PRI welcomes sustainability due diligence legislation

A consortium of stakeholders, including PRI, Eurosif and the Investor Alliance for Human Rights, supported by 142 signatories representing $1.5trn AuM, issued a statement in support of the EU Commission’s proposal for a directive on corporate sustainability due diligence (CSDD).

Particularly, the parties welcomed the duty imposed on financial and non-financial companies to carry out effective due diligence, set climate targets and transition plans and link executive remuneration with sustainability performance.

Nevertheless, the current draft fell short of their expectations and subsequently the stakeholders have called upon the EU Commission with five recommendations to ensure a positive impact throughout the value chain, increase coherence with the EU sustainability framework and enable investors to manage their exposure to sustainability issues.

Ongoing due diligence
The proposal limited financial companies’ due diligence obligations to a pre-service assessment and only considered activities of their clients receiving investments. In response, the consortium requested the inclusion of ongoing assessments covering the entire value chain and guidance clarifying how different types of financial companies should interpret their responsibilities.

Scope
The stakeholders called upon the regulator to introduce a clear timeline for increasing the scope of undertakings subject to the CSDD in sequence with the corporate social responsibility directive. They deemed the current scope of the proposal insufficient, creating additional risks and challenges for investors.

Responsibility & oversight
According to the consortium, the proposal’s language requiring directors to take responsibility and have sufficient oversight of due diligence requirements, climate targets and transition plans is too vague. The stakeholders called for increasing specification.

Remuneration and performance
The stakeholders requested a stronger link between directors’ variable remuneration and sustainability performance. Additionally, the focus on climate change objectives was deemed too narrow. The parties felt it diminished and disregarded the importance of other sustainability factors and the interconnection of the different pillars of ESG. They called upon the regulator to ensure the CSDD clearly mandates the incorporation of sustainability factors into variable remuneration by removing conditionality.

Transition & alignment
Article 15 of the proposal requires a transition plan but does not provide guidance on its requirements. Here, the consortium requested the legislator to require in-scope companies to set emission reduction targets and meet specific actions and resource allocations.