France seeks weaker EU due diligence rules for banks

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France is pushing for banks not to be held liable for the environmental or labour shortcomings of their clients as crunch talks get under way on new EU due diligence rules, effectively calling for the proposed regulations to be watered down.

Negotiators from the bloc’s governments, European parliament and the European Commission will seek to reach an agreement on the text on Wednesday, with Paris leading calls for banks to be exempt from the new due diligence rules, at least temporarily, or to have the rules altered.

Home to one of the bloc’s largest banking sectors, France has argued that a broader application of the rules to include end customers would hamper lending, though some EU lawmakers disagree. Financial institutions could be excluded from the new rules during a phase-in period, or the directive could be watered down, people close to the talks said.

The requirements for companies to not only report on but also prevent environmental and social governance abuses in their supply chains could affect more than 13,000 businesses in the EU depending on the outcome of the negotiations.

Under the rules, civil society groups would be able to take businesses to court over harm caused by impacts from their supply chains. Another contentious requirement is whether companies will have to make and fulfil climate transition plans.

Paris has argued that in its current form, the text would make banks liable for their clients as well as suppliers, unlike companies which are only liable for suppliers.

“What we’re asking is for the same rules for all companies and banks,” one of the officials said. A second official insisted France was not seeking a carve-out for banks, just an “equal application of the rules”.

Members of the EU parliament, who must sign off on the final text, have argued for financial institutions to be included given their impact on business investment decisions and ability to influence company behaviour through lending rules.

“Why do we want financial services in there? Because we need them to enforce due diligence on real economy operators because they create the impact on human rights on the ground,” said René Repasi, a German socialist lawmaker

A proposal circulated by the Spanish, who currently negotiate on behalf of the member states, in November said that “given the delicate balance on the issue . . . and the difficulties to find a compromise” the financial sector should be excluded from the directive for now. They could end up being included but with a later phase-in date, the second French official said.

A parliament official said lawmakers could “tweak a little” in order to include some downstream activities of financial services. The commission has previously proposed keeping banks in the scope but limiting the requirements to lighter touch checks, according to a document seen by the Financial Times.

Italy, Spain and the Czech Republic are among countries sympathetic with the French position, said three people familiar with the talks, while Germany’s position is less clear-cut and some other member states disagree.

In a preliminary agreement among EU governments last year, Paris had signed up to the idea that banks could be covered at the discretion of national governments. But Paris has since strengthened its opposition to the draft law.

The rules are part of a wider push by the EU to ensure that the bloc’s environmental impact does not stretch beyond its borders. The latest negotiations come in the wake of a landmark agreement at the UN COP28 climate summit to transition away from fossil fuels and reach zero carbon emissions by 2050, where the financing of countries vulnerable to climate change was a central part of negotiations.

French officials said their government was behind the initial European impetus for the law, but that it was now going in a direction they disagreed with. France brought in its own “vigilance law” in 2017, following the 2013 deadly collapse of the Rana Plaza clothing factory in Bangladesh that was used by western brands. The law has already been used by non-profits to challenge businesses in court.

In the EU, Germany also has a due diligence act for companies.

Part of the reason Paris has led the charge for amendments is the size of its financial sector, home to lenders such as BNP Paribas and Crédit Agricole, which aims to rival London after the UK’s exit from the EU. In the run-up to discussions at EU level, the European Banking Federation had also called for caution in distinguishing liability for supply chains and clients.

ShareAction, the responsible investment charity, said that the “stark divide” between the positions of EU legislators “sets the stage for challenging and tense discussions, expected to unfold until the early morning hours”.