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EU supply chain law and the financial sector – Arbeits&Wirtschaft Blog

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EU supply chain law and the financial sector – Arbeits&Wirtschaft Blog

After the European Commission in early 2022 its Draft EU supply chain law published by the Council in December 2022 its negotiating position fixed. This does not necessarily want to make the financial sector responsible when it comes to respecting human rights and the environment in their business dealings. That would be a big loophole in the EU supply chain law. It is now up to the European Parliament to plug this hole and ensure full application of the law to the financial sector.

Human rights violations and the financial sector: a tragic example

Financial companies can negatively impact human rights and environmental goals through the projects and companies they finance. A shocking example of this is the Murder of Honduran environmental activist Berta Cáceres. As a co-founder of the indigenous organization COPINH, she campaigned with many other members of the indigenous Lenca people against the construction of a controversial hydroelectric power station. The implementation of the project would have destroyed the surrounding environment and thus the livelihood of the local population. According to COPINH, however, there was insufficient consultation with the Lenca group beforehand. Violence was repeatedly used against protesters as part of protests against the planned project. caceres as well as other members of Lenca wrote letters to the Dutch development bank FMO, which is co-financing the project, and the Finnish Finnfund. They informed them about these human rights violations in connection with the planned construction of the hydroelectric power station. However, they did not withdraw their funding. After continued aggression against the community of Lenca was Berta Cáceres finally murdered in 2016. Only after the two financial institutions withdrew from the project.

Cases like this show that the financial sector can play a key role in the respect or progressive disregard of human rights. Therefore, financial companies should also be obliged to implement human and environmental due diligence. These are intended to effectively prevent or mitigate negative impacts on human rights and the environment in connection with financed projects and companies or, in the event of damage, lead to compensation. According to its own statements, the FMO has a due diligence process before and during the start of the project and consultations carried out. However, this voluntary process could not prevent the severe negative impact on Lenca’s human rights. Nor has it resulted in the Development Bank using its leverage to mitigate the negative impact. In order to contain the risk of such tragic cases as that of Berta Cáceres, the comprehensive EU supply chain law is needed. This should contain clear and binding regulations regarding the human rights due diligence process and also include the financial sector.

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The role of the financial sector in the EU Commission’s draft

In principle, financial companies are included in the EU Commission’s proposal for an EU supply chain law, albeit with restrictions. In principle, affected companies should be obliged by the EU supply chain law to identify, prevent and end negative effects on human rights and the environment in their “value chain”. The definition of the “value chain” in the draft by the EU Commission covers both the upstream and the downstream area. Upstream processes relate to the origin and production of a good or service. The downstream part concerns the further use of the goods or services. In the financial sector, the downstream area is particularly relevant: when granting loans, for example, banks should implement their due diligence with regard to potential negative effects on human rights and the environment.

The EU Commission provides for a simplified implementation of the duty of care for the financial sector. This should only be carried out before the transaction is concluded and not – as is the case with companies from other areas – at regular intervals and at least every twelve months. Another exception for the financial sector is the planned exception for SMEs – according to the EU Commission’s draft, these should not be considered part of the value chain of financial companies. It does not depend on the size of the company whether its activities can have a negative impact on human rights or the environment or not. Much more relevant than the size of the company is the likelihood that it can negatively impact human rights and the environment. The higher this is, the more important it is to implement due diligence.

Even financial market participants such as members of the Investor Alliance for Human Rights advocate in a joint statement for a comprehensive implementation of due diligence and argue that this would ultimately also minimize their own (reputational and/or financial) risks.

The role of the financial sector in the Council’s general approach

Based on the Commission’s draft, the Council of the EU also published its negotiating position at the beginning of December 2022.

