At the end of last month, the European Commission launched a public consultation on putting sustainability at the heart of the corporate governance framework for EU companies.

The consultation is wide ranging and will be relevant to all those interested in the G in ESG. The proposed “due diligence duty” is particularly interesting with clear parallels with the French corporate duty of vigilance law.

The consultation is available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/public-consultation.

What is the purpose of the consultation?

The consultation aims to gather:

  • the views of stakeholders on the need and objectives for EU intervention as well as different policy options;
  • data that can be used to better assess the costs and benefits of different policy options; and
  • additional knowledge about certain specific issues, in particular as regards national frameworks, enforcement mechanisms and current jurisprudence.

Who should respond?

The Commission is seeking views from a wide range of stakeholders including businesses and their directors, any individuals and groups impacted by the operations of these businesses in the EU and in their global value chains (employees, consumers, investors, local communities etc.), investors, environmental organisations, trade unions and non-governmental organisations representing the interests of other stakeholders, and public authorities with a possible role in supervising and enforcing the new rules.

Why is the Commission launching the consultation?

The Commission believes that embedding sustainability in the corporate governance framework will contribute to the COVID-19 recovery and to the long-term resilience and development of companies. This reflects the view expressed in the European Green Deal (COM/2019/640 final) that “sustainability should be further embedded into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects.”

The consultation follows two studies conducted for the Commission earlier this year. The first study (the study on directors’ duties and sustainable corporate governance published in July 2020) reported that there was a trend for publicly listed companies within the EU to focus on short-term benefits of shareholders rather than on the long-term interests of the company. It recommended that an EU policy intervention was required to lengthen the time horizon in corporate decision-making and promote a corporate governance framework that was more conducive to sustainability.

The second study (the study on due diligence requirements through the supply chain published in January 2020) reviewed due diligence processes designed to address adverse sustainability impacts, such as climate change, environmental and human rights issues. The study concluded that only one in three businesses taking part in the underlying survey claimed to undertake due diligence which took into account all human rights and environmental impacts.

Both these surveys are discussed in the introduction to the current consultation.

What are the key themes?

The consultation is divided into the following sections:

  • Section I: which looks at the need and objectives for EU intervention on sustainable corporate governance;
  • Section II: which explores the duty of care owed by a director and the extent to which that involves stakeholders’ interests;
  • Section III: which proposes a possible corporate due diligence duty;
  • Section IV: which covers other elements of sustainable corporate governance; and
  • Section V: which contains an impact assessment.

Key themes include:

  • whether companies and their directors should take account of broader stakeholder interests including human rights violations, environmental pollution and climate change in corporate decisions alongside financial interests of shareholders;
  • considering whether an EU legal framework for supply chain due diligence should be developed to address adverse impacts on human rights and environmental issues;
  • discussing whether 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 in the long run (3) and to identify the opportunities arising from promoting stakeholders’ interests;
  • whether a “due diligence duty” should be introduced. For the purposes of the consultation, references to a “due diligence duty” are references to a legal requirement for companies to establish and implement adequate processes with a view to preventing, mitigating and accounting 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 supply chain; and
  • as part of a wider discussion on enhancing sustainability expertise on the board, a potential requirement for companies to have at least one director with relevant environmental, social and/or human rights expertise alongside other options.

What does this mean for companies incorporated in the UK?

This consultation provides further evidence of the clear trend towards requiring companies to consider the environmental (including climate, biodiversity), social, human and economic impact of their business decisions. In the UK the concept of "enlightened shareholder value" which underpins section 172 of the UK Companies Act 2006 arguably already achieves this objective. In any event, companies incorporated in the UK are unlikely to be affected by any future directive on sustainable corporate governance which is introduced following the consultation.

Instead the impact will probably be indirect as the UK is likely to have regard to EU developments when considering whether any changes are required to section 172 as part of the increasing focus on the role of ESG factors in corporate decision making.

Any changes introduced following the consultation will of course be relevant for EU subsidiaries of groups headquartered in the UK.

When does the consultation close?

The consultation closes on 8 February 2021.