Financial institutions in the European Union are on the verge of being impacted by a new ESG requirement, a development they fought hard to evade.
A joint document dated January 24, obtained by Bloomberg, reveals that the European Parliament and the European Council are progressing towards an agreement. The document suggests that banks, asset managers, and insurers should be treated similarly to other companies in ensuring their value chains remain free from environmental and human rights violations.
The document emphasizes that financial entities, like companies in other sectors, should play a role in safeguarding human rights and the environment, core values of the union.
While discussions are ongoing, the January 24 statement signals a departure from the temporary deal made in December. This deal, known as the Corporate Sustainability Due Diligence Directive (CSDDD), excluded the finance sector. However, the recent joint statement sets a June 1, 2025, deadline for the European Commission to produce a report forming the basis of a new legislative proposal.
Under CSDDD, large companies face civil liability for violations in their value chains, holding them accountable for the actions of clients and vendors. The provisional agreement, awaiting final approval, was struck to avoid delays due to EU elections.
CSDDD’s current wording lacks specific requirements for addressing human rights or environmental impacts downstream. Consequently, the European Council and Parliament advocate for regulations that outline sustainability due diligence for financial institutions regarding their clients, investees, and business partners.
This new legislation adds to increasing ESG pressures, with a June report identifying almost 1,600 climate lawsuits since 2015. Corporate lawyers, for the first time, cite ESG as the top litigation risk, according to a January survey by Baker McKenzie.
