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Ended with Response
Ended with Response

Response to the European Commission proposal for an initiative on Sustainable Corporate Governance

About this consultation

This initiative is complementary to the review of the Non-Financial Reporting Directive (NFRD, Directive 2014/95/EU), which currently requires large public-interest companies to disclose to the public certain information on how they are affected by non-financial issues, as well as on the company’s own impacts on society and the environment. The NFRD also requires companies to report on their social and environmental policies and due diligence processes if they have them, or otherwise explain why they do not have any (comply or explain approach). While the NFRD is based on incentives “to report”, the sustainable corporate governance initiative aims to introduce duties “to do”.

The initiative would build upon relevant international standards on business and human rights and responsible business conduct, such as the United Nations’ Guiding Principles on Businesses and Human Rights and the OECD Guidelines for Multinational Enterprises and its Due Diligence Guidance for Responsible Business Conduct.

Background

This initiative looks to strengthen the respect of human rights, including labour rights and corporate social responsibility criteria throughout the value chains of European companies.

Sustainability in corporate governance encompasses encouraging businesses to frame decisions in terms of their environmental (including climate and biodiversity), social, human and economic impact, as well as in terms of the company’s development in the longer term (beyond 3-5 years), rather than focusing on short-term gains.

Reporting to the public on the application of sustainability in corporate governance and on the fulfilment of directors’ and corporate duties would enable stakeholders to monitor compliance with these duties, thereby helping to ensure that companies are accountable for how they mitigate their adverse environmental and social impacts.

Proposed changes

This public consultation aims to collect the views of stakeholders with regard to a possible Sustainable Corporate Governance Initiative. It builds on data collected in two studies: the study on directors’ duties and sustainable corporate governance; and the study on due diligence requirements through the supply chain; as well as on the feedback received in the public consultation on the Renewed Sustainable Finance Strategy.

It includes questions to allow the widest possible range of stakeholders to provide their views on relevant aspects of sustainable corporate governance.

Consultation questions 

Here are the key questions from the European Commission: 

  • Human rights, social and environmental due diligence requires companies to put in place continuous processes to identify risks and adverse impacts on human rights, health and safety and environment and prevent, mitigate and account for such risks and impacts in their operations and through their value chain. In the survey conducted in the context of the study on due diligence requirements through the supply chain, a broad range of respondents expressed their preference for a policy change, with an overall preference for establishing a mandatory duty at EU level.
  • Do you think that an EU legal framework for supply chain due diligence to address adverse impacts on human rights and environmental issues should be developed?
  • Do you consider that corporate directors should be required by law to (1) identify the company´s stakeholders and their interests, (2) to manage the risks for the company in relation to stakeholders and their interests, including on the long run (3) and to identify the opportunities arising from promoting stakeholders’ interests?
  • Do you believe that corporate directors should be required by law to set up adequate procedures and, where relevant, measurable (science – based) targets to ensure that possible risks and adverse impacts on stakeholders, ie. human rights, social, health and environmental impacts, are identified, prevented and addressed?
  • Do you believe that corporate directors should balance the interests of all stakeholders, instead of focusing on the short-term financial interests of shareholders, and that this should be clarified in legislation as part of directors’ duty of care?
  • Which risks do you see, if any, should the directors’ duty of care be spelled out in law? How could these possible risks be mitigated?
  • As companies often do not have a strategic orientation on sustainability risks, impacts and opportunities, do you believe that such considerations should be integrated into the company’s strategy, decisions and oversight within the company?

For the purposes of this consultation, “due diligence duty” refers to a legal requirement for companies to establish and implement adequate processes with a view to prevent, mitigate and account for human rights (including labour rights and working conditions), health and environmental impacts, including relating to climate change, both in the company’s own operations and in the company’s the supply chain. “Supply chain” is understood within the broad definition of a company’s “business relationships” and includes subsidiaries as well as suppliers and subcontractors. The company is expected to make reasonable efforts for example with respect to identifying suppliers and subcontractors. Furthermore, due diligence is inherently risk-based, proportionate and context specific. This implies that the extent of implementing actions should depend on the risks of adverse impacts the company is possibly causing, contributing to or should foresee.

Please explain whether you agree with this definition and provide reasons for your answer

  • How could companies’- in particular smaller ones’- burden be reduced with respect to due diligence? Please indicate the most effective options.
  • Enhancing sustainability expertise in the board Current level of expertise of boards of directors does not fully support a shift towards sustainability, so action to enhance directors’ competence in this area could be envisaged. Please indicate which options are in your view effective to achieve this objective.
  • Do you consider that any other measure should be taken at EU level to foster more sustainable corporate governance? If so, please specify.
  • A clarified duty of care and the due diligence duty would be expected to have positive impacts on stakeholders and the environment, including in the supply chain. According to your own understanding and assessment, if your company complies with such requirements or conducts due diligence already, please quantify / estimate in quantitative terms the positive or negative impact annually since the introduction of Improvements on health and safety of workers in the supply chain, such as reduction of the number of accidents at work, other improvement on working conditions, better wages, eradicating child labour, etc.