European Parliament sets the tone for an EU sustainable corporate governance law

The European Parliament is working on a report that will set the tone for a sustainable corporate governance framework that does not rely on soft law exclusively when determining areas such as directors’ duties regarding stakeholders and supply chains.

The EP’s Legal Affairs Committee (JURI) is currently drafting a non-legislative report that will provide the basis for future legislation on the subject.

This effort complements the European Commission’s own initiative on the subject, originally included in the 2018 Action Plan, see background here. 

According to the ‘rapporteur’ for the initiative at JURI, Renew Europe MEP Pascal Durand, a consistent European approach on sustainable corporate governance “should be achieved through the establishment of concrete obligations to do and not only to report information”.

“It is necessary to establish a new framework defining company boards’ duties in terms of sustainability,” he wrote in JURI’s draft report. 

JURI’s draft report has taken a stakeholder-centric approach towards directors’ duties, proposing that boards should define, disclose and monitor a corporate sustainability strategy. 

Durand suggested: “This duty should require taking into consideration also the interest of stakeholders who may be adversely impacted by the company’s activities. The Rapporteur is of the opinion that the sustainability strategy should include measurable, specific, time-bound and science-based targets aligned with the Union’s commitments at international level.”

JURI is now consulting other parliamentary committees before a final draft is voted on at a plenary session. Renew Europe MEP Pascal Canfin, Chair of the Committee on the Environment, Public Health and Food Safety (ENVI) has also called for the adoption of an EU legislative framework on the subject. 

“It is necessary to establish a new framework defining company boards’ duties in terms of sustainability” – European Parliament’s Pascal Durand

This would be one that requires companies “to establish, implement, regularly assess and update a corporate sustainability strategy in consultation with all relevant stakeholders… and addresses environmental impacts such as loss of biodiversity and deforestation, as well as mid- and long-term planning towards achieving climate neutrality by 2050.”

Heidi Hautala, rapporteur for the Committee on International Trade (INTA), has called for the adoption of three “distinct, yet mutually reinforcing” legislative proposals on: directors’ duties and sustainable corporate governance; on corporate human rights and environmental due diligence; and on the reform of the Non-Financial Reporting Directive (NFRD). 

All committees considered an enhanced NFRD a key part of this new potential sustainable governance legally binding framework.

There seems to be agreement between JURI and INTA that tax transparency and responsibility should also be part of this framework. 

Hautala, a Finnish MEP for the Group of the Greens/European Free Alliance,  wrote in INTA’s draft report: “Tackling tax avoidance is a fundamental part of sustainable corporate governance.”

It is expected that the plenary session of the Parliament in the week commencing 16 November will vote on a final report drafted by JURI that would inform future legislation.