Sustainability due diligence obligations for financial institutions

The role of financial institutions in mitigating supply chain impacts – the case of deforestation

In our new policy brief, we analyse along with Climate & Company and Rechtsanwälte Günther why sustainability due diligence obligations for financial institutions are key to achieving the EU's climate goals. As an example for this tool, we draw on due diligence obligations for financial institutions to avoid financing projects that cause deforestation. In addition, the policy brief presents specific recommendations for regulating financial actors through the EU Corporate Sustainability Due Diligence Directive (CSDDD).

At present, the EU’s financial sector on a large scale finances infrastructure and agricultural production projects that cause deforestation worldwide, contributing to climate change and biodiversity loss. Meanwhile, billions of dollars of investment are missing to transform the economy towards carbon neutrality and biodiversity conservation. Shifting investment to sustainable projects would provide the right incentives for companies to reduce the negative impacts of their supply chains on nature and people.

We identified three key arguments in favour of sustainability due diligence obligations for the financial sector:

  1. Voluntary commitments have not been sufficient. Existing market structures provide too little incentives for financial institutions to comply with due diligence obligations on a voluntary basis.

  1. Financial institutions need a level playing field, which EU legislation could create.

  1. Coherence between different directives is needed to create an effective and efficient legal and market framework. Excluding financial institutions from the CSDDD would be incoherent with other EU efforts to promote sustainable finance.

Financial institutions could still be included in the ongoing negotiations of the European CSDDD in the trilogue between the Commission, the Council and the Parliament. The policy brief makes recommendations on the definition of value chains of financial institutions, the continuous assessment of impacts and risks, the obligation to terminate business relationships as well as specific measures of institutional investors and asset managers.

Louise Simon (Climate & Company), Dr. Johannes Franke (Rechtsanwälte Günther), Ingmar Juergens (Climate & Company), Katharina Brandt (Germanwatch)
Policy Brief