(Bloomberg) — Financial firms in the European Union look set to be hit by a new ESG requirement that they lobbied hard to avoid.
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The European Parliament and the European Council are moving toward an agreement that banks, asset managers and insurers should be viewed in the same way as other companies when it comes to ensuring that their value chains aren’t subject to environmental or human rights violations, according to a Jan. 24 joint document seen by Bloomberg.
Lawmakers and member states “emphasize that financial undertakings — as companies in other economic sectors — should contribute to protecting human rights and the environment, which are core values of the union,” the document said.
Though talks are still underway, the Jan. 24 wording represents the strongest signal yet that a stop-gap deal reached in December to exclude the finance sector from the rule, known as the Corporate Sustainability Due Diligence Directive (CSDDD), won’t be made permanent. Last month’s provisional agreement was struck to bring weeks of negotiations on CSDDD to an end. However, that temporary accord made clear that the finance sector may still be included in the future.
In the Jan. 24 joint statement, the council and parliament set a June 1, 2025, deadline for the European Commission to follow up with a report that will form the basis of a new legislative proposal.
Under CSDDD, large companies face civil liability for environmental and human rights violations in their value chains, leaving them on the hook for the acts of their clients and vendors.
The provisional agreement, which still needs final approval from lawmakers and member states, was reached in time to avoid getting held up by EU elections. Those are set to trigger a shift to the right that may put climate goals at risk, according to a recent forecast from the European Council on Foreign Relations.
The current wording of CSDDD doesn’t set specific requirements for addressing the “many potential and actual human rights or environmental adverse impacts that occur in the downstream part of their activities, which encompasses both clients and investee companies,” according to the joint statement.
As a result, rules are needed to lay down “appropriate sustainability due diligence requirements for regulated financial undertakings as regards the activities of their clients, investees and business partners, as well as, as appropriate, liability rules,” the European Council and Parliament said.
The new legislation adds to growing ESG pressures, with a June report identifying almost 1,600 climate lawsuits alone since 2015. And for the first time ever, corporate lawyers now say ESG is the top litigation risk, according to a January survey by Baker McKenzie.
–With assistance from John Ainger.
(Updates to add background on elections, legal risks in final paragraphs.)
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