Message from the CEO, Nina Schindler
The members of the European Association of Co-operative Banks (EACB) closely follow the Commission’s Proposal for a Directive on Corporate Sustainability Due Diligence as it explicitly includes credit institutions and financial products, thus representing a crucial regulatory development.
Overall, it has to be emphasised that the co-operative business model and its governance arrangements are by nature well-tailored to reflect sustainability goals, long-termism, and the needs of their members and local communities. It is our strong belief that all companies should reflect the social and environmental dimension in the way they pursue economic activity, and co-operative banks are ready to support their clients in this respect with their services.
While the EACB appreciates that the Commission’s proposal prioritises sustainability and a long-term vision, values which are part of the co-operative DNA, numerous elements tabled reveal not practicable and therefore require further reflection. Co-operative banks point to the imposition of overly burdensome mandatory due diligence procedures, subject to administrative enforcement in EU Member States. Vaguely defined legal requirements for directors in relation to sustainability matters, also raise concerns of our members.
In fact, when it comes to provisions specific to credit institutions, the proposal does not seem to duly consider the existing well-known high regulatory standards and requirements imposed on banks and bank management. During the forthcoming political debate, it will be essential to ensure that the future legislation well reflects the diverse EU banking landscape and takes into account the specific co-operative banking network deeply rooted in local communities. In final consequences, it might be adequate to limit the proposal to a limited list of financial services, where due diligence is possible and would make sense.
3 Questions to Marija Laurila, Head of the Company Law Unit, DG JUST, European Commission
Maija Laurila is, since 2016, the Head of the Company Law Unit at the European Commission, Justice and Consumers Directorate General. Previously, she has worked in the Commission on consumer and competition policies, and prior to that at the EU General Court. She also did academic research after obtaining her law degrees.
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- What are the main objectives and core elements of the Commission’s proposal for a Directive on Corporate Sustainability Due Diligence?
The aim of the proposal is to underpin the sustainability transition in line with the EU’s human rights and environment-related goals. It would require the larger companies in all sectors of the economy to elevate sustainability matters to the strategic decision-making level and to switch to a greener and just modus operandi. One core element is the requirement for companies to identify their actual and potential adverse human rights and environmental impacts, and to prevent or mitigate them (due diligence). Companies would need to adopt a due diligence policy and integrate the mitigation of adverse impacts into other corporate policies. Directors would need to ensure that input received from stakeholders is duly considered. As large companies today tend to have complex value chains, the proposal also covers human rights abuses and environmental harm that might occur through their value chains, including outside the EU. The due diligence obligation also applies to third country companies generating high turnover in the EU.
Furthermore, companies are asked to adopt a plan to ensure that the business model and the corporate strategy is compatible with the sustainability transition and with the limiting of global warming to 1.5 °C in line with the Paris Agreement. Another core element of the proposal is the requirement for corporate directors of EU companies to act in the best interest of the company by also taking into account the consequences of their decisions for sustainability matters in the short, medium and long term.
Finally, the Directive also outlines the Commission`s and the Member States’ role to assist companies in the implementation as for example through dedicated websites or the facilitation of joint stakeholder initiatives.
- How do you see the role of the financial sector in this context, and particularly of co-operative banks? Are there any specific rules for them in the proposal?
The proposal applies horizontally in all sectors, including in the financial sector, to companies that have more than 500 employees and more than EUR 150 million net turnover and to some smaller companies in specific high-impact sectors. A special feature for the financial sector is that the scope extends beyond limited liability companies, covering, among others, cooperative credit institutions as well. However, according to the data available (Orbis database), this group comprises less than 80 undertakings. Thus, most cooperative credit institutions would not fall under the new Directive. Nevertheless, the financial sector, as a whole, plays an important role in the sustainability transition and several specific rules are already applicable. The Corporate Sustainability Due Diligence Directive would complement those measures by establishing a horizontal framework for improving sustainable management and business processes through harmonised due diligence for adverse impacts.
The international responsible business conduct and due diligence frameworks, on which the proposal is based, apply also to financial companies. However, due to their specificities, some derogations were introduced in the proposal. Firstly, financial undertakings would not be required to do – and would not bear liability for – due diligence with regard to adverse impacts arising beyond their direct clients (e.g. at the level of the value chain of their direct clients or investee companies). Retail and SME clients receiving a loan, credit, financing, insurance or reinsurance would also fall outside of the due diligence obligations. In addition, financial undertakings providing credit, loan or other financial services would need to identify adverse impacts only before providing that service and not on an on-going basis.
- Where do you expect to see the major benefits and which areas do you see as potentially more challenging for companies, including banks?
