Welcome back to our regulation tracker, where we aim to monitor policymakers’ latest views and actions on all things sustainable finance – as well as the industry’s response to them.
The European Commission has approved a Corporate Sustainability Due Diligence directive aimed at making businesses accountable for human rights violations and environmental harm in their supply chains.
After several delays, and pending the European Parliament approval, the directive will oblige member states to bring forward their own corporate due diligence laws to ensure companies prevent human rights abuses and the violation of environmental standards throughout their value chain.
What’s the issue? As the proposal was leaked, a few issues emerged, as first reported by Euractiv. Most of the due diligence requirements will only apply to “established business relationships” of EU companies, which, in this context, the European Commission defines as “direct and indirect business relationships which are, or which are expected to be lasting, in view of their intensity and duration and which do not represent a negligible or ancillary part of the value chain.” Naturally, this provision risks excluding some vulnerable workers from the protection of the law. Further, only companies with more than 500 employees and a net worldwide turnover of €150mn will be subject to the directive. Some smaller companies in “high impact” sectors would be captured by the law at a later stage. The law will come as a blow for human rights activists and companies may struggle to deal with some of its complexities.
Some appreciate the effort: “The ultimate goal is to strengthen [the] EU’s regulatory corporate governance framework in a drive towards creation of long-term sustainable outcomes aligned to needs of society, business leaders, stakeholders and suppliers,” Anita McBain, head of ESG research EMEA at Citi told Sustainable Views
Others know more is needed: Earlier in February, Anna Cavazzini, a member of the European Parliament with the German Green Party, said that the corporate governance directive will be a “true game changer” for human rights globally. “Nevertheless, for severe violations like forced labour, we need stronger mechanisms to complement the due diligence legislation.”
Changes to the structure of the EU social taxonomy to bring it more in line with its existing green equivalent have been proposed by independent advisors in a report due for publication on February 28th, according to Responsible Investor. Originally, there was to be a two-dimensional structure, one on human rights and the other on products and services for human needs. This is to be replaced with a single structure centred on the ultimate objectives of providing decent work, adequate living standards, as well as inclusive and sustainable communities. It’s also proposed that the social taxonomy should exclude activities considered harmful under the EU’s green taxonomy, such as coal-fired power generation.
Too soon to tell: A few industry professionals declined to comment with a banker saying: “According to backstage discussions, I heard there might be some changes between the leaked version, which was still a draft, and the final one.”
More generally, in a research note, Fitch Ratings wrote: “Investors face challenges around developing standardised and quantitative criteria to measure social aspects of investments to avoid ‘social washing’. The EU social taxonomy serves as an example of the increasing focus on social risks and the need for transparency.“
In other policy news
The governor of BSP, the Philippines’ central bank, has outlined a third round of sustainability measures. Benjamin Diokno told a conference organised by The Economist that the regulations will include guidelines on management of environmental and social risks for the investment activities of banks, the conduct of climate stress testing and beefing up prudential reports.
Continued delays to the US climate disclosure framework are holding up the Securities and Exchange Commission’s possible introduction of new sustainable fund-labelling requirements. “Guidance on labelling sustainable and ESG funds would be the natural next step for the SEC to take,” Gregory Hershman, head of US Policy at the UN-convened Principles for Responsible Investment told ESG Investor.
The European Commission has discussed exclusion of nuclear and natural gas activities from the proposed EU Green Bond Standard, according to Environmental Finance. That would represent a departure from its decision on the EU green taxonomy where the fuels were controversially included.