EU ramps up legislative work on sustainable corporate governance

Action Plan items on directors duties and supply chain oversight could make it onto statute book

The European Commission (EC) has launched a final consultation aimed at putting the sustainable corporate governance framework it envisaged in its Action Plan for Financing Sustainable Growth into EU law.

The last piece of the EU plan, Action 10, which introduced the notion of sustainable governance as a policy-making area, deferred any regulatory intervention until a body of evidence was gathered. 

As the EC gathered this evidence, Action 10 has emerged amid the current global conversation about corporate purpose, representing a European perspective in the shareholder vs. stakeholder capitalism debate.

In late 2019, the Green Deal boosted the notion of sustainable corporate governance, considering it a priority that would complement another key project in the pipeline – the revision of the Non-financial Reporting Directive.

The core of the consultation launched yesterday focuses on two studies commissioned on the back of the Action Plan that found merit in legislating on Action 10 by embedding sustainability issues into EU corporate laws. 

One study focused on directors’ duties, encompassing stakeholder engagement and proposing a new dimension of the ‘duty of care’ for directors. A second focused on due diligence requirements through the supply chain – also known as ‘duty of vigilance’.

Crucially, the latter study found that the majority of stakeholders surveyed, including multinationals, would support mandatory due diligence of supply chains as a new sustainability-related legal standard for company boards.

The two studies paved the way for Didier Reynders, Commissioner for Justice and Consumers, to announce in April this year that the EC will be promoting legislation on the duty of vigilance with a 2021 deadline in mind.

The EC consultation is seeking stakeholders' views on shaping the direction EU law might take. For example, whether boards should be required to identify the company's stakeholders and promote their interests by introducing relevant targets for directors; or effective ways for boards to manage human rights, labour rights, health and environmental impacts in the company's supply chain.

Separately, the European Parliament (EP) has tabled two own-initiative reports on the subject – this procedure is considered a precursor of legislative initiatives in the EU. One report was filed under the name of ‘sustainable corporate governance’ and the other as ‘corporate due diligence and corporate accountability’. 

The Committee on Legal Affairs (JURI) discussed yesterday the draft reports and amendments. According to an EP spokesperson, a vote on JURI is scheduled for 16 November, while the plenary vote would be held on 14 December.