EXECUTIVE SUMMARY

This policy brief sheds light on why mandatory sustainability due diligence for financial institutions is key to reach the goals of the EU Green Deal, while providing a clear and useful framework for financial institutionsthemselves.

Withouranalysis,weaimtosupportEUandnationalregulatorydecision-makersaswellasfinancialinstitutions who work on the role that the financial sector needs to play in the economic transformation to protect our planet Thepolicybriefisalsousefultocivilsocietyandthebroaderprivatesector

We explain the need, from both a sustainability and a profitability perspective, for financial institutions to address the environmental and social impact of their investment and financing decisions, including through their value chains We discuss how setting sustainability due diligence obligations for financial institutions would provide for the appropriate regulatory framework for them to play a substantial role in reducing their direct and indirect impacts on climate change and biodiversity loss, while reducing the related financialrisks Deforestationservesasanimportantexample,asitrepresentsamajordriverofbiodiversityloss andclimatechange.Furthermore,therisingcommitmentsandpracticesoffinancialinstitutionsineradicating deforestationintheirportfolios,aswellasitscoverageinboththeEUDRand(potentially)theCSDDD,underline thepolicyandmarketrelevanceofdeforestationinthiscontext

Weidentifiedaconcisesetofargumentsforintroducing mandatory sustainabilityduediligenceinthefinancial sector:

Voluntary commitments have not been enough. Due diligence has not yet been sufficiently incorporated in the risk management procedures of financial institutions. Information asymmetries, high search costs and non-disclosure of value chain relationships and sustainability risks and impacts in the supply chain, have minimised incentives for financial institutions to consider their investee companies’ negative environmental and social impacts as financially material These market imperfections can be addressed most efficiently by setting regulatory incentives for FIs to exercise correspondingduediligence

Financial institutions need a level-playing field This could be provided by EU legislation which addressesthemthesamewayacrossMemberStatesandwouldreducetheuncertaintiesinliabilityrisks thatfinancialinstitutions couldface LeavingtheinclusionofFIsupto MemberStatesintheirnational transpositionoftheDirectivewouldrisksignificantlydistortingcompetitionintheEU’sinternalmarket Policy coherence is key for an effective and efficient framework. Excludingfinancial institutions from due diligence obligations would create serious incoherence in the EU legal framework for corporate sustainability due diligence and sustainable finance. This would not only undermine the crucial role of financial institutions in achieving the EU’s goal of “shifting trillions [of EUR]” toward sustainable business activities, but it would also create considerable legal uncertainties for them, as they already have sustainability-related obligations under existing law that would benefit from a clear guidanceonduediligence.

This policy brief provides concrete options for improving the CSDDD to inform the on-going legislative process.