The Financial Sector’s Impact on the Environment: A Missed Opportunity in the Due Diligence Directive Deal

On 14th December 2023, a significant political agreement was reached by the European Parliament, Commission, and Council on the Corporate Sustainability Due Diligence Directive (CSDDD). Despite this achievement, there are growing concerns about the exclusion of the financial sector as a key contributor to environmental damage.

The primary objective of the agreement is to assist companies in transitioning to a net-zero economy. However, it has been criticized for inadequately addressing corporate environmental abuses. Uku Lilleväli, the Sustainable Finance Policy Officer at WWF European Policy Office, expressed disappointment with the agreement, describing it as a missed opportunity. He stated, “Today marks a disappointing turn of events. Despite the historic opportunity, the negotiators have agreed to afford financiers the freedom to violate human rights and further deteriorate the already fragile state of ecosystems.”

Lilleväli emphasized that the complete exemption of financial activities from due diligence obligations overlooks the vital role of the finance sector in today’s economy. He also highlighted the agreement’s failure to provide the financial sector with the opportunity to make well-informed, resilient financial decisions.

Although the agreement includes provisions for companies and financial institutions to adopt and implement climate transition plans with mandatory emission reduction targets, it lacks liability and public enforcement to ensure effective implementation. This leaves room for greenwashing and suboptimal performance.

In addition, despite the progress made on climate targets and plans, the Directive neglects to adequately address corporate environmental abuses. The scope of environmental impacts is narrowly defined, focusing on violations of a select few international treaties and excluding fundamental agreements such as the Paris climate agreement. This limitation raises concerns about the effectiveness of the due diligence law in addressing various adverse environmental impacts.

Furthermore, Lilleväli highlighted the limitations in environmental scope, making it challenging to address pollution from chemicals used in industries such as fashion, textiles, mining, and agriculture. The narrow scope also creates an unequal playing field among different sectors and introduces inconsistencies with sustainability reporting laws, ultimately increasing the burden for companies.

As the provisional agreement moves towards finalization at the technical level and formal endorsement by the European Parliament and the Council, WWF has called for a thorough review of the loopholes. The organization urges the negotiators to address these issues to ensure that the directive benefits people, businesses, and the planet.

In conclusion, the Directive’s deal on Corporate Sustainability Due Diligence falls short in addressing the significant impact of the financial sector on the environment. While there are measures to promote climate transition, the oversight of financial activities in due diligence obligations and the narrow definition of environmental impacts raise concerns about the overall effectiveness of the agreement. As the agreement progresses towards formal endorsement, it is crucial for policymakers to consider these concerns and make necessary adjustments to better protect the environment and communities.