Banks, Insurers May Escape EU’s Toughest ESG Regulation So Far

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Banks, asset managers and other financial firms have won a reprieve from Europe’s most consequential ESG regulation to date, as a wave of intense industry lobbying pays off.

Spain, which holds the European Union’s rotating presidency, has proposed that financial firms be excluded from the initial roll-out of the Corporate Sustainability Due Diligence Directive, according to a Nov. 9 draft proposal seen by Bloomberg. The proposal still requires the approval of member states and lawmakers.

CSDDD, which the EU plans to use as a tool to force all industries to pay more attention to the value chains connected to their operations, has the potential to expose firms to unprecedented legal risk. If a single link in a firm’s value chain is tied to human rights abuses, environmental destruction or similar acts, Brussels wants to hold the EU-based business accountable.

The finance industry has lobbied hard against being included in the scope of the directive, arguing that such a wide-reaching rule is reasonable to consider for manufacturers, but not for banks, asset managers and insurers. The negative fallout would be “huge,” Philippe Angelis, senior policy adviser for corporate reporting and sustainable finance at Insurance Europe, said earlier this year.

The international scope of the directive has also raised concerns outside the EU. In June, Treasury Secretary Janet Yellen warned of the potential “negative, unintended consequences” facing US firms because of CSDDD.

Treasury Secretary Janet Yellen Testifies before House Financial Services Committee in June 2023. Photo credit: Al Drago/Bloomberg

Jose Manuel Campa, chairman of the European Banking Authority, says it’s logical to include banks in the directive because giving individual sectors too much leeway ultimately allows them to say they don’t care what happens in their value chain.

“I like the philosophy of the directive, which is what we apply in our prudential requirement,” Campa said.

The European Council and Parliament will hold negotiations later this month on moving forward with CSDDD. Until now, whether to include the finance industry had remained a key sticking point in reaching an agreement before the end of the year. Spain’s proposal is intended to allow the broader talks to continue, with a view to returning to the issue of whether to include banks at a later date, according to the draft.

CSDDD is the key plank within the EU’s package of legislation designed to make its economy sustainable by holding businesses accountable for their social and environmental impact. Under the directive, companies would face civil liability and potentially large administrative fines if they fail to comply.

In June, the EU Parliament agreed to include the finance industry in CSDDD. But already then, the lawmaker who spearheaded the initiative, Lara Wolters, said she was bracing for pushback during talks with the EU Council.

Within the EU Council, however, member states can’t agree on how to proceed, according to the draft proposal seen by Bloomberg.

There was a “complete split” in early discussions over including the financial industry, with some countries being “flexible to an ambitious approach” while others pointed to the lack of an impact analysis and “practical difficulties,” according to the document.

Excluding banks from CSDDD would undermine its clout, nonprofits have warned.

Spain’s proposal is “a very big mistake,” said Isabella Ritter, EU policy officer at London-based ShareAction. It will also make reaching a compromise “quite challenging” because “the European parliament firmly stands behind the financial sector inclusion.”

Top photograph: Visitors view the city skyline from the outdoor viewing area at the Circulo de Bellas Artes de Madrid (CBA) building in Madrid, Spain, on Tuesday, Dec. 27, 2016. Photo credit: Angel Navarrete/Bloomberg