Investors give verdict on planned EU rules for green and social supply chain due diligence

NBIM is the latest investor to throw its weight behind Commission’s proposal on sustainable corporate governance

Norges Bank Investment Management (NBIM) is the latest investor to come out in support of plans by the EU to introduce tighter rules on how companies monitor human rights and environmental risks in their supply chains. 

The European Commission closed a public consultation today on the proposals, which centre on company law and corporate governance. 

The prospective rules seek to “enable companies to focus on long-term sustainable value creation rather than short-term benefits”, as well as “help companies to better manage sustainability-related matters in their own operations and value chains as regards social and human rights, climate change, environment, etc”.

The initiative is an attempt to take forward ‘Action 10’, dedicated to “sustainable corporate governance”, of the EU’s Action Plan on Sustainable Finance, released in 2018. While the Action Plan was spearheaded by the Commission’s Financial Stability, Financial Services and Capital Markets unit (known as FISMA), this project is being led by the department for Justice and Consumers. 

Last April, Didier Reyders, the Commissioner for Justice, announced he would develop legislation on mandatory sustainable due diligence for companies.

And last month the European Parliament’s Legal Affairs Committee approved a draft legislative initiative advocating for corporate mandatory human rights and environmental due diligence. The report, Corporate due diligence and corporate accountability, will need to be approved by the wider European Parliament at a plenary in early March.

The current plans are aimed at Limited Liability Companies and are expected to take the form of a Directive rather than a Regulation – meaning that EU Member States will have some freedom to implement them as they see fit. 

The consultation was opened in October following a feedback period on a ‘roadmap’. Altogether the two feedback periods garnered 114 responses. The proposal will now be subject to an impact assessment, with a final proposal expected in Q2 of 2021.

Currently, the Commission is considering requiring “companies to take measures to address their adverse sustainability impacts, such as climate change, environmental, human rights (including workers and child labour) harm in their own operations and in their value chain by identifying and preventing relevant risks and mitigating negative impacts (due diligence duty)”. 

It is also mulling rules for “company directors to take into account all stakeholders’ interests which are relevant for the long-term sustainability of the firm or which belong to those affected by it (employees, environment, other stakeholders affected by the business, etc.), as part of their duty of care to promote the interests of the company and pursue its objectives”; and for “company directors to define and integrate stakeholders’ interests and corporate sustainability risks, impacts and opportunities into the corporate strategy – following appropriate procedures – with measurable and time-bound, science-based targets where relevant, including as regards climate targets aligned to the Paris agreement, biodiversity and deforestation targets, etc. and according also to the company’s size and activity, and to implement such strategy through proper risk management and impact mitigation procedures”.

The proposals are expected to build on existing voluntary international standards, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

NBIM, one of the largest investors in the world, told the Commission in its feedback: “We welcome the initiative to develop legal requirements for a mandatory due diligence duty across a company’s operations and supply chain. Voluntary due diligence standards have not yet led to the desired standard of corporate due diligence, and harmonisation at the EU level would promote a level playing field for companies.”

The manager of Norway’s $1trn sovereign wealth fund also supported the initiative’s suggestion that directors remuneration could be used to incentivise focus on long-term value creation.

The European Fund and Asset Management Association (EFAMA) also came out in support of the proposals late last year, saying: “encouraging companies to focus on long-term, sustainable value creation has the potential to promote a cultural shift in the way companies operate, and unlock sizeable investments towards a sustainable and just transition.”

Both NBIM and EFAMA recommended improving the tools available to shareholders to make an impact on companies' sustainability and governance practices, with the former encouraging the removal of “obstacles to cross-border voting and streamline the filing process for shareholder proposals”. Whilst the latter suggested the Commission could consider initiatives to facilitate shareholders’ access to the Board of Directors, introduce more safeguards for minority shareholders, better hold directors accountable or facilitate the tabling of shareholders' resolutions – “beyond the provisions already included in the Shareholders Rights Directive”.

Danske Bank also contributed to the feedback, welcoming the proposals but urging the Commission to more thoroughly map existing national-level rules on corporate sustainability in Europe, and ensure “alignment of this initiative with thematically overlapping initiatives under the EU Action Plan [and] appreciate the relevant sectoral framework applicable to financial institutions with coming changes to CRR / CRD IV, AIFMD, UCITS, MiFID II etc”.

Likewise, the CFA Institute recommended the “the introduction of a monitoring exercise with the purpose of gauging the state of governance frameworks developed in the EU member states”. The association of investors also said the Commission should “ensure that member states develop their own mechanism, with clear and appropriate indicators, with the aim to push companies and investors to comply with governance guidelines or, if they do not, to provide a valid and clear explanation.”

Other investor voices were much more critical of the plans. Swedish investment firm Investor AB warned that the initiative would “create increased uncertainty among global investors as well as European entrepreneurs and companies and may lead to European companies getting less access to risk capital, business sector dynamism and innovation being hampered, and incentives for undertaking forward-looking investments and innovations necessary to support sustainable economic growth and carbon transition being severely undermined”. 

Human rights has been climbing up the responsible investment agenda over the past 18 months. The Principles for Responsible Investment has been prioritising labour rights in its recent work, and last year 105 international investors including Legal & General Investment Management, Federated Hermes International, Aviva Investors and Robeco, called on governments to put in place regulatory measures on human rights due diligence.