Bankers Slam ‘Excessive’ ESG Bill That Ratchets Up Legal Risks

Some of the most powerful lobbyists in Europe’s finance industry are preparing to fight the passage of an ESG bill, after it won early backing from European Union lawmakers.

(Bloomberg) — Some of the most powerful lobbyists in Europe’s finance industry are preparing to fight the passage of an ESG bill, after it won early backing from European Union lawmakers.

The Association for Financial Markets in Europe, whose members dominate the region’s debt and equity capital markets, says a planned EU law designed to make it easier to sue companies for ESG violations ignores the unique status of financial firms. 

The Corporate Sustainability Due Diligence Directive (CSDDD) moved a step closer to becoming law last week, after the EU Parliament’s legal affairs committee struck a preliminary agreement to cover all sectors, including the finance industry. If passed, the law will force companies to pay a lot more attention to their value chains.

In practice, that means that human rights abuses or environmental damage that occurs in an EU corporation’s value chain may expose that company to civil liability or regulatory penalties.

CSDDD has the potential to be one of the EU’s most far-reaching pieces of environmental, social and governance rulemaking. While ESG regulations passed to date impose disclosure requirements on companies, the due diligence directive would force them to act on the information they’re disclosing. If they don’t, they can be punished by regulators and sued by stakeholders.

The finance industry is already struggling to digest several other major pieces of ESG regulations, many of which are the subject of regular updates and reviews, such as the Sustainable Finance Disclosure Regulation. SFDR has been so mired in revisions and confusion since its enforcement in 2021 that many investors and even national regulators are now demanding a fundamental overhaul.

Lara Wolters, the EU Parliament member responsible for ushering CSDDD through the chamber, said she’s bracing for a “tough” battle with the finance industry. She also said there’s too much at stake for lawmakers to cave.

The power that banks, asset managers and insurers have “is huge,” Wolters said. So to suggest “that power isn’t going to be used to try to affect any positive change” would be “crazy,” she said.

The finance industry is equally galvanized. Oliver Moullin, sustainable finance general counsel at the AFME, said the decision by lawmakers to include “any type of financial services in any jurisdiction” is “excessively broad.”

The current wording of CSDDD “doesn’t adequately consider the challenges that banks will face in implementing the requirements in practice,” he said in an interview.

The next step for CSDDD is a formal vote of the parliament committee, which is due to take place on Tuesday. After that, it goes to the full chamber and then to the European Council. That still gives the finance industry plenty of openings to continue lobbying decision makers in the EU.

Nonprofits say financial firms, unlike other sectors, have already won some concessions as CSDDD looks set to disregard indirect links to their value chains. “That’s the shocking part,” said Aurelie Skrobik, corporate accountability campaigner at Global Witness. The industry is already getting “special treatment,” even though it “could be among the biggest game-changers.”

Philippe Angelis, senior policy adviser for corporate reporting and sustainable finance at Insurance Europe, said it makes sense to apply such a comprehensive standard to manufacturers, but not to the finance industry, where the value chains that need to be monitored are likely to be vastly bigger.

“It would be disproportionate and impractical for insurers to have to investigate potentially millions of customers and customers of customers,” Angelis said. “In addition, liability should focus on companies that are directly causing or contributing to an adverse impact, rather than those who are only linked.”

The proposed law encompasses virtually all corners of the finance industry, including pension funds, crypto-service providers and hedge funds. Danny O’Connell, head of the Brussels office of the Alternative Investment Management Association, said that if CSDDD is enforced in its current form, it would introduce “significant legal uncertainty for the investment manager.” 

Fund managers obviously have to operate within the parameters of their contracts with clients, O’Connell said. But with CSDDD, “suddenly you would have this secondary mandate,” he said.

The European Council, which is comprised of the heads of EU member states, may be inclined to lend a sympathetic ear. As things stand, council members are split, with some countries with large financial hubs such as France keen to exclude banks or to leave the decision to national authorities.

Meanwhile, not everyone in the finance industry thinks CSDDD should be fought.

As a bank or investment manager, “arguably you’ve been able to not really care about human rights or biodiversity and still make a lot of money,” said Eric Pedersen, head of responsible investment at Nordea Asset Management. “That will become more difficult with this regulation.”

(Adds reference to SFDR in sixth paragraph.)

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