We relied on extensive evidence showing that more sustainable operations pay off for the companies, in some cases already in the shorter run. Such benefits include increased competitiveness, innovation, better financial performance, and more resilience. Common EU rules would bring additional benefits such as level playing field and more legal certainty.
Due diligence for adverse impacts is likely to also result in better identification and management of the risks for the companies that derive from climate change or from their own adverse impacts. The past two “COVID” years have shed more light on the importance of dealing with risks related to dependencies on natural resources, skills, supplier and consumer markets in third countries etc. The comprehensive approach of the proposal does not only bring direct value added for financial undertakings but it could have a positive knock-on effect on banks and insurance undertakings providing services to companies of the real economy, and on other investors financing such companies. Banks would be well advised to start preparing, including by adjusting their strategies, corporate policies, thinking due diligence processes, possibly integrating them in the existing risk management, updating their standard contractual terms for providing loan and credit etc. Also, banks should not forget that they are also actors in the real economy: they purchase goods and services, rent offices, hire workers, etc.
Even though the majority of cooperative banks may not be required to comply with the proposed rules, it is in their interest to follow the approach also in line with the UN Guiding Principles on Business and the due diligence guidance for responsible business conduct developed by the OECD.
Second Opinion from Frank Brogl,Chair of the Corporate Governance and Company Law Working Group, EACB & Head of Banking Supervisory Law Affairs, DZ BANK AG
Frank Brogl is a lawyer and chair of the EACB Corporate Governance and Company Law Working Group. At DZ BANK AG, he is responsible for banking supervisory law affairs for several decades. As an in-house lawyer and in his current function as group head for supervisory and general law, he is primarily responsible for the legal aspects of sustainability in the company. Frank Brogl has been employed in the banking sector since the mid-1980s and in the co-operative sector since the mid-1990s. He is a member of various working groups and committees of associations and authorities at national and European level and is the editor and author of specialized literature on banking supervision law.
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The members of the EACB are intensively working on the Commission’s Proposal for a Directive on Corporate Sustainability Due Diligence, which explicitly includes credit institutions and financial products in the scope. European co-operative banks support the European Commission objectives, in particular respect for human rights and the environment, in line with the UN Agenda 2030 for Sustainable Development and the Paris Agreement on Climate Change. It is important to harmonize corporate sustainability due diligence at the EU level to ensure a level playing field. We welcome the principle of extraterritoriality established by the Commission’s proposal to enhance a "do not harm" culture globally and also to ensure fair competition. Our members – set up as co-operatives in their legal form –are by nature fully engaged to support the common good of society and the local economy, with a long-term vision, promotion of social inclusion, responsibility and resilience, solidarity and sustainable development as key values when it comes to our approach to business. We believe that the proposal, which currently includes in the scope all credit institutions regardless their legal form, should better reflect the particularity of our business model and recognise a cooperative difference.
Currently, with the experts of the Corporate Governance and Company Law Working Group at the EACB, we are looking into distinct aspects of the proposal with a special focus on what it may imply for co-operative banks as we see there are many open questions and elements. A prominent example is the scope of financial services in the value chain which still needs to be carefully assessed. We notice that a number of crucial provisions of the proposal, including those of a direct importance for the financial sector (i.e., obligation to identify, mitigate and bring to an end adverse impacts, communication obligations, director’s duty of care) are often ambiguous and leave room for various interpretations. This could lead to problems of legal uncertainty, risk of litigation and diverging transposition of the Directive.
Moreover, as the financial services industry is already heavily regulated, including in relation to the expectations on environment and sustainability, the scope of the obligations laid down for financial service providers should be additionally limited to clients that are not themselves financial services providers. Looking at the proposed provisions defining due diligence obligations, we are concerned by undue administrative burden imposed on companies and credit institutions and related practical limitations. For example, the proposed requirements to consult ‘potentially’ affected groups in order to identify adverse impacts appear particularly challenging.
In addition, it should be avoided that transaction processes carried out on behalf of customers, which are customary in the market, are significantly slowed down by excessive auditing obligations of credit institutions, thus, no longer meeting the expectations and needs of market participants. Last and not least, certain policy choices relating to enforcement may have negative repercussions on the national litigation practices. We are particularly worried that the provisions on civil liability bear the risk of unduly interfering with the principles of national civil law, undermining its consistency. As the outcome of the legislative procedure, we would wish to see the EU legislation setting clear and feasible requirements, which would fully meet the criteria of the EU principles of proportionality and subsidiarity, ensuring the competitiveness of the EU companies globally. We expect the future EU legislation to fully recognise a corporate diversity and, more importantly, the particularities of co-operative banks which so far have not been considered by the Commission.