With the ongoing trialogue on the Corporate Sustainability Due Diligence Directive (CSDDD), now in its decisive phase, there are growing fears that with intensive pressure from lobbyists, the EU will adopt the unjustified carv-eouts for financial institutions in the CSDDD’s scope on human rights due diligence.
The EU’s European Commission passed the CSDDD in 2022. Through thorough human rights due diligence, the CSDDD aims to guarantee that the operations of EU-based businesses that fulfill a specific threshold respect human rights. The passing of the CSDDD would represent a step forward from voluntary standards that have been shown to be insufficient in addressing violations of human rights.
These requirements equally applied to financial institutions, and this positive step was welcomed by many, including investors and investor networks. However, to the shock of many, the EU Commission removed financial institutions from the text.
Later, the EU parliament reintroduced them, but with unjustified presumptions and carve-outs despite warnings from the United Nations Working Group on Business and Human Rights. The reintroduction was a good gesture, but the carve-outs are detrimental to human rights, especially in the global south.
The assumption that financial endeavors are inherently linked to negative effects in their value chain is especially concerning because, under international standards and best practices, financial undertakings can, and often do, directly cause, contribute to, and result in negative effects on human rights, including harassment of human rights defenders, land grabs, environmental degradation, and employee rights violations.
However, with the unjustified carve-outs in place, the financial institutions won’t be liable, first, to harm caused by a third party in their business relations, and two, where the financial institutions neither cause nor contribute but their operations, products or services are directly linked through their business relationships to the harm.
One needs to take a statistical glimpse, from the African continent’s outlook, to understand why including financial institutions in the CSDDD scope is overdue and important for host communities.
The EU is Africa’s biggest trading partner. Over 65 percent of Africa’s exports to the EU were primary goods (raw materials, food and drinks, and energy) whose production, by default, required huge land acquisitions and labour placing host communities at risk of human rights violations. This is compounded by the demand for minerals, like lithium critical in a transition from fossil fuels.
According to the 2022 World Investment Report, the largest holders of foreign assets in Africa remained European, with France ($60 billion) taking the lion share and only coming second to the United Kingdom ($65 billion), a non-EU member.
In 2021, international project finance deals targeting Africa rose 26 percent in number and increased to $121 billion in value, dwarfing the 2020 figure of $36 billion. The rise was supported by multilateral finance and capital market investors targeting energy ($56 billion) and renewables ($26 billion).
Relatedly, the EU accounted for 50 percent of the Foreign Direct Investment (FDI). All these monies fuel more demand for factors of production, especially labour and land, whose acquisition processes, in some cases, are tainted with human rights violations.
This statistical snippet should give us a picture of the role that banks, equity funds, pension funds, insurers, investors, and asset managers play in financing practices that might have adverse impacts on human rights.
Therefore, EU financial actors have unparalleled power to sway businesses using their products and services to adhere to human rights and business standards, and granting arbitrary exemptions would undermine the fundamental goal of the CSSD.
In closing, financial actors like other companies should be subject to the same key due diligence obligations of identifying, preventing, mitigating, ending, and remedying human rights violations for sustainable development.
Mr Simon Peter Esomu is a business and human rights lawyer.
