MEPs have today given European Parliament a mandate to fight for investors to be included in the upcoming Corporate Sustainability Due Diligence Directive (CSDDD).
Politicians endorsed proposals made by the group responsible for the file at plenary, giving the green light for Parliament to push for asset managers and institutional investors to have special provisions within the Directive.
Those provisions would acknowledge that, while companies should identify environmental and human rights breaches through their supply chains, financial institutions should only have to do so for their ‘tier one’ companies – those with whom they have a direct relationship through their portfolios or lending books.
All entities must identify the areas that pose the highest sustainability risks and then use their “leverage” to address those breaches. For most entities (including insurers and banks), that leverage is through their contractual agreements; but because most large investors don’t have the same contract-based relationships with portfolio companies, they would have to demonstrate their influence through voting and engagement instead.
“The way this text is constructed, it is not intended to hold investors liable for causing harm in their portfolios,” explained Richard Gardiner, head of EU policy for NGO the World Benchmarking Alliance. “But they could face penalties for not engaging as part of the due diligence duties outlined in this legislation.
“So if, either through an NGO expose or regulatory investigation, a big asset manager was found to be consistently including companies that are deforesting, for example, in its portfolio, and not conducting effective stewardship to drive improvements, they could be found in breach of this law and be sanctioned or fined by the supervisor.”
There was a push from MEPs on the right of Parliament to water down the proposals, or even reject the entire text.
Elise Attal, head of EU policy at the Principles for Responsible Investment, welcomed the outcome today, saying: “The text agreed is an important step forward in creating a practical and effective directive which provides needed clarity in the EU’s sustainable finance architecture.”
She added that “a greater acknowledgment of the investor approach to due diligence is needed” as the text goes through trialogue, which will see Parliament take on the EU Council, who wants to exempt the financial sector from the Directive, and the Commission, which did not make special provisions for investors in its original text.
Trialogues could now begin as early as next week, with plans to agree the final rules before next year’s Parliamentary elections.
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