When Will Finance Be Included in CSDDD?

The Corporate Sustainability Due Diligence Directive (CSDDD) is a key piece of European Union (EU) ESG regulation aimed at ensuring that companies conduct due diligence to prevent human rights violations and environmental harm in their supply chains. 

Financial institutions were initially included within scope, meaning they would have had to carry out due diligence requirements relating to their clients and other ‘downstream’ financing activities. They were later removed following lobbying efforts. However, the saga is far from over, as the EU is set to revisit the issue within the next two years.

What is CSDDD?

The Corporate Sustainability Due Diligence Directive (CSDDD) is a legislative framework adopted by the EU to require large companies to assess and address human rights and environmental risks in their operations and supply chains. The directive applies to both the companies' direct activities (i.e., “upstream” operations) and those of their business partners, including suppliers and customers (i.e., “downstream” activities). It seeks to ensure that companies take proactive steps to identify, prevent, and mitigate negative impacts on people and the planet, holding them accountable for both their own practices and those of their business relationships.

You can find more information about CSDDD in our Essential Guide to CSDDD, here. 

When is it Being Introduced?

The CSDDD must be incorporated into national law by EU Member States by 26 July 2026. The rules will then apply to companies based on a staggered timeline, outlined below, to allow sufficient time for preparation. As a result, it will be several years before the full implementation of the new rules.

The phased application of these rules will help businesses prepare for compliance. This means that it will take a few years before the new requirements are fully enforced.

Timeline for Application

Category	Net Turnover Threshold	Number of Employees	Date of Application
EU companies	EUR 1,500 m (global)	5,000	26 July 2027
EUR 900 m (global)	3,000	26 July 2028
EUR 450 m (global)	1,000	26 July 2029
Non-EU companies	EUR 1,500 m (in EU)	N/A	26 July 2027
EUR 900 m (in EU)	N/A	26 July 2028
EUR 450 m (in EU)	N/A	26 July 2029
EU Franchisors/Licensors	Turnover: EUR 80 m (global)	N/A	26 July 2029
Royalties: EUR 22.5 m (global)	N/A	26 July 2029
Non-EU Franchisors/Licensors	Turnover: EUR 80 m (in EU)	N/A	26 July 2029

How Financial Institutions Were Originally Going to Be Included

Initially, the CSDDD was expected to apply to financial institutions in much the same way as it applied to non-financial companies. Financial institutions were to be held accountable for conducting due diligence not just on their direct activities, but also in relation to their financing and investment decisions, particularly in their "downstream" relationships. This would have meant that FIs needed to assess the human rights and environmental risks associated with companies and projects they financed, including how their capital flows impacted industries and entities with potential negative consequences.

The initial draft of the directive suggested that financial institutions would be required to conduct due diligence not only on their direct (upstream) relationships but also on the downstream impacts of their investments and financing.

Lobbying Efforts and Exclusion from Major Due Diligence Requirements

However, following intense lobbying from the financial sector, the European Commission revised its stance, ultimately excluding financial institutions from most of the CSDDD's requirements related to “downstream” activities. This means that while financial institutions are still required to perform due diligence on the companies they directly engage with (i.e., upstream) - and they are also captured by other requirements such as transition plans - they are not currently obligated to assess the broader impact of their investments or financing decisions on the downstream activities of the businesses they finance.

As a result, the financial sector's compliance obligations under the CSDDD have been significantly reduced, at least for the time being. The shift in policy was seen as a victory for the financial sector, which had argued that including downstream activities would be too burdensome and complex to implement effectively.

CSDDD Saga Not Over for Financial Institutions

Despite this reprieve, financial institutions should not assume they are permanently exempt from CSDDD's downstream requirements. The European Commission has committed to revisiting this issue specifically within two years: iIn its latest FAQ document (here), the Commission clarified that it would produce a report by July 2026, evaluating the implementation of the directive and considering, among other things, whether to extend the CSDDD's due diligence obligations to include downstream activities for financial institutions. Should following this review the Commission decide to re-include finance within scope of CSDDD, this could lead to finance seeing significantly more requirements under CSDDD.

What Does This Mean for Financial Institutions?

The potential extension of the CSDDD to include downstream activities in the future means that financial institutions should treat the current rules as a temporary reprieve rather than a permanent exemption. While the financial sector is not currently required to conduct due diligence on the downstream impacts of its investments, this could change by 2026, meaning that FIs need to stay informed about developments in the legislation and begin preparing for the possibility of more stringent requirements in the future.

Until then, FIs should continue to assess their current due diligence processes and ensure they comply with the existing obligations. They should also monitor EU developments closely, as any future changes could require significant adjustments to their practices, particularly in terms of financing decisions, risk assessments, and impact evaluations - and be prepared for another fight over the scope of CSDDD.