Catherine Purkiss and Eszter Balazs, 89 Belgium
The information and views presented in this article are those of the authors only, and do not reflect the positions and opinions of their former or current employers, or of any organisation they were or are affiliated with.
Executive summary
The European Commission’s Legislative Proposal on Sustainable Corporate Governance pays heed to the importance of the Sustainable Development Goals, the OECD Due Diligence Guidance for Responsible Business Conduct, the Paris Agreement, adopted on 12 December 2015, and the Intergovernmental Panel on Climate Change 2018 Special Report on Global Warming of 1.5ºC, by proposing the introduction of mandatory disclosure of sustainability targets, actions and impacts for EU businesses. A summary of the core components of the proposal will be followed by an explanation of the reasons behind the ever-growing need to recognise our ‘decade of action’, best practices for sustainable corporate governance and the key takeaways arising from the consultation.
The Core of the Proposal
Following a public consultation on the 30th July 2020, the European Parliament approved a non-legislative report 5 months later, in December, that calls on corporations to conduct more sustainable business in the context of shortcomings in existing corporate governance laws (the system which controls company actions) [1]. The Parliament wants the Commission’s future proposals to make sustainable business, and disclosure of data relating to this, mandatory, rather than voluntary, and to outline clear sustainability rules for organisations to abide by [1].
The initiative for Sustainable Corporate Governance is a proposal for a directive and comes under the Commission’s umbrella topic of ‘Justice and Fundamental Rights’ [2]. The ultimate aim is to strengthen the EU’s regulatory framework on corporate governance and law to drive companies towards the creation of sustainable outcomes and value with long-term benefits and to increase the alignment of society’s needs with business leaders, stakeholders and suppliers’ interests [2]. In the Draft Report on Sustainable Corporate Governance published in September of 2020, the European Parliament recognises that any strategy should incorporate [3]:
- ‘Measurable, specific, time-bound and science-based targets’ that mirror the EU’s international scale commitments such as the Paris Agreement
- Company targets that embed biodiversity, deforestation, gender equality, employee rights, a definition of a fair salary and other geography or sector-specific issues alongside climate change action
Commission adoption is expected in the fourth quarter of this year, after the public consultation closed on the 8th February 2021 and the roadmap feedback closed earlier, on the 8th October 2020 [4].
The proposal aligns with the Communication on the European Green deal and its pledge for sustainability to be embedded into corporate governance frameworks [5]. The Sustainable Corporate Governance initiative was also a deliverable mentioned in the Action Plan on a Circular Economy, the Biodiversity and Farm to Fork strategies and is expected to be a component in the updated Strategy on Financing Sustainable Growth [5]. It’s also complementary to the Non-Financial Reporting Directive review [5]. Indeed, in the context of covid-19 recovery, and research showing companies with better social and environmental performance are more prepared for crises, long-term development and resilience of companies gains even greater importance [5].
Undoubtedly, however, the key to this proposal being a success, is tackling the status quo of corporate short-termism and instead, switching the focus to increasing the appeal of non-monetary long-term benefits for the wider planet – unlocking the bigger picture view.
Benefits for Profit, People and the Planet
Kate Raworth, one of the most influential economists of our time, argues that the “planetary household” should be taken into consideration when thinking about global economics. Therefore, both the social and planetary boundaries need to be respected to create a just society that is also considerate towards nature. She visualises her idea through the “Doughnut Economics Model” (Figure 1). Based on this model, the resources used up for the sake of our economy should stay between two rings. We should use enough natural resources to give every human being the necessary social foundation (such as food, water, basic income or education) while putting a limit on exploiting natural resources when it becomes harmful for the environment. Unfortunately, she argues, at the moment economic activities in many cases have exceeded their limits on both ends: damage is done to the environment, while, in many parts of the world, people’s basic needs are still not met [6].
In a way, the Social Corporate Responsibility policy approved by the European Parliament serves to create a legal framework for companies that encourages them to prioritise long-term challenges and goals instead of short-term profit-making and to conduct business activities in a way that is less harmful for the environment and society [7].
