EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE 

Proposal for a Directive on corporate sustainability due diligence: expectations vs. reality

By Blazej Blasikiewicz, EBF Director of Legal, International and Public Affairs

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BRUSSELS, 20 June 2022

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Advancing the respect for human rights and environmental protection on a level playing field basis

Banks are following the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines that set out responsibilities to conduct due diligence in banks’ own activities or business relations. In this respect, banks welcome the proposal of the Commission for a Sustainability Due Diligence Directive to advance the respect for human rights and environmental protection and embed these aspects into supply and value chains, to create a level playing field and avoid fragmentation amongst Member States. However, the proposals in the Directive differ substantially from these guidelines and established international practices, introducing unclear concepts and definitions and in many aspects would be operationally difficult to implement, not least because the proposal does not really consider specificities of the banking sector compared to corporates. Also, while one of the objectives was to address legal fragmentation at EU level, the proposal still leaves excessive room for Member States’ add-ons.

Understanding banks’ business models and operations

There is first and foremost a difference between operational supply chains and banks’ clients and it is important that these be clearly distinguished. The business models and specificities of the banking sector need to be better understood including the lending process and the types of financial products being offered by banks.

For example, banks can provide loans to a company for a specific project or purpose, that is known by the bank. But there can also be general purpose loans, which are used by companies to cover diverse corporate expenditures and are not solely related to specific capital investments. The products provide companies with flexibility to finance their day-to-day operations and banks do not know whether such loan is used to cover financial needs of the parent company or a specific subsidiary. The due diligence framework should take these existing realities into account and recognise that it makes sense to include clients’ subsidiaries within the value chain only in the event that they are signing the relevant contract.

Further clarification would also be needed on what “established business relationship” would mean for banks. Would, for example, therenewal of a credit line trigger a new due diligence process? What is meant by client and which entities are in the scope of the proposal? Which financial products or services are in the scope of the proposal?  Does any new product or service contract for the same client trigger new due diligence obligations?  What are the expectations with respect to banks due diligence obligations and what are the additional requirements not already covered by existing regulations targeting credit institutions? These are only some of the questions that need to be further looked at to clarify the application of the proposals for banks.

Consistency with other parts of the EU ESG framework

The proposal is seen as one of the EU regulatory actions aimed at establishing a comprehensive ESG framework, complementing the other pieces of the sustainable finance strategy. It is therefore crucial to ensure consistency and alignment with relevant legislation in this area including on concepts and requirements appearing throughout different pieces of regulation such as the transition plan requirements that will be further detailed in the Corporate Sustainability Reporting Directive. This consistency of requirements should also be achieved within the proposal itself. An example of inconsistency is that while one article of the Directive suggests that adverse impact is required by banks only prior to signing the contract, the requirement to conduct a periodic assessment every 12 months is included in another.

Civil liability in conflict with national civil law

One of the central concepts of the Directive is the inclusion of civil liability which goes against the established principles of national civil law and creates an unaccountable and uncertain legal risk for companies. The powers granted to supervisory authorities would constitute an effective enforcement mechanism. The directive does not provide a clear definition of damage, which would lead to difficult and costly disputes, neither does it provide a clear definition of value chain and other concepts which will furthermore complicate the dispute process. Another legal issue relates to the obligation to terminate a contract when a potential adverse impact could not be prevented, which is contrary to basic principles, i.e., pacta sunt servanda.

Focus on achieving the desired objectives

The requirements included in the proposal should also be further balanced in terms of efforts versus achievement of the desired objectives. As due diligence policies and processes are set up at consolidated level, it would seem logical to require the application of the obligations of the directive at consolidated level. To avoid multiple obligations on clients, instead of requiring banks to impose a code of conduct on clients, the EC should develop a set of principles which could serve as a basis for compliance applicable to everyone.

What could also be investigated by the Commission is how ESG ratings could play a role in the due diligence process provided by the Directive and if they can support financial entities in the task. The use of recognized and supervised common metrics could help avoid very inconsistent results in the due diligence made by different financial institutions on the same client.

To conclude, while the objectives to advance the respect for human rights and environmental protection on a harmonized basis is welcome, we hope that the European Parliament and the European Council will use their power to further clarify the requirements of the Directive so European companies can implement a due diligence framework that is operational and holds European companies responsible for aspects within their control in a manner proportionate to the desired objectives of the Directive.

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For more information:

Blazej Blasikiewicz, Director of Legal, International and Public Affairs b.blasikiewicz@ebf.eu