and investment funds are currently excluded from EU directive intended to eliminate human rights and environmental abuse, according to a current draft of the proposal.
The corporate sustainability due diligence directive was first proposed in February of this year. The regulation aims to enhance progress towards the European Green Deal and the United Nations Sustainable Development Goals (SDG), as well as harmonising legislation across the whole of the EU.
If passed into law, the directive would apply to companies with more than 500 employees and €150m (£130m) in net global turnover and require them to identify and mitigate abuses such as forced labour and pollution in their value chain. However, according to the current draft, the decision on whether or not financial service providers should be included will be left to each member state.
Speaking with GTR, James Marlow, a member of law firm Linklaters’ global environmental, social, and governance (ESG) practice, said “While it represents a step forward in the EU legislative process, they still have to go through the trilogues with the European Parliament. Nothing in the draft is therefore final, and there is room for movement, especially in relation to the more controversial elements of the proposal”
Guillaume Croisant, a Brussels-based member of Linklaters, said the directive is intended to implement proportionate obligations. “There is a trade-off and a balance to be made between imposing far-reaching obligations on businesses, to fight effectively the environmental and human rights adverse impacts of their value chain, while ensuring that these obligations remain achievable and proportionate to the businesses’ size and activities,” he said.
Also excluded from the proposal is the obligation of financial service providers to suspend or terminate a business relationship “where none of the appropriate measures taken to address the adverse impact have been successful”. Instead, firms will have to monitor potential abuses “while pursuing efforts to address the adverse impact”.
As the law is still in the proposal phase, it will likely be amended through the EU legislative process and will need to be approved by the EU Parliament, which could potentially alter its scope. This is expected to take place sometime during 2023.
The directive adds another element to the mix of regulations around business reporting, alongside the existing Non-Financial Reporting Directive (NFRD) and the upcoming Corporate Sustainability Reporting Directive (CSRD) regulations, which has left financial advisors fearful of claims of greenwashing.