The legislative proposal, which will be published in the fourth quarter of 2021, should have a special focus on two issues:
- due diligence
- corporate director duties
Due Diligence
International supply chains have brought some economic benefits to both developed and developing countries. However it has given an enormous lobby power to companies that ignored the environmental and social harm caused by their operation and business activities. Multinational corporations have been encouraged to take responsibility for their international supply chains on a merely voluntary basis. In the initiative for Sustainable Corporate Governance this shall change, as due diligence will play a crucial part in the proposal, ensuring that the international supply chains of corporations respect the fundamental social and labor rights as well as our environmental resources [8].
Corporate Director Duties
Stakeholders interest prioritises short-term profit-making rather than long-term goals, values or challenges such as environmental protection. The proposal on social corporate responsibility aims to change this profit-oriented attitude by introducing new corporate director duties that are focusing on enhancing the (social) accountability of companies [9].
The Need for a Decade of Action
Our generation might be the last one that can act against climate change and environmental degradation. For this reason, the Commission is strongly committed to the UN’s call for a Decade of Action to deliver the UN Sustainable Development Goals by 2030 [10]. Out of the 17 Sustainable Development Goals set by the United Nations, number 17, “Ensuring sustainable consumption and production” is the one that is the most closely tied with the Sustainable Corporate Governance legislative proposal to be published by the Commission. Millions of plastic bottles are purchased every minute, and non-recyclable waste continues to rise as well as fossil fuel usage. Responsible business practises must have a crucial role in turning this production pattern around by introducing greener, less wasteful, less environmentally harmful and more responsible means of production [11]. The Sustainable Corporate Governance initiative serves to encourage businesses to think long-term rather than prioritising short-term financial gains, therefore it makes the whole production cycle and business practise more responsible, accountable and sustainable.
Sustainable Action in Progress- Recent Developments & Best Practices for Sustainable Corporate Governance
The onus on both the public and private sector to be more sustainable has undoubtedly increased as consumer and citizen demand for more equitable development, conservation and a fairer world for generations to come grows. With this has come some commendable sustainable actions that the Sustainable Corporate Governance proposal seeks to make the norm. The ‘Attenborough effect’, named after the powerful influence of the popular environmentalist Sir David Attenborough, demonstrates the power of celebrity to make a positive difference [12] and Softcat and Smurfit Kappa being the first Financial Times Stock Exchange 100 (FTSE 100) and FTSE 250 companies respectively, to achieve 5 stars from SDG focused initiative, Support the Goals, highlights increasing corporate engagement with sustainability [13]. IKEA has even purchased forests from nonprofit organisation The Conservation Fund – providing them with the business benefit of a guaranteed timber supply while simultaneously enabling them to paint themselves in a sustainable light [14]. In the public sphere, the UK government signed a legally binding target of net zero greenhouse gas emissions by 2050, making them the first major economy on the planet to pass laws in an attempt to stop their impact on climate change [15]. These examples indicate some major positive progress being made and illustrate the best practices that the Sustainable Corporate Governance directive should hopefully instigate – inarguably, the potential of the proposal is huge.
Problems with the Proposal: Feedback and Areas of Contention
The consultation period from 26th October 2020 to 8th February 2021 produced 113 valid responses and feedback contributions [16]. Belgium, Germany and France are the top 3 countries that account for the majority of these comments [16]. While it is positive that there is clear European engagement with the proposal, there was only 1 respondent representing an environmental organisation and 1 respondent from a non-EU citizen [16]. With sustainability being a global effort requiring transnational cooperation and the environment being one of the three main pillars of sustainability, this statistic shows a downfall of a consultation that clearly hasn’t captured the views of key stakeholders, an issue that could lead to accusations of a Eurocentric approach to a dilemma that, in reality, disproportionately affects Amazonian and Equatorial citizens. That said, non-governmental organisations, business associations and companies collectively account for 63.71% of responses to the consultation and these are arguably the main target audience of the Sustainable Corporate Governance Directive, with NGO contributions to the feedback also bringing the added benefit of an apolitical, human rights and moral approach to what is otherwise becoming an increasingly politicised issue in an era of greenwashing (the deceptive use of marketing and public relations to persuade an audience your company is environmentally friendly) by private and public sector organisations [16].
