CSDDD, which the EU plans to use as a tool to force all industries to pay more attention to the value chains connected to their operations, has the potential to expose firms to unprecedented legal risk. If a single link in a firm’s value chain is tied to human rights abuses, environmental destruction or similar acts, Brussels wants to hold the EU-based business accountable.

The finance industry has lobbied hard against being included in the scope of the directive, arguing that such a wide-reaching rule is reasonable to consider for manufacturers, but not for banks, asset managers and insurers. The negative fallout would be “huge,” Philippe Angelis, senior policy adviser for corporate reporting and sustainable finance at Insurance Europe, said earlier this year.

The international scope of the directive has also raised concerns outside the EU. In June, Treasury Secretary Janet Yellen warned of the potential “negative, unintended consequences” facing US firms because of CSDDD.

Jose Manuel Campa, chairman of the European Banking Authority, says it’s logical to include banks in the directive because giving individual sectors too much leeway ultimately allows them to say they don’t care what happens in their value chain.

“I like the philosophy of the directive, which is what we apply in our prudential requirement,” Campa said.

The European Council and Parliament will hold negotiations later this month on moving forward with CSDDD. Until now, whether to include the finance industry had remained a key sticking point in reaching an agreement before the end of the year. Spain’s proposal is intended to allow the broader talks to continue, with a view to returning to the issue of whether to include banks at a later date, according to the draft.

CSDDD is the key plank within the EU’s package of legislation designed to make its economy sustainable by holding businesses accountable for their social and environmental impact. Under the directive, companies would face civil liability and potentially large administrative fines if they fail to comply with the directive.

Member states remain divided over the initial EU Council proposal, the draft proposal shows. In June, the EU Parliament agreed to include the finance industry in CSDDD. But already then, the lawmaker who spearheaded the initiative, Lara Wolters, said she was bracing for pushback during talks with the EU Council.

Excluding banks from CSDDD would undermine its clout, nonprofits have warned.

Spain’s proposal is “a very big mistake,” said Isabella Ritter, EU policy officer at London-based ShareAction. It will also make reaching a compromise “quite challenging” because “the European parliament firmly stands behind the financial sector inclusion.”