The financial markets association calls for “focused” scope to ensure the directive’s objectives are met, recommends transition plan “consistency”.
Investors and lenders want greater certainty over the risks posed to non-finance services by the Corporate Sustainability Due Diligence Directive (CSDDD) ahead of EU trialogue negotiations.
“There are still concerns about how the requirements of the legislation will work in practice for financial services,” said Oliver Moullin, Managing Director, Sustainable Finance and General Counsel at the Association for Financial Markets in Europe (AFME).
“The broad scope being considered and discussed around the value chain raises questions about how it applies to financial services products,” he told ESG Investor, calling for a workable approach to financial services within the directive.
All companies within the scope of CSDDD will have to implement due diligence measures to identify, end, prevent, mitigate and account for negative human rights and environmental impacts of their actions, including in their value chains inside and outside Europe.
According to AFME, financial institutions face “serious challenges” if the obligations are applied beyond their upstream supply chain to their relationships with corporate clients or trading counterparties in their downstream value chain.
“There are practical challenges with applying due diligence to different types of financial services, for example, with regards to processing payments within a short period of time,” said Moullin.
AFME has proposed that any inclusion of downstream business relationships should be focused on the provision of financing where the inclusion of the services within the legislation is expected to have the greatest impact on safeguarding human rights and the environment.
Further, for financial institutions, due diligence obligations on their downstream value chain should not cover a scope going beyond the activities of large corporate clients receiving loan or credit services. It should be clear in any event, said AFME, that CSDDD does not extend to other services including (but not limited to) trading and investment activities, derivatives, custody, clearing or payment services.
“We believe it is crucial to reach a workable solution in the trialogues to avoid risking the competitiveness of EU companies internationally,” said Moullin. “We believe that a thoughtful and practical approach is necessary, and we don’t think this has been adequately considered since the legislation is applied to all sectors.”
AFME represents the interests of financial market participants in Europe. Its mission is to promote fair, deep, and integrated European wholesale capital markets and to provide a unified voice for the European financial services industry.
Coherence is key
Under CSDDD, companies with a turnover of more than €150 million (US$165 million) will have to develop a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement. Further, companies that identify climate change as “a principal risk for, or a principal impact of” their operations would have to include emissions reduction objectives in their business plans.
“The requirement for companies to have a climate transition plan is supported by AFME as it enhances accountability. However, it is essential that transition planning requirements are clear and consistent across EU regulation,” said Moullin.
There are several proposed requirements relating to transition plans currently being negotiated or finalised within the EU, including the Corporate Sustainability Reporting Directive (CSRD), underpinned by the European Sustainability Reporting Standards (ESRS), and the Capital Requirements Directive (CRD).
“We emphasise the need for consistency within the EU to avoid the burden of having separate transition plan requirements under different regulations, such as CSDDD, which would be different from the transition plan included in sustainability reporting under the CSRD,” said Moullin, noting that banks have additional transition plan requirements under CRD.
“It is crucial to align and make these requirements consistent to facilitate an internationally aligned approach, especially for companies that operate globally,” he said.
“The ISSB [International Sustainability Standards Board] standards also include disclosures on transition plans, so it is important to promote interoperability – this alignment is essential for investors who compare plans across jurisdictions.”
The Glasgow Financial Alliance for Net Zero (GFANZ) has also published guidance for financial institutions on transition plans to enable the industry to convert net zero ambitions into actions.
Conflicting or confusing requirements risk creating market confusion or unnecessary compliance costs that may hamper the speed and effectiveness of transition plan adoption, according to AFME.
The CSDDD is expected to enter trialogue negotiations later in this year with the aim of adopting the directive by 2024. Its rules will become applicable in 2025 at the earliest.