Interestingly, the European Policy Office of WWF (World Wildlife Fund) was one respondent to the consultation [17]. In their feedback, they emphasised the logistics through which such a legislative instrument could work, stating that ‘a specified, significant percentage of the KPIs and remuneration of executive management should be linked to the achievement of the targets set in the company’s sustainability strategy’ [17]. Much like sales companies measure progress in terms of commodities sold to consumers, using this suggestion from WWF, companies would be obliged to measure their success in terms of sustainability. This proposal echoes the suggestions of Kate Raworth in her Doughnut Economics model, which compels humanity to reside above a sustainable, equitable and just social foundation of sufficient education, energy, employment, nourishment and freedom of speech [18]. Although this foundation provides all that humanity needs to thrive, citizens should make a conscious effort to remain within the bounds of an ecological ceiling so as to mitigate against climate change, biodiversity loss, altered nitrogen and phosphorus cycles, ozone depletion, chemical pollution and more unsustainable consequences of crossing ecological thresholds [18]. Likewise, KPIs – Key Performance Indicators, linked to the achievement of sustainability targets mirrors the move away from monetary measures of success and development that the Human Development Index takes, in replacement of the more commonly used development indicator – Gross Domestic Product, or GDP [19].
WWF’s European Policy Office consultation response also emphasizes the importance of recognising natural capital and the associated rewards as a means of fighting short-termism [20]. They suggest that company executives should not be rewarded with company shares that encourage employees to focus on short-term economic maximisation but should invest that money in diverse ways that allow for a more long-term, sustainable approach to be taken and the benefits to be reaped and seen by all [20].
Thirdly, WWF suggests that the ‘do no harm’ oath made in the European Green Deal should be implemented [20]. Compliance with this principle should be regulated through liability rules that enable due diligence with the involvement of indigenous peoples, human rights defenders, women’s organisations, trade unions and other stakeholders to ensure this [20]. There should be suitable grievance frameworks and judicial remedy before EU Member States’ courts to ensure accountability, transparency and protection [29]. With all this in place, WWF states that the legislation could nicely complement the DG ENV-led approach to minimise the risk of forest degradation and deforestation linked to products on the EU market [20].
Conservation International, another global NGO, also contributed to the consultation. They recognised the positive trend of an increasing number of corporations improving sustainability in their supply chains, but argued that an EU regulation is highly necessary to create a level-playing field with increased transparency and comparability in reporting, enabling harmonization [21]. Indeed, companies need to have certainty on the requirements they are expected to fulfill, and these should be streamlined at the level of the EU market to avoid unnecessary administrative burden (and) ensure equal treatment [21]. Intersectionality is also key for Conservation International as they believe this is the way to mobilise private sector engagement with the UN SDGs, hence they welcomed the Commission’s all-inclusive approach to sustainability, incorporating environmental, social and human rights risk and impact dimensions [21].
Conservation International felt that the scope of the legislation should be sufficiently large to capture all companies based in, or providing services to, the EU, regardless of their size, turnover, status or sector, with specific support being offered to Small and Medium Enterprises or high risk companies if required [21]. Within this wide scope, obligations should include the company being required to consult relevant parties, such as local people, while they identify, assess, mitigate and report risks, continuing to comply with existing international due diligence requirements in the process [21]. Such a suggestion could help tackle the issue of ‘green-washing’ and ‘SDG-washing’ as the key to this inarguably, is to encourage companies to disclose their positive but, more importantly, negative, sustainability impacts and risks.
Linked to this, robust performance standards should cover the full spectrum of sustainability definitions – including climate change, biodiversity loss and air, soil and water pollution for instance [21]. The importance of company liability for adverse impacts in their global supply chains was also stressed, with the legislation ideally enabling financial or nonfinancial compensation as a form of remedy if detrimental impacts do occur [21]. In this sense, there is a balance to be struck between having strong enforcement mechanisms – achieved through public disclosure on the obligations and a deterrent but proportionate penalty regime – and having access to remedy [21]. Equally, Conservation International proposed that the Commission should consider providing financial and technical support to advance supply chain traceability and access to quality data [21].
‘Overall, the legislation should lay out a hierarchy/sequencing between a set of mitigation measures, to make sure it does not entail systematic ceasing of relationships with suppliers operating in high risk environments, but rather facilitates engagement to shift business practices and drive supply chain transformation.’ – Conservation International [21]
While Conservation International and WWF have offered their insightful views on what successful Sustainable Corporate Governance Legislation should look like that the Commission should take into account, undoubtedly, there remains the question of whether a legislative requirement would actually increase ‘green-washing’, as opposed to decrease it. Regardless, whether the intentions behind sustainable actions matter if they have a positive impact for the planet remains to be food for thought.
