MEPs Vote to Raise the Bar for ESG Investors

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    Stockholm (NordSIP) – On Thursday 1 June the European Parliament successfully passed a common position on the Directive on Corporate Sustainability Due Diligence (CSDDD), with potential implications for institutional investors as well as corporations.  The main aim of the CSDDD is to improve corporate behaviour by requiring larger companies to carry out greater due diligence on their activities and those of their suppliers.  Any identified negative impacts on human rights or the environment would have to be prevented or mitigated by them.

    Success despite dilution attempts

    The vote passed despite last-minute attempts by parliament’s centre-right bloc to delay the harmonised implementation of the EU directive, dilute climate-related obligations and shield company directors from responsibility.  These largely failed, although directors will now no longer be expected to be directly involved in setting up and managing due diligence activities.  The CSDDD is expected to be formally adopted sometime in 2024, ideally before the European elections, whereupon member states will have two years to implement it within their national legislation.  Smaller companies are likely to be exempt at first, with minimum turnover and staff levels set out for EU and non-EU based organisations.  The right-wing European People’s Party (EPP) political bloc and business lobby groups had been pushing for a higher size threshold to limit the CSDDD’s overall applicability.

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    Expectations on institutional investors

    While in-scope companies will likely be subject to the full range of due diligence obligations, institutional asset owners and their managers will have more limited requirements.  The CSDDD will require institutional asset owners and financial institutions to focus on top tier companies in their portfolio, or those to whom they have directly provided credit.  Investors or lenders would have to address any identified adverse human rights or environmental activities either through their direct contractual arrangements or, in the case of portfolio companies, through more robust and targeted engagement.  The full extent of obligations on the finance sector remains to be seen, as it is expected to be at the forefront of so-called “trilogue” negotiations with the EU Commission and member states.

    Potential ramp-up of ESG litigation

    The trilogue negotiations are expected to focus on the finance sector’s inclusion, aspects of civil liability and the implications of the proposed company directors’ duty of care.  In light of the recent growth in ESG-related litigation towards governments, companies and individuals, there are concerns from some observers that the CSDDD will provide yet another instrument to hold companies accountable for adverse activities within their supply chains.  Nevertheless, the success of the vote, which passed with 366 MEPs in favour and 225 against, would indicate a broad consensus within the EU parliament to tackle greenwashing and eradicate delaying tactics on the part of companies.  The reputational risk and threat of litigation brought by the CSDDD may be one of the catalysts needed to accelerate the transition towards more sustainable economies.

    Image courtesy of Andreas N from Pixabay
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