Ministers of the 27 EU member states have backed a proposal that makes it possible for countries to exempt banks and investment funds from planned EU rules that will require companies to report their impact on human rights and the environment.
The EU ministers, meeting under the Czech presidency of the European Council, on Thursday endorsed their negotiation position on the Corporate Sustainability Due Diligence Directive, also known as CSDDD. This position opens the door to discussions on the proposal with the European parliament, which is expected to vote on the directive in May 2023.
“For the EU to reach its climate and sustainability goals and to ensure the protection of human rights, it is important that companies identify and prevent, bring to an end or mitigate the impact of their activities on human rights and the environment.” said Jozef Síkela, Czech Minister for Industry and Trade. “Responsible behaviour for companies producing clothes, mobile phones and other everyday use objects is also something European customers start caring about more and more.”
Avoiding duplication
Several member states, including Luxembourg, Germany and Ireland, had called for an exemption for the financial sector because they wanted to prevent a situation where financial firms would be subject to legal uncertainties and duplications of requirements. Investment funds for example are already required to report on their ESG and/or sustainability exposures under the EU’s sustainable finance framework. The CSDDD will also make more data available for funds that look to invest in sustainable companies.
“Together with other member states, Luxembourg is committed to ensuring that the specificities of the financial sector are adequately taken into account,” a spokesperson for Luxembourg’s finance ministry told Investment Officer last week.
“Legal uncertainties and duplications with already existing obligations in the financial sector need to be avoided,” the spokesperson said. “A number of member states, including Luxembourg, have therefore spoken out in favour of the adaptation of the scope of the Directive – similar to the rules for the Corporate Sustainability Reporting Directive (CSRD), which was voted on earlier this year.”
Financial services optional
The ministers now have agreed that the CSDDD approach to financial undertakings would make the applicability to financial services optional, so that member states can decide for themselves whether financial services should be within scope of their national law.
The directive was first proposed by the European Commission in February. The proposal would also oblige boards of EU based firms to ensure that their business model and strategy align with targets for limiting global warming and for human rights.
The CSDDD would require large companies to undertake due diligence on their own activities and that of their suppliers, and to identify, mitigate, or avoid any actual or potential adverse impacts of their business operations. The directive will also set penalties in relation to the breach of the CSDDD obligations.
Scope has been narrowed
The general approach that now has been adopted by the EU ministers includes a phased-in approach, while raising their threshold for the first group of companies required to report. Ministers back an initial threshold of 300 million euro in annual turnover, against an original proposal of 150 million.
Ministers also agreed to replace the term “value chain” with “chain of activities”. This concept reduces the obligations for companies because it it focuses purely on a company’s suppliers, leaving out entirely the use of its products or provision of its services.