A narrow vote last week on a sustainable corporate governance initiative in the full session of the European Parliament has signalled resistance to a project that was expected to pass with overwhelming support.
The Parliament’s own initiative report (INI in the EU jargon) was backed by just 347 MEPs versus 307 and 42 abstentions. Although non-binding, these reports set the tone for the European Commission to exercise its legislative initiative power.
The opposition at the plenary came from the majority of the centre-right European People’s Party (EPP) Group. In mid-November, however, the text was agreed upon at the Parliament’s Legal Affairs Committee (JURI) by different political groups and led by Renew rapporteur Pascal Durand.
Nonetheless, 16 MEPs who belong to the EPP Group voted in favor of the report, including shadow rapporteur for the project Emil Radev from Bulgaria. The rest are from Ireland, Belgium, Luxembourg, the Netherlands, Finland and Slovakia.
RI understands business associations might have successfully persuaded MEPs to rethink their support for the Parliament’s report, as it sends a strong message to the European Commission, which is currently seeking stakeholder views in a consultation open until February 2021.
This consultation is aimed at implementing a legal framework for sustainable corporate governance as envisaged in the Action Plan for Financing Sustainable Growth from 2018.
This was the last piece of the EU plan, Action 10, which introduced the notion of sustainable governance as a policy-making area to counter short-termism but deferred any regulatory intervention until a body of evidence was gathered.
To that end, the European Commission commissioned two studies from accountancy firm EY that found an appetite for such a regulatory intervention. One study focused on directors’ duties and a second focused on ESG due diligence requirements through the supply chain.
On the back of those studies, Didier Reynders, Commissioner for Justice and Consumers, announced in April this year that the Commission would be promoting due diligence legislation with a 2021 deadline in mind for a proposal.
Business organasiations such as EuropeanIssuers, BusinessEurope and EcoDa have taken issue with the findings of EY’s studies.
For example, EuropeanIssuers said they had “severe shortcomings” as they are based on “deeply flawed assumptions without presenting strong evidence and ignoring relevant academic research”. See letter to Commissioner Reynders here, quoting the concerns of nine Harvard scholars including Lucian Bebchuk.
After a recent joint conference on corporate governance, the three industry bodies said the evidence presented by the studies “seeks solutions to false problems”.
The three bodies said directors are aware that they have an important role to play to integrate sustainability risks and to guide towards ESG transition.
The bodies stated: “The European Commission can certainly accompany this evolution but it should refrain from bringing too harsh regulation that could be detrimental to the evolutions observed, causing the trend of delisting in Europe to become worse which is something the Capital Markets Union is trying to reverse.”
RI understands that business organisations might dislike a European take on the current shareholder vs stakeholder debate somehow making it into EU corporate law to the extent that director duties change dramatically.
However sources who preferred not to be named said the project might look more radical than it really is because neither the Parliament nor Commision are suggesting granting stakeholders rights to enforce such director duties. It is more about consulting stakeholders’ views and having regard for their interests.
Filip Gregor, Head of the Responsible Companies Section at Frank Bold, a purpose driven law firm, told RI that the sustainable finance agenda needs to be rooted in corporate governance to ensure companies seriously integrate sustainability into their strategy.
“Without sustainable corporate governance, all the green investment would be just a welcome additional source of capital for companies that they could enjoy while not being compelled to change their business as usual,” Gregor said.
JURI is also working on a related file on ESG-inspired corporate due diligence and corporate accountability, which is a binding report through which the Parliament can propose EU law. It was supposed to be voted in December but it has been pushed back to 2021 and could face similar opposition.