Concluding Remarks
Sustainable Corporate Governance is currently an initiative awaiting its legislative proposal by the European Commission in the fourth quarter of 2021. The initiative aims to call corporations to conduct more sustainable business by requiring them by law for certain data disclosures, changes in shareholder’s duties, and potentially mandatory due diligence.
The initiative aligns not only with the Green Deal, but also the UN’s Sustainable Development Goals and counters short-termism that is currently stopping or hindering many businesses and corporations to adopt more sustainable means of production. It is crucial to find a way for corporations to serve the demand of the people while also being considerate towards nature’s resources. Some companies have already shown best practices such as Softcat, Smurfit Kappa and IKEA.
After the public consultation closed on 8 February, the Commission’s final proposal is to be published at the end of this year. Both WWF and Conservation International have voiced their views and ideas on how to make this proposal work. However, it is not clear whether the benevolently intended legislation will be able to create real change or only increase greenwashing as companies desire to present their sustainability data in a way that is good for them. In light of COP26 highlighting our inability to achieve the Paris Agreement of limiting global warming to 1.5C without the help of nature, the need to incentivise improved and genuine actions on corporate sustainability has never been greater.
Sources
[1] European Parliament. Legislative Proposal on Sustainable Corporate Governance. Available at:https://www.europarl.europa.eu/legislative-train/theme-an-economy-that-works-for-people/file-legislative-proposal-on-sustainable-corporate-governance [Accessed 3/11/2021].
[2] European Commission. Sustainable Corporate Governance. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance [Accessed 3/11/2021].
[3] European Parliament. Draft Report. Available at: https://www.europarl.europa.eu/doceo/document/JURI-PR-655848_EN.pdf [Accessed 3/11/2021].
[4] European Commission. Sustainable Corporate Governance. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance [Accessed 3/11/2021].
[5] European Commission. Inception Impact Assessment – Ares(2020)4034032. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance_en [Accessed 3/11/2021]
[6] Raworth, K., 2018. Doughnut economics. White River Junction: Chelsea Green Publishing.
[7] See note 5 above.
[8] European Parliament., EPRS, Towards a mandatory EU system of due diligence of supply chains, Briefing, October 2020
[9] European Commission., Study on directors’ duties and sustainable corporate governance, Study, July 2020
[10] United Nations Development Programme. 2021. Decade of Action | United Nations Development Programme. [online] Available at: https://www.undp.org/stories/decade-action [Accessed 2 November 2021].
[11] Sustainable Development Goals, United Nations. 2021. Goal 12 | Department of Economic and Social Affairs. [online] Available at: https://sdgs.un.org/goals/goal12 [Accessed 2 November 2021].
[12] Global Citizen. The ‘Attenborough Effect’ Is Causing Plastic Pollution to Plummet. Available at: https://www.globalcitizen.org/en/content/attenborough-effect-plastics/ [Accessed 3/11/2021].
[13] Support the Goals. Business Ratings. Available at: https://businesses.supportthegoals.org/ [Accessed 3/11/2021].
[14] Green Matters. IKEA Just Bought — and Will Protect — an 11,000-Acre Georgia Forest. Available at: https://www.greenmatters.com/p/ikea-georgia-forest [Accessed 3/11/2021].
[15] British Government. UK becomes first major economy to pass net zero emissions law. Available at: https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law [Accessed 3/11/2021].
[16] European Commission. Sustainable Corporate Governance. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/feedback_en?p_id=8270916 Accessed [3/11/2021].
[17] European Commission. Feedback From: WWF European Policy Office. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/F1004114_en [Accessed 3/11/2021].
[18] Kate Raworth. What on Earth is the Doughnut? Available at: https://www.kateraworth.com/doughnut/ [Accessed 3/11/2021].
[19] UNDP. Human Development Index. Available at: http://hdr.undp.org/en/content/human-development-index-hdi [Accessed 3/11/2021].
[20] European Commission. Feedback From: WWF European Policy Office. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/F1004114_en
[21] European Commission. Feedback From: Conservation International. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/F594634_en [Accessed 3/11/2021].