Missed Chances: Implications of Financial Exclusion from EU Due Diligence Directive

Financial institutions in the European Union are poised to be exempt from the Corporate Sustainability Due Diligence Directive (CSDDD), leading to apprehension regarding their capacity to address human rights risks. Despite evidence from the World Benchmarking Alliance and Danish Institute for Human Rights indicating subpar sector performance in mitigating these risks, the decision to exclude financial institutions has raised concerns.

The CSDDD is designed to enhance environmental and human rights protections for large companies within the EU and globally. It is applicable to companies with over 500 employees and a net worldwide turnover of at least EUR 150 million, aiming to address adverse impacts across company operations and supply chains. Notwithstanding its commendable goals, the financial sector will initially be exempted, with a review clause for potential future inclusion. The regulations are expected to come into effect in 2027.

Elin Wrzoncki of the Danish Institute for Human Rights expressed disappointment at the exclusion of the financial sector, while affirming the accomplishment of implementing human rights due diligence on large companies. Richard Gardiner, of the World Benchmarking Alliance, also voiced disappointment, remarking that the exclusion from the directive was a missed opportunity and could have been a game-changer.

This exclusion implies that financial institutions will initially only be obligated to check for human rights and environmental harms within their own operations. This has prompted criticism from Uku Lilleväli of the WWF European Policy Office, who labeled the agreement as an affront to those impacted by the severe harms caused by EU financiers globally.

The benchmarks from the World Benchmarking Alliance and Danish Institute for Human Rights revealed that only a small percentage of financial institutions are conducting adequate human rights due diligence. This underscores a significant disparity between awareness and understanding of ESG risks within the financial sector and their actual documented policies and practices related to human rights.

Looking ahead, the agreement needs to be endorsed and formally adopted by EU institutions, with a vote on the text scheduled for 2024. Additionally, the CSDDD will also apply to non-EU companies with substantial net turnover within the EU, further expanding the scope of the directive.

In conclusion, the exclusion of financial institutions from the CSDDD has sparked concern and criticism. The evidence presented by authoritative sources underscores the inadequate performance of the financial sector in addressing human rights risks. The future integration of core social indicators in benchmark reports aims to provide a clearer understanding of the current state of affairs. As the agreement moves towards formal adoption, the debate surrounding the exclusion of financial institutions and its implications is expected to persist.