PensionsEurope has called for clarity on whether the European Commission’s (EC) proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) covers the activities of institutional investors.

In response to the EC’s proposal, PensionsEurope noted that it is supportive of creating equal obligations and frameworks across the EU through legislation, which ensures that companies live up to their responsibility to protect human rights and the environment.

“Moreover, we believe that the Directive could create a level playing field in the EU. However, we see the need for clarifications in the proposed directive, and we would like to make the following observations,” PensionsEurope stated.

Under the EC’s current proposal the directive brings into scope the entire financial sector, irrespective of legal personality, including pension funds, which PensionsEurope has raised concerns about.

“The main activity of a pension fund concerning the proposal is investing contributions on behalf of employees in a diversified portfolio of assets: shares, corporate and government bonds, credits, real estate, infrastructure, and private equity. In most cases, pension funds will be minority shareholders with only a fraction of the shares. The question is whether these activities fall within the scope of the due diligence requirements of the CSDDD,” PensionsEurope said.

It highlighted that several definitions and provisions indicate that this is not the case. For example, the definition of ‘value chain’ and ‘business relationship’ mention that for financial services companies there needs to be a client relationship and finance needs to be provided to this client.

Furthermore, the organisation said that due diligence has to be exercised only ahead of the provision of the financial services.

“This provision seems tailored towards services such as banking and insurance. Pension funds trade on a continuous basis in order to rebalance the portfolio and invest contributions. It is unclear whether due diligence has to be exercised ahead of each trade or only when it was decided to include the investee company in the portfolio.

“Nevertheless, we have understood that the European Commission believes that pension funds should conduct due diligence on investments, including shares and corporate bonds purchased on the secondary markets. If this is indeed the case, the proposal would merit various clarifications. Otherwise, it would create unclarity amongst pension funds and supervisors about the scope of the requirements,” PensionsEurope stated.

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