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Data Benefit of CSDDD at Risk as FIs Seek Exclusion, Experts Warn

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The anticipated exclusion of financial companies from the EU’s sustainability due diligence law has stung ESG professionals, with some arguing that an opportunity to improve data quality would be missed.

The EU’s executive body, the European Commission (EC), is reportedly ready to cede to requests from parts of the financial sector to be left out of the list of industries subject to the Corporate Sustainability Due Diligence Directive (CSDDD). The law aims to ensure all businesses take decisions with a due diligence perspective in mind on human rights and the environment.

Once in place, the CSDDD is expected to work in tandem with the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) to ensure that data on firms’ ESG performance is properly passed onto regulators and investors.

The European Parliament and the EC are divided on the matter, prompting frustration among ESG professionals who fear that any exclusion of the financial industry would be counter-intuitive to their need for good-quality data.

“When you look into the whole set of guidelines from the EU, it is actually to serve investors, so I don’t I don’t quite get why investors feel so uncertain about all this data that will be served directly to them,” said Amanda Koefoed Simonsen, ESG manager at Danish sustainability consultancy ESG Implementation.

“Data needs to be more streamlined and this directive is actually there to make definitions around what is a sustainable business activity so that investors can move their money into sustainable companies,” Koefoed Simonsen told ESG Insight.

Industry Split

The European financial community is also split on the issue. The loudest calls for exclusion have come Germany’s powerful banks and institutions as well as those in Italy. Most vocally against them have been the industry participants in Denmark, the Netherlands and Portugal.

The German Investment Funds Association (BVI) has been vocal in its oppositions, arguing that the CSDDD creates inconsistencies with other sustainability regulations, such as SFDR. BVI also argues that the compliance work required by financial institutions would be prohibitively expensive and that CSDDD would compromise the competitiveness of European asset managers.

Some financial organisations, such as the Institutional Investors Group on Climate Change (IIGCC), have some sympathy with the BVI. While it supports inclusion, it has called for changes to the proposed law to ensure the “coherency of the EU’s sustainable finance regulatory framework”.

But many have reacted against exclusion. Philippe Diaz, a member of the European Financial Reporting Advisory Group’ (EFRAG) sustainability reporting technical experts group has taken BVI to task.

“All I can say is that if Dutch and Danish investors are in favour, PRI is in favour, IIGCC is in favour – all argue that there are sensible ways with differentiated responsibilities that would allow for full financial sector inclusion under the due diligence obligation of the CSDDD, why would you oppose?” Diaz wrote on LinkedIn.

Who Benefits?

Koefoed Simonsen said she could understand why financial institutions may be rattled by the directive.

“That’s a lot of new stuff, new regulation, and everything that’s new is also high risk,” she said. “So, it makes total sense in that regard.”

But she said the data benefits that inclusion would bring should be attractive to them.

“Companies do the due diligence and then report in on it – this is basically about helping investors make better-informed decisions.”

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