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The EU's first step on climate and corporate accountability ignores the financial sector's role - much to its detriment

Oil refinery, Niger Delta
Is it finally the time for corporate responsibility? 

On the day after COP28 ended, the European Council and European Parliament reached a landmark provisional deal on the Corporate Sustainability Due Diligence Directive (CSDDD), which requires companies to identify and address adverse environmental and human rights impacts of their business.  

ActionAid welcomed the adoption of the directive, which guarantees new rights for the most vulnerable throughout EU companies’ value chains.  

This long-awaited regulation came after a long political battle, where the EU maintained provisions to strengthen access to justice for victims of corporate abuse, particularly access to evidence, reasonable time limits to file claims and the ability of NGOs and unions to represent victims. It also includes provisions to implement relevant stakeholder engagement at every step of the due diligence process. These are key to enhance the right to protection of vulnerable groups, especially women, who are disproportionately affected by the adverse impacts of corporate activities.

Nora Awolowo

However, the directive has several shortcomings specifially on the recognition of indigenous rights and climate obligations. The directive fails to address any obligations to a Free, Prior, and Informed Consent (FPIC) requirement, which would ensure that indigenous peoples and local communities are adequately consulted when affected by companies’ operations. While it sets a requirement for the adoption of climate transition plans (including the financial sector) with scopes 1, 2, and 3 and absolute reduction targets disclosures required, it fails to reference the Paris Agreement and does not attach civil liability to the companies’ failure to implement climate plans. This means that companies cannot be held accountable if they fail to address the climate impacts, including prevention and mitigation, of their operations. 

The financial sector is required to specify how they are going to invest in measures put in place to meet the transition plan, yet it is “temporarily” excluded from due diligence obligations under the Directive. This decision goes against the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, which state that human rights due diligence obligations should apply to the financial sector. Financial institutions do not directly commit environmental or human rights violations, but it’s their business activities that do.i This exclusion means the sector can continue to do so completely unchecked and fund business activities that do.

Why does the financial sector matter? 

COP28, which took place last December in Dubai, sent an important signal on the need for a transition away from fossil fuels. Fossil fuels are by far the largest contributor to climate change, accounting for over 75% of global greenhouse gas emissions. The potential emissions from the coal, oil and gas fields already in production would push emissions way above 1.5°C, having catastrophic consequences for communities everywhere. Despite not being responsible for most of the pollution leading to climate change, vulnerable communities in the Global South are experiencing its most severe impacts.

Niger Delta flooding
Nora Awolowo

Since the Paris Agreement, EU banks have provided a total of US$239.6 billion in fossil fuel financing in the Global South. These financial flows not only continue to fuel the climate crisis, but also bolster the fossil fuel industry’s impacts on the health and wellbeing of communities, which disproportionately affect the most vulnerable. Fossil fuel extraction is linked to violence against women, indigenous peoples, frontline communities, and environmental and human rights defenders, as well as an increase in gender-based violence. Without any mandatory obligations for financial actors on due diligence, the financial sector will continue to prioritise short-term profits, aiming to maximise shareholder value at the expense of the rights of the most vulnerable. 

Shell is one of the world’s largest privately owned oil companies, and its operations in the Global South have received an estimated US$37.6 billion in financing since 2016. The major European banks behind this financing are headed by BNP Paribas (US$3.9 billion), Barclays (US$3.8 billion) and HSBC (US$2.8 billion). For decades, the oil extraction operations of Shell have been devastating communities in Nigeria’s Niger Delta. Oil spills and gas flaring have decimated fish populations, resulting in the loss of fishing livelihoods, exposing local communities to food shortages.  

MARTHA ONISURU is a fisherwoman in the area.  

Her anger is palpable. “Before the arrival of Shell, when we cast our nets there was always a surplus of fish, and we would have problems taking all the fish home. Now that Shell has arrived, and they started burning their fire and spilling oil everywhere, since they came here, we cannot catch fish. We are dying of hunger. Even the water in our taps now has oil in it since Shell came. Water that is meant for consumption is now contaminated. Whenever we drink from the water, we have stomachaches. The oil has damaged everything.”

Setting minimum standards for human rights, social and environmental frameworks, including enhanced due diligence procedures in sensitive sectors throughout the investment value chain, could be a step-change for a transformation of the European financial system, one that tackles unequal structures of power and effectively addresses its role in the climate crisis. 

The EU has taken the first step in fostering corporate responsibility, including human rights and environmental considerations, now it must ensure that the next review includes the financial sector in the directive’s obligations. Additionally, the directive will need to be integrated into each national law (‘transposed’) in the two years after it is officially published. This will become the next challenge, and we need to guarantee that it ends up being effective.