The Corporate Sustainability Due Diligence Directive (CSDDD) represents one of the European Union’s most ambitious attempts to hold businesses accountable for their global impact. The directive establishes a corporate due diligence duty with core elements focused on identifying and addressing potential and actual adverse human rights and environmental impacts from the operations of companies, their subsidiaries, and  their business partners.

The CSDDD covers companies with more than 1,000 employees if, during a financial year, they had an annual, worldwide net turnover of more than €450 million. The directive requires these companies to implement comprehensive due diligence processes on everything from measures to prevent forced labor in supply chains to the alignment of business strategies with the Paris Agreement’s 1.5°C climate target.

Unlike previous voluntary frameworks, the CSDDD imposes legal obligations backed by enforcement mechanisms, including administrative supervision, fines, and potential civil liability for non-compliance. Debate continues over the CSDDD on matters like the proper thresholds for company size and the scope of obligations that the directive imposes. , and one controversy is drawing particular attention from financial institutions.

The Controversy: Finance’s Special Exemption

The controversy centers around what a group of investors and human rights advocates describe as a “modest in scope but highly significant in purpose” financial review clause. This provision would require the European Commission to periodically assess whether financial institutions should be subject to the same due diligence obligations as other sectors.

However, under the EU’s omnibus proposal, this clause would be removed, effectively cementing the financial sector’s exclusion from the directive’s requirements. This has sparked fierce debate, with critics arguing that it “throws away the facts and locks in a special exemption for the finance sector that no other sector gets”.

The stakes are high. Thirty groups, including ShareAction, Oxfam, Americans for Financial Reform, and the European Environmental Bureau have signed a letter urging Brussels to keep the review clause. They argue that removing it would send the wrong message about the EU’s commitment to comprehensive sustainability oversight.

Meanwhile, European Central Bank President Christine Lagarde has warned against cutting EU sustainability rules too drastically, noting it could impede the central bank’s efforts to incorporate climate change into its monetary policy framework.

The Practical Challenge: What Would Financial Due Diligence Actually Look Like?

If financial institutions were brought under the CSDDD’s scope, the practical implications would be staggering. Banks, insurers, and investment firms would need to assess the human rights and environmental impacts not just of their own operations, but of their entire lending and investment portfolios.

Consider a major European bank: Would it need to conduct due diligence on every company in its loan portfolio? Would it be required to investigate the supply chains and subsidiaries of each borrower to identify potential human rights violations or environmental damage? The directive’s current language suggests the bank would, as companies are required to assess impacts “across their chains of activities.”

This creates a cascade effect that could fundamentally reshape corporate liability. If banks must verify that their borrowers comply with human rights and environmental standards, companies seeking loans would likely need to provide extensive documentation proving their compliance. This would expand the due diligence burden from the financial institution to every company seeking financing.

The compliance costs could be enormous. Small and medium enterprises, which often lack sophisticated ESG reporting systems, might find themselves locked out of financing unless they could afford the additional compliance infrastructure. Larger companies might face increased borrowing costs as banks passed through their expanded due diligence expenses.

But the implications go deeper. Banks conducting comprehensive due diligence on borrowers would essentially become gatekeepers for corporate sustainability compliance. A company with questionable labor practices in its supply chain might find itself unable to secure financing, creating powerful market incentives for improved ESG performance throughout the economy.

Looking Ahead

The omnibus proposal is currently with the European Parliament’s committee for legal affairs, with a vote on amendments planned for October 13, 2025. The outcome will determine whether financial institutions remain outside the CSDDD’s scope or face future scrutiny through the review clause. The financial sector’s exclusion from the CSDDD reflects the practical challenges of implementing comprehensive due diligence across complex financial relationships.

The question remains: Can the EU achieve its sustainability objectives while leaving one of the economy’s most influential sectors largely unregulated? The answer may determine not just the future of European sustainability policy, but the global trajectory of corporate accountability.

This post comes to us from Professor Roee Sarel at the University of Hamburg’s Institute of Law and Economics and Hadar Y. Jabotinsky at the Hadar Jabotinsky Center for Interdisciplinary Research of Financial Markets, Crises and Technology.