The EU Corporate Sustainability Due Diligence Directive (CSDDD) exempts financial institutions from due diligence to identify, mitigate and remedy potential adverse impacts, whether human rights or environmental, in their downstream “chain of activities”. In practice, however, it will be hard to escape entirely, not least as the sector will still need to adopt and implement transition plans.

Adoption of the CSDDD
After protracted negotiations and delay, the EU’s Council of Ministers reached an agreement on the CSDDD, the text of which was approved by the European Parliament on 24 April 2024, adopted by the council on 24 May 2024 and published in the Official Journal on 5 July 2024.   This legislation, to be phased in from 2027, establishes an EU-wide corporate due diligence duty on businesses to promote sustainable and responsible corporate behavior grounded in human rights and environmental concerns. To gain support to pass the measure, far fewer companies will now fall within scope, and there will be a transition period of between three to five years depending on the size of the business. Moreover, financial institutions will not now have to carry out due diligence on downstream business partners (the chain of activities) that receive their services and products, such as loans and finance.

However, there is no escape for the financial sector as these important concessions are subject to significant provisos. First, financial institutions may still be caught indirectly. This may happen when in-scope business counterparties perform mandated due diligence on them, requesting information about their operations. What’s more, under the CSDDD, larger financial institutions must adopt transition plans to show how they are mitigating their impact on global warming. This means that their business model must comply with the goal of limiting global warming to 1.5°C. In practice, preparation of such a transition plan requires downstream due diligence into their customers and on the use to which, for example, the proceeds of transition or sustainability-linked finance is put.

The European Commission must report within two years on whether to extend the financial sector’s due diligence obligations. Given the current political climate, this would seem unlikely, but the position may change. As the CSDDD is a directive it remains open to individual EU member states to go further.

Catalyst for a transitioning economy
As recognized in the Paris Climate Agreement, financial institutions are critical players in the transition to a carbon-neutral economy and, because of their role in allocating capital, they can act as a catalyst in achieving better sustainability outcomes in society generally. When reflecting on their role, those in management at financial institutions should remember that the recitals to the CSDDD state that they are expected to consider the “adverse impacts” of their activities and use their financial leverage to influence other companies generally. Moreover, reference is made to the OECD Guidelines for Multinational Enterprises, which indicate the types of measures that are appropriate and effective for financial institutions to take in due diligence processes, while acknowledging the specific circumstances of financial services.

Intrinsically, bound up with transition plans is transition finance, where financial institutions lend to businesses to finance their transition to net-zero emissions. Unlike sustainable and green finance into renewables and recyclables, transition finance often invests in higher emissions and hard-to-abate sectors to put them on pathways to align with the 1.5°C Paris Climate Agreement goal. This path will not necessarily be linear and may in fact see emissions increase in the early years, for example, in the energy sector pending the deployment of new technologies and behavioral societal changes. For this reason, it is imperative for both the institutions providing this finance and their customers that transition plans are robust and credible and will withstand vigorous due diligence by third parties.

Click here to explore the directive’s ambit and the requirement for transition plans in further detail.


Eva-Maria Ségur-Cabanac heads Baker McKenzie's Sustainability offering for Financial Institutions. She is a dual-qualified lawyer, admitted to practice in Austria and New York and focuses her practice on cross-border transactional work. She also advises clients on ongoing capital markets and corporate compliance issues and represents clients in related disputes. She is a regular speaker and author of articles related to Sustainable Finance and the EU regulatory framework regarding ESG.


William-James Kettlewell is a counsel in the EU Competition and Regulatory Affairs Practice Group of the Brussels office. He advises businesses on Europe-wide energy, climate and sustainability issues. Thanks to his engineering background, he brings a novel perspective on legal matters as well as a practical understanding of energy and climate policies. His range of expertise spans from the EU's carbon pricing instruments (EU ETS and CBAM), renewable fuels and hydrogen markets, to the EU ESG landscape (EU taxonomy, CSRD, CSDD, etc.).


Richard Powell is Lead Knowledge Lawyer for Baker McKenzie's Financial Institutions Industry Group where he is responsible for legal content projects, training and knowledge initiatives. Previously he was a member of the UK Financial Conduct Authority's Enforcement Division where he advised on regulatory cases. He has also been an editor of Bloomberg Law's UK Financial Services Law Journal.