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Navigating Change: the Financial Sector and the Updated Corporate Due Diligence Directive

Increased due diligence obligations for financial institutions

Following approval by the Council, the revised Corporate Due Diligence Directive (CSDDD) represents a comprehensive effort to bolster accountability, transparency, and sustainability across all industries, including the financial sector.

A significant update includes the incorporation of regulated financial undertakings within the directive’s scope. This expansion underlines the European Union’s commitment to fostering responsible business practices across diverse sectors.

Regulated financial undertakings are now subject to due diligence obligations. The directive clarifies the definition of ‘chain of activities,’ and notably specifies that financial undertakings are only subject to due diligence obligations for the upstream component of their chain of activities, which differs from other undertakings included in the CSDDD directive. This refinement aims to streamline regulatory oversight and focus attention on critical areas of risk. Drawing from international standards such as the OECD Guidelines, the directive provides guidance on appropriate measures for financial services. It emphasizes leveraging shareholder rights to influence positive outcomes.

Transparency and accountability are central to the directive, with mandates for comprehensive reporting on due diligence policies and activities. Financial undertakings are required to communicate externally relevant information, aligning with existing reporting obligations outlined in Directive 2013/34/EU and Regulation (EU) 2019/2088.

The European Commission will play a crucial role in monitoring the directive’s implementation and effectiveness. Reports to the European Parliament and Council will assess the directive’s impact on SMEs, potential revisions to definitions, and the necessity for additional sustainability due diligence requirements tailored to financial undertakings.

Though pending approval by the European Parliament on April 24th, 2024, stakeholders in the financial sector are encouraged to familiarize themselves with the updated requirements and should proactively align their practices accordingly. Forethix can help its partners adapt to this crucial new directive reap the benefits of early compliance.