Sustainability due diligence and reporting obligations for financial institutions

In our new briefing, Germanwatch and the sustainable finance think tank Climate & Company analyse the expected reporting and due diligence obligations in the financial sector across a number of key EU regulatory measures on sustainability. In particular, the briefing focuses on potential obligations resulting from the respective regulatory measures that may help to identify and minimise the risk of deforestation.

The main findings of the briefing include:

1. Some of the regulatory measures addressed in the study principally cover deforestation as a (potential) adverse impact. However, none of the EU regulatory measures includes thorough sustainability due diligence requirements for financial institutions, particularly with regard to deforestation. The Regulation on Deforestation-free Products and Corporate Sustainability Due Diligence Directive (CSDDD) could be suitable instruments to prescribe such requirements but currently exempt--or, in the case of the legislative proposal for the CSDDD, largely exempt--the financial sector.

2. Ambitious mandatory disclosure on sustainability risks and impacts would make it easier for financial institutions to exercise due diligence. Particularly for financial institutions, solid and mandatory supply chain disclosure would significantly facilitate the implementation of the CSDDD as well as the Regulation on Deforestation-free Products (if finance were to be included in a future version of the Regulation).

3. For the mandatory disclosure of companies’ sustainability risks and impacts to be useful to financial institutions, the specific requirements of the EU disclosure regulatory measures will need to enter into force as soon as possible (and be feasible).

4. Guidance from the EU Commission would help financial institutions to comply with their disclosure and sustainability due diligence requirements.