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    EC Seeks Feedback for Initiative on Sustainable Corporate Governance

    July 30, 2020

    EC is seeking feedback, until October 08, 2020, for an initiative that would involve development of proposal for a directive on sustainable corporate governance. The initiative aims to ensure that sustainability is further embedded into the corporate governance framework with a view to better align the long-term interests of management, shareholders, stakeholders, and society. It aims to improve the framework to incentivize corporate boards to integrate properly stakeholder interests, sustainability risks, dependencies, opportunities, and adverse impact into strategies, decisions, and oversight. A public consultation on sustainable corporate governance is planned to be launched in the third quarter of 2020. EC plans to adopt the directive by the first quarter of 2021.

    EC also published the findings of its study on directors' duties and sustainable corporate governance. The study shows that many companies, in particular those listed on regulated markets, face pressure to focus on generating financial return in a short timeframe and redistribute a large part of the income generated to shareholders, which may be to the detriment of the long-term development of the company as well as of sustainability. This EC initiative would create legal certainty and level playing field for the necessary measures to be taken by companies to identify, assess, and mitigate adverse impacts in the value chain. An EU-level initiative could include the appropriate combination of the following corporate and directors’ duties with a view to requiring limited liability companies “not to do harm” and to empowering corporate directors to integrate wider interests into decisions:

    • Companies to take measures to address their adverse sustainability impacts in the areas of climate change and environmental and human rights harm in their own operations and in their value chain by identifying and preventing relevant risks and by mitigating negative impacts (due diligence duty)
    • Company directors to take into account all stakeholder interests that are relevant for long-term sustainability of the firm and to define and integrate stakeholder interests and corporate sustainability risks, impacts, and opportunities into the corporate strategy
    • An appropriate facilitating, enforcement, and implementation mechanism accompanying these duties, including possible remediation where necessary
    • Other possible corporate governance arrangements, for example, regarding directors remuneration 

    Depending on the scope and detail of the initiative, it will need to be established which issues would need to be laid down in legislation and which issues would rather have their place in complementary guidance. This initiative will need to be coherent and consistent with the review of the Non-financial Reporting Directive (NFRD). The new sustainable corporate governance framework would bring benefits to companies as well as to the economy, in particular in the medium to long-term. The majority of a large sample of surveyed companies (mostly large) expect significant or very significant economic benefits arising from a corporate due diligence duty. This, together with potential new directors’ duties and other elements of the new sustainable corporate governance framework, would positively contribute to the productivity, profitability, and attractiveness of EU businesses due to a better management of sustainability-related risks, reaping opportunities, and better taking into account the interests of all stakeholders.

    The new sustainable corporate governance framework would improve the resilience of companies vis-à-vis changing environmental or social circumstances, or to sudden shocks (like the COVID-19 pandemic). As first movers in the sustainability transition, EU companies could gain remarkable competitive advantages on global markets. Introducing harmonized EU rules would level the playing field in the EU internal market, which may also save certain costs compared to what companies are doing now, trying to keep up with various recommendations and expectations. The new framework would also contribute to macroeconomic growth and the increased investment into innovation, research, and technological development. Due consideration will need to be given to limiting and alleviating the burden for small and medium sized enterprises (SMEs), for instance, by the inclusion of exemptions from certain substantive and possible reporting obligations and/or by simplified standard(s), according to the proportionality principle, based on the size and impact of the company.

     

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    Comment Due Date: October 08, 2020

    Keywords: Europe, EU, Banking, Insurance, Securities, ESG, Sustainable Finance, Governance, Corporate Governance, Sustainability, NFRD, Climate Change Risk, EC

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