Large corporations and listed companies in Europe will have to start examining - probably from 2026 onwards - how they can prevent or compensate for any harm caused by their business activities to people and the environment. Whether asset managers and other large financial parties will also be required to do so is still uncertain.
European authorities are speeding up negotiations on the final text of the so-called Corporate Sustainability Due Diligence Directive (CSDDD, also known as the CS3D). Before the end of this year, the European Commission, the European Parliament and the European Council want to reach an agreement on it. Member states then have two years to transpose the directive into national law.
One of the biggest points of contention yet to be decided is whether banks, insurers, pension funds and investment firms should also be covered by the directive. Some countries are strongly in favour of this, including the Netherlands, Denmark and Portugal, but reportedly the big member states - at least France, Germany and Italy - are less enthusiastic about it. France is even said to be against any participation by the financial sector.
Liability
However, the dividing lines do not only run geographically. There are also differences of opinion within the financial sector, including within the Netherlands. Banks and pension funds would like the obligations under the CSDDD to also apply to the financial sector, but asset managers are not in favour.
For Dutch industry association Dufas, the new regulations are therefore a complex file, said Randy Pattiselanno, manager of regulatory affairs. “The directive requires strict due diligence for investments and we are certainly not opposed to that. Only, we think such due diligence obligations for asset managers should be included in the sectoral legislation already in place, and not in the CSDDD.”
In Luxembourg, industry group Alfi also wants the specificities of the asset management industry to be recognized. “While it is clear that a common set of rules should apply to the commercial sector, it should be kept in mind that for financial institutions and in particular asset managers the supply - and investor chain are not on equal terms,” Alfi has told EU policymakers.
The costs would otherwise be (too) high, especially in relation to small-sized investments, the interest groups fear. A second objection concerns the liabilities included in the CSDDD. “These may discourage asset managers from investing in, for example, emerging markets where it is uncertain whether one can meet the said liabilities. And then you throw the baby out with the bathwater. After all, people then just forgo these less ‘safe’ investments, while you want to invest in these countries as well,“ said Pattiselanno.
Pension funds versus asset managers
For parties that are members of both Dufas and the Pension Federation - because they are pension administrators as well as asset managers - the situation may be different. The Pension Federation supports the proposal (from the European Parliament in particular) to include asset managers and other institutional investors in the CSDDD. Incidentally, partly because they are already further along in integrating ESG risks into the investment process than many European industry peers.
Pattiselanno: “Hence also that we are looking at a compromise, nowadays called a landing zone in European jargon. If it proves insufficient to regulate the due diligence obligations for asset managers only in sectoral legislation, we certainly have our eye on the European Parliament’s proposal, if it is then adjusted in order to keep things workable for asset managers. For instance, by introducing a minimum threshold. Investments are then only in scope of regulation from a certain percentage onwards.”
‘A global world’
European negotiations are now in full swing and will continue in November with a trilogue, a meeting of representatives of the European Commission, Council and Parliament. At present, a majority of EU countries believe that each country should be allowed to decide for itself whether to impose the obligations on its own financial companies, said Jan Klink, MP for the Dutch liberal party VVD. Together with Stieneke van der Graaf of the Christian Union party, he has been following the development of positions in the various European forums for the past 18 months on behalf of the Parliamentary Committee on Foreign Trade & Development Cooperation. “The argument is generally that the financial world is a global world and that European companies are not served by stricter rules that only apply to them. Particularly in the case of blended financing by banks, this can be an issue.”
Divisive issue in coalition
Instead, the Dutch position is that as much harmonisation as possible is needed. “If everything is left to national governments, the playing field is even more fragmented, it becomes a patchwork quilt,” Klink said. A possible separate Dutch law to make corporate responsibility mandatory was a divisive issue in the coalition in recent years. This Dutch international corporate social responsibility law was in preparation, but the collapse of the Dutch cabinet put an end to that. VVD and CDA did not mourn this, Klink said. “We wanted to wait and see what would be realised at the European level first, so that we could connect to it.”
Speed of the process
That agreement on the CS3D will still be reached at that European level this year is considered likely by many of the parties involved. Even if, on some topics, opinions thus diverge widely. Klink: “If the European Council had wanted to frustrate this process, it would have already happened last year. But a position was adopted then by qualified majority, which means that there were also countries against that position. Including the Netherlands, therefore, because that position is that the financial sector should remain outside regulation. But apart from that, it was then clear that people wanted to keep the momentum in this process.”
Last summer, the European Parliament also quickly reached agreement. It did include the financial sector in its position and also added a few other, more far-reaching points.
And the Spanish EU presidency, too, wants to speed things up, that much is clear. That presidency ends at the end of December and people are keen to show that much has been achieved by then. Reaching agreement on a topic as far-reaching as corporate sustainability will favourably influence the assessment of the Spanish presidency, one expects.
Dynamics
How the penny will finally drop on whether or not the financial sector should be included in the CS3D, however, is by no means a foregone conclusion. Pattiselanno of Dufas: “Last week we still thought that the big countries would really hold it back, but in the meantime we see in the exchange of views yet another compromise proposal from one of the big countries, around a possible review clause. This means that the financial sector might be included in the CS3D only after conducting a comprehensive impact assessment. So it could also go the other way. In any case, the momentum is high.”
According to Responsible Investor, the possibility of complete exclusion is indeed real. That option would best suit the pursuit of a global level playing field. On the other hand, the Council’s negotiating power might not be strong enough - due to internal divisions - to push that option through, and the European Parliament’s vote could be decisive.