Like the EU Commission, the Council also stipulates that SMEs should not be considered part of the value chain of financial companies and service providers. From the point of view of the Council, the implementation of the duty of care should only be carried out before the start of business. The Council exchanges the concept of the “value chain” for the so-called “activity chain”. This primarily covers the upstream area of ​​the value chain. As discussed earlier, the downstream is far more relevant to the financial sector and its potential negative impacts on human rights and the environment. Thus, the regulations in the Council’s position would hardly be relevant for the financial sector.

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Another problematic aspect of the Council’s general approach is that, in contrast to the EU Commission, it does not provide for the financial sector to be included in the EU supply chain law. It should be left to the member states to decide whether they want to impose binding due diligence obligations on the financial sector. This would make the application of the directive to this area extremely unlikely. Due to the fact that himself some member states are trying to make an exception for the financial sector can be assumed that they will not oblige him with this directive. Since the other member states could suffer competitive disadvantages through the implementation of this part of the directive, their implementation would also be questionable. Leaving the application to the financial sector up to the member states also contradicts the self-imposed goal of Europe-wide harmonization of the regulations on corporate due diligence.

The concept of the ‘chain of activity’ as envisaged by the Council is simply too narrow for a meaningful coverage of the financial sector. This is because activities with a significant impact on human rights and the environment, such as investments in large infrastructure projects or the granting of large-volume loans, would not or only insufficiently be covered by the EU Supply Chain Act.

Disappointment: Austria is silent on the EU supply chain law in the Council

Austria, represented by Economics Minister Martin Kocher, took a stand in the vote on the general approach to the EU Supply Chain Act in December 2022 contain. Despite the weaknesses in the Council’s position mentioned above, the general approach is a milestone in the EU legislative process and an important hurdle that has been overcome. Supporters of the EU supply chain law welcomed the fact that the Council found and voted on a compromise relatively quickly. In the run-up to the council meeting, the responsible departments – the Ministry of Justice and the Ministry of Economic Affairs – ensured broad involvement and conducted an open and constructive debate with civil society organizations as well as the AK and the ÖGB. The disappointment with Minister Kocher’s voting behavior was therefore great. Regarding the financial sector referred cooker on the position of the Ministry of Finance, which insists on an exception.

The role of the financial sector in the European Parliament

Before the EU supply chain law can finally be passed and come into force, it still has to clear a few hurdles. The regulation of the financial sector is not yet set in stone. The EU Parliament is expected to vote on its negotiating position in May. Some committees have already voted, including the Committee on Economic and Monetary Affairs (ECON), which plays a key role in the EU supply chain law with regard to the financial sector.

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The ECON is in favor of a mandatory application of the EU supply chain law to the financial sector and even calls for an extension to other financial services. In addition, according to the committee, all financial companies covered by the directive should also implement their due diligence obligations regularly and not just before starting business. Thus differs the position of the ECON in this respect significantly different from that of the Council and the Commission.

In contrast to the position of the Council, the ECON does not refer to the concept of the “activity chain”, but retains the concept of the “value chain” from the EU Commission’s draft. This means that the downstream area of ​​the value chain relevant to the financial sector is effectively covered. However, even in the position of this committee, SMEs are given a special status and are not considered part of the value chain of financial companies. They therefore do not have to be taken into account when implementing the due diligence obligations.

However, it remains to be seen what role the financial sector will play in Parliament’s final position.

Conclusion

An EU supply chain law that does not fully cover the financial sector is incomplete. Mandatory measures are also needed in this area to implement due diligence with regard to human rights and the environment. It should also not be left to the discretion of the member states whether an EU supply chain law should also be applied to the financial sector, as this would run counter to the goal of legal harmonization.

Also the AK and the ÖGB are in favor of a strong and comprehensive EU supply chain law that makes all sectors accountable. In order to express these demands at European level, they support the campaign “Justice is everyone’s business” (Justice Is Everybody‘s Business), which addresses European decision-makers with its demands for a comprehensive and fair EU supply chain law. As the Commission and the Council still differ on the obligations of the financial sector, the European Parliament’s position is already being eagerly awaited.

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