EU adds financial services to due diligence proposal  

Proposed legislation will hold financial services firms based in or operating in the EU accountable for human rights and environmental violations in their value chain.  

The latest draft of the European Commission’s corporate sustainability due diligence directive confirmed the financial services sector will be included in the legislative framework.  

The proposed directive would apply to financial institutions with more than 500 employees and €150m in turnover, smaller companies in high-risk sectors and global firms.  

Firms will be required to identify, mitigate, and address human rights and environmental violations across their supply chains. 

Under the new legislation, companies must also carry out due diligence checks during the creation of contracts with new clients.  

Following months of debate regarding whether financial services should be included in the directive, the sector will be covered by the regulation but to a lesser extent than other sectors.  

Financial institutions will fall in the lowest category of ‘contribution to harm’ under the United Nations Guiding Principles framework and exceptions will be allowed for asset management firms.  

However, the proposal has faced contrasting criticism as EU ministers previously advocated for banks and investment funds to be excluded from the regulation.  

Whereas responsible investment advocacy group ShareAction criticised the European Parliament’s decision to “water down” the rules for financial institutions.  

Isabella Ritter, EU policy officer for ShareAction, said: “The current proposal requires only light touch due diligence for the finance sector, going against international standards.” 

The corporate sustainability reporting directive will also facilitate the development of a single ESG strategy for the EU as it will mandate unified ESG disclosures from all large and listed companies.  

The proposed legislation strengthens warnings from several UK MPs who have claimed the country is falling behind the standards being set on the continent.

A report by 16 parliamentary officers urged the UK government to develop a standardised approach to ESG disclosures and improve reporting quality by clarifying disclosure rules.  

Even though the group claims the UK is lacking behind the EU, the FCA’s rules to suppress greenwashing were previously commended for setting a “higher bar” than the EU.