The European Parliament and Council have reached a provisional political agreement on a new set of rules requiring European investors such as banks, pension funds and insurers, to carry out due diligence.
This means investors will need to disclose the steps they have taken to address the adverse impact of their investment decisions on people and planet.
The agreement, which was reached on 7 March 2019, also fundamentally redefines the risks that investors must consider when decision making – moving away from pure financial risk to their profits, and towards risks to human rights and our global environment.
Global Witness, who have been long campaigning for a more ethical and sustainable financial sector in the EU, celebrated the historic agreement.
The anti-corruption NGO has previously highlighted how Europeans’ money – and EU-based investors – far too often play a key role in funding projects linked to human rights abuses, land grabs and large-scale environmental destruction. They have highlighted examples from oil exploration in Africa’s oldest national park to a mining project in India which sparked violent protests.
Investors across Europe play a powerful role in improving the overseas and European operations of the companies they invest in. By using their significant leverage, they can insist on higher environmental, social and governance standards in the companies and projects they invest in.
Richard Gardiner, EU Campaigner, Global Witness said: “This agreement is an important step forward in ensuring EU investors can no longer be blind to the environmental and human rights abuses carried out by the companies they invest in. It will lead to greater investor accountability and understanding of the impact that investors have on climate change and human rights abuses.”
The NGO pointed towards the recent Brumadinho dam burst in Brazil, which left over a hundred people dead and hundreds missing. Following the disaster, Brazilian regulators have ordered mining company Vale, who operated the dam, to suspend activity in this and two more of its mines. Vale’s CEO has resigned.
Rachel Owens, Head of EU Advocacy, Global Witness said: "This example makes it clear that voluntary mechanisms are not enough to tackle the corporate damage done to communities, and our environment, is no longer cost-free.
“Eighty per cent of investors in Vale, the company at the heart of this devastating mining dam disaster, were signed up to the UN’s Principles for Responsible Investing – but missed major red flags such as concerns around the land being secured illegally. The EU has today agreed to rules for investors to ensure they no longer bankroll projects and companies who cause harm to people and planet.”
"It is also especially encouraging to see pension funds in scope - which huge amounts of ordinary people's funds flow through.
“What's more, this EU decision sets a global example for other governments to follow suit. For the UK, to remain competitive in a post-Brexit landscape it must implement similar or more stringent rules for investors.”
However, the rules still have weaknesses, said the NGO.
On top of this, investors will initially only be subject to a ‘comply or explain’ compliance mechanism, although it will become mandatory for large investors after 18 months. This means that investors themselves will need to determine whether they consider the adverse impacts of the investment decisions or not.
"There is a real risk that investors intent on putting profit before people could continue to ignore the substantial environmental, social and governance risks as regulators will have fewer tools to challenge those investors that do not comply with the rules. The Commission and Regulators must strictly enforce these rules, and challenge those investors that do not comply, and do not satisfactorily justify why their investments are not contributing to human rights or environmental abuses. Only through strict enforcement can the goals of these rules be fully achieved”, Owens confirmed.
The new rules are a cornerstone of the EU’s Action Plan on Financing Sustainable Growth which was launched in March last year. Global Witness says the EU is currently leading the way on ensuring finance is re-orientated towards sustainable economic activity.
* Global Witness https://www.globalwitness.org/en-gb/
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