On March 15th, EU member states gave the green light to a joint text of EU's Corporate Sustainability Due Diligence Directive (CSDDD, or CS3D), after weeks of intense negotiations. The EU Parliament followed, by also approving the joint text in April. With just one step remaining – a final approval at the EU Council, it seems the CSDDD could shortly be enacted, giving EU countries two years to incorporate it into domestic law.
The road to agreement wasn't easy, though. It took some serious back-and-forth and compromises to get there.
Unfortunately, the final version of the directive ended up being watered down and limited in scope, as it only applies to companies that have both a turnover above 450 million euros and over a thousand employees. By this criterion, the directive applies to just about 0.05% of European businesses – a microscopic percentage.
There was significant and diverse opposition to some of the originally proposed provisions of the directive. Among the key opposition, were some larger countries such as Germany and Italy, which expressed concern that the regulations would excessively burden businesses, particularly small and medium sized ones.
A similar argumentation was made for the finance sector, claiming that investors could not reasonably conduct due diligence on businesses in their portfolios and lending books, and had little leverage over those firms when it came to mitigating harms. Thus, the sector was excluded from most of the Directive’s due diligence requirements back in December.
However, co-legislators made an official commitment to reconsider the inclusion of the finance sector in future, once there was a better understanding of how the Directive worked in practice.
Unfortunately, this commitment was withdrawn during the latest negotiations, and was therefore not part of the text signed-off by Parliament on 24 April.
Still, it's a win that we now have a law in place, holding the biggest companies with global footprints accountable for preventing, mitigating and remedying human rights and environmental abuses within their supply chains. There are also some potentially positive side effects, as the requirements that the largest companies must live up to now will raise both awareness levels of smaller companies, as well as the standards practiced by the many suppliers which they have in common with the largest companies.
Storebrand’s and the Nordics’ perspective:
Since 2019, we began supporting an investor initiative led by the Investor Alliance for Human Rights requesting EU human rights regulation regarding supply chains. We also supporting these initiatives in other European countries, including Norway. The initiative is still active: the latest investor statement was distributed and presented to several members of the EU Parliament and the European Council, asking for an ambitious and effective European directive on corporate sustainability due diligence that would also cover the financial sector, in February this year before it was voted on.
We have supported investor statements requesting national human rights due diligence in Switzerland and the UK too. Neither of these countries are part of the EU and thus it is important that national regulation covers the same issues as the EU directive. For us as investors, it is important to create a level playing field for all companies. This means that the larger the number of countries requiring this type of due diligence from companies, the more likely it will be that companies pay attention to these issues.
In Norway, the Transparency act was passed in 2021, entering into force in July 2022 with the first required reporting date already in June 2023. The law applies to around 9000 Norwegian companies or companies providing good or services in Norway. In 2019, Storebrand joined the KAN (Koalsjion for ansvarlige næringsliv, which translates in English as “Coalition for a Responsible Private Sector”), where, as investors we shared our views with civil society and companies, regarding the importance of such a law for investors. We also have given feedback to policymakers, via our Norwegian finance industry association (Finans Norge) and in panels organized by the coalition where Norwegian authorities were invited to discuss the bill.
There isn’t a uniform Nordic position on due diligence, as the stance varies across borders. Sweden’s government took a negative stance to CSDDD, first signalling that they would even vote against, but ended up abstaining from voting. In contrast, Norway has been ahead of the game in terms of due diligence requirements, with the Transparency Act (Åpenhetsloven) already being enforced since early 2022. Norway’s Åpenhetsloven covers companies with more than 50 employees and with a turnover of over 70 million NOK, which is estimated to cover around 9000 companies. Hence, Norway requires more companies to do due diligence than the entire EU combined.
For the past few months, we at Storebrand have been publicly voicing our support for the directive also in the Nordics. In November last year1, we participated in a communique urging the Swedish
government to play a proactive role in the trilogue negotiations. Storebrand advocated for the inclusion, rather than exclusion, of the financial sector in the CSDDD, to advance sustainable finance and aligning investments with broader societal and environmental goals. In February this year, we also participated in a joint public statement along with several Nordic businesses, such as Ericsson, IKEA, Axfood and Telia, urging the governments to support the CSDDD 2.
How we address due diligence:
Storebrand has been working on human rights and due diligence for many years. We have committed to adhering to international standards and guidelines, including the UNGPs (United Nations Guiding Principles on Business and Human Rights) and the OECD Guidelines for Multinational Enterprises. By implementing due diligence processes aligned with these frameworks, we acknowledge our responsibility to identify, assess, manage, and mitigate the risks of adverse impacts associated with its investments. Due diligence is not just about ticking boxes for us; it's about taking a hard look at the risks associated with our investments and addressing them.
In our view, due diligence is a crucial tool for creating a level playing field and providing stronger incentives for companies and financial institutions to consider environmental and social factors in their value chains. We believe that the CSDDD should not be seen as an additional burden, but rather complementary to existing regulations such as the Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), and the EU Taxonomy. For example, SFDR is a reporting and transparency requirement, not a due diligence requirement. SFDR means that we must disclose information related to our due diligence, not that we must conduct it.
Due diligence is not just about ticking boxes for us; it's about taking a hard look at the risks associated with our investments and addressing them.
How does due diligence for us as investors work and look like in practice? In line with the CSDDD, we take a risk-based approach, which means that we identify areas where the risks of harm are greatest and prioritize parts for due diligence based on this. If we find that we, through our investments, are linked to harm, we should try to influence to prevent or mitigate harm and adverse impact. This can be done through our investment decisions, through dialogue with companies, through participating in collaborations to gain more support for the issue, or through other means following our escalation process.
Supporting more constructive dialogue:
We view this directive positively as it will now formalize the requirements and thus facilitate the dialogue that we have with companies. We have experience in discussing these issues with companies in their supply chains, ranging from forced labour, human rights in conflict areas to the rights of indigenous peoples. If we ourselves are expected to conduct due diligence, it can facilitate a better, more constructive, and more informed dialogue about these risks when we are forced to identify areas where we see a high risk of negative consequences.
Importantly, we acknowledge that many investors, including ourselves, already allocate significant resources to due diligence processes in line with international standards. The directive merely formalizes what responsible investors have voluntarily committed to. The foundations laid by the UNGPs, have now been formalized into actual law. CSDDD is not a new concept: it builds on the pioneering work of the late John Ruggie, an international relations and corporate responsibility expert, as well as the UNGPs, finally translating these international standards into national law.