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EU corporate sustainability legislation risks being toothless if banks not included


By David Whitehouse

Planned European Union legislation to improve corporate accountability for human rights and sustainability won’t achieve the desired effect if France succeeds in excluding the financial services sector.

The European Commission published its proposal for a directive on Corporate Sustainability Due Diligence (CSDDD) in February 2022. The directive will create a corporate due diligence duty to prevent negative human rights and environmental impacts in a company’s own operations, those of its subsidiaries and their value chains. Large companies also need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5C in line with the Paris Agreement. 

The directive will also apply to non-EU companies that are active in the EU, above a revenue threshold. The proposal is due to be examined by the European Parliament’s legal affairs committee in March, with the parliament expected to vote on it in May. A final agreement by all the EU institutions is expected in the second half of this year, with EU member states having two years to transpose the CSDDD into national law. Company directors’ duties will be enforced through existing member states laws on director obligations.

France has been trying to block the inclusion of banks in the legislation. It’s “of the utmost importance” that the banks are included, says Giulia Barbos, a human rights policy researcher at the BankTrack NGO in The Hague. “Banks are the backbone of the economy. Leaving out the financial sector means the law would be missing the point.

“Banks are not implementing their human rights responsibilities,” despite their commitments, Barbos says. “Voluntary standards are not enough to move the needle.”

There have been improvements in recent years, as 42 out of 50 banks surveyed at least now have a human rights policy in place, with consultation and due diligence having improved, Barbos says. But there is still a lack of remedies for communities on the ground which are affected by bank-financed projects. “We see a real need for mandatory legislation concerning banks and human rights.”

Many financial institutions are already doing what the law would require them to, Barbos says. But they have to compete with others who are not meeting the same standards. There is a need for a “level playing field” which would “make good business sense.”

Mark Dummett, head of Business and Human Rights at Amnesty International, agrees that legislation needs a cutting edge. “Companies don’t just have a responsibility to build schools and be nice to people,” given that their business models can cause major harms, he says. Dummett is worried that France is pushing for financial sector exclusions from the CSDDD. “Financial institutions need to assess the impact of their investments.”

ESG Confidence Needed

Corporate acceptance of the environmental, social and governance (ESG) agenda over the last 10 years is “a very important and valuable trend” generated by consumer pressure, says Phil Bloomer, executive director at the Business and Human Rights Resource Centre in London. But this progress is “currently being undermined” by a “lack of proper industry or international regulatory standards,” he says.

What currently exists is “essentially a cacophony of different ESG standards. Investors and consumers can get quickly confused. There has to be some kind of consistency.” The lack of agreed standards lends itself to greenwashing, Bloomer argues.

Bloomer points to the fine of $4 million imposed by the US Securities and Exchange Commission (SEC) on Goldman Sachs in November for failures to follow ESG policies and procedures between April 2017 and June 2018. Likewise, Asoka Woehrmann, the CEO of Deutsche Bank’s asset management branch DWS, stepped down in June after the company was raided by prosecutors over allegations of misleading investors about the credentials of its “green” investments. Such failures, Bloomer says, “lead to a loss of confidence in ESG portfolios. That needs to be excluded. People need to have confidence in ESG.”

Many in the corporate world are demanding tougher requirements. In February 2022, over 100 companies, investors and business associations, including Aviva, Danone, Ericsson and IKEA called on the EU to adopt a legislation on mandatory human rights and environmental due diligence, including civil liability provisions. In December, Norway’s sovereign wealth fund said it would exclude two Thai companies and one Israeli firm from its portfolio due to the risk of human rights’ violations.

The EU directive has potential to banish greenwashing, Bloomer says. “The EU is taking the lead” in terms of corporate responsibility agenda, he argues. The CSDDD will “fill a significant gap in the S of ESG,” and will have a “global effect,” Bloomer says. The final directive needs to have “financial penalties and civil liability,” which will “change the calculus of risk” in boardrooms, Bloomer says. The directive, he argues, needs to do enough to produce legal advice to boards to get the risk out of supply chains. Otherwise, it will be just “a beautiful set of words.”

Climate, Deforestation

Human rights is sometimes perceived as an abstract, specialist “activist” discourse for others to worry about. In the UK and the US, there is strong resistance to the idea of imposing “burdens” on business. But the term “human rights violations” is in fact a piece of shorthand and a euphemism for environmental destruction and illegal or extra-judicial violence.

Whether or not Western companies are willing to do business with those responsible in the long term defines how their corporate brands are perceived. Where human rights issues involve climate and sustainability, the viability of human society is ultimately at stake.

Only 2% of a sample of European companies are reporting on all elements that make up a credible climate transition plan. That’s according to CDP, a German-based not-for-profit charity that runs a global disclosure system on environmental impacts. Only 34% of companies assess the impact of their value chains on biodiversity and just 17% assess both upstream and downstream impacts, CDP says.

Mandatory disclosure on sustainability risks and impacts would make it easier for financial institutions to exercise due diligence, according to a briefing from independent human rights group Germanwatch and the sustainable finance think tank Climate & Company in January. Germanwatch says that since the Paris Agreement in 2015, financial institutions have provided $267 billion in credit to 300 companies operating in the world’s three largest tropical forest regions. Legally binding due diligence obligations on deforestation are “non-existent,” it says. “Avoiding financing deforestation remains entirely dependent on voluntary initiatives by financial actors.”

Transition to cleaner forms of energy brings its own human rights dangers which financial institutions need to address. Kenya is among countries where local communities claim that they have not been sufficiently consulted and that geothermal power projects do not adequately address the need for resettling residents.

“Alternative/renewable and sustainable energy projects that do not centre the needs and perspectives of workers, local communities and indigenous folks, that result in dispossession, land grabs and human rights violations, are simply unjust and contrary to the definition of a ‘just transition’,” says Katherine Robinson, head of campaigns and communications at Natural Justice in Johannesburg. “It is naïve to assume renewable projects are inherently human rights centred and just,” Robinson says.

None of the EU regulatory measures includes thorough sustainability due diligence requirements for financial institutions, particularly regarding deforestation, Germanwatch says. The CSDDD could be a suitable instrument to achieve this but does not comprehensively do so in its current version, Germanwatch argues. Bloomer agrees that climate needs to be top of the agenda. “The single greatest human rights issue now is climate breakdown.”

David Whitehouse is a freelance journalist in Paris.

Author: David Whitehouse

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