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    EC Unveils New Corporate Sustainability Rules

    Stockholm (NordSIP) – On 23 February, the European Commission officially unveiled its long-awaited initiative on sustainable corporate governance. Abandoning the initial plans for a comprehensive Sustainable Corporate Governance Directive, the Commission adopted a proposal on a Corporate Sustainability Due Diligence Directive instead. The new directive aims to foster sustainable and responsible corporate behaviour throughout global value chains, bring legal certainty, level the playing field for companies, and provide more transparency for consumers and investors. According to the press release, the rules require companies “to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example, pollution and biodiversity loss”.

    The proposal also addresses the crucial issue of company directors’ duties. Directors are explicitly required to set up and oversee the implementation of due diligence and integrate it into corporate strategy. According to the new rules, they should consider human rights, climate change, and environmental consequences in decision-making as an integral part of their duty to act in the company’s best interest.

    Another important part of the proposal is linking directors’ variable remuneration incentives to transition plans and emission reduction objectives. Putting financial and sustainability-related goals on an equal footing is a step in the right direction, despite some concerns that the way the new rules are formulated might enable companies to justify non-compliance.

    However, the scope of companies covered by the proposed rules has already attracted some criticism for being too narrow. Initially, the new due diligence rules will only apply to larger companies, with over 500 employees and more than €150 million in revenues, including non-EU companies with revenues earned in the EU above the thresholds. Companies with more than 250 workers and €40 million in revenue get an extended grace period of two years before they need to comply.

    “Excluding 99% of companies from the environmental and human rights due diligence, which comes down to respecting the law, is shocking,” comments Benoît Lallemand, Secretary-General of Finance Watch. “A four-year delay for companies between 250 and 500 employees from high-risk sectors, and exempting them from the measures aimed at combating climate change in Article 15, makes it even worse,” he adds.

    Patrick Wilcken, Head of Business and Human Rights at Amnesty International, shares similar concerns. “The EU Commission’s decision to develop a directive marks a milestone on the road to greater corporate accountability across the EU. However, the narrow scope of the draft means that this is a missed opportunity, as in its current form only 1% of all EU companies would be required to check that their business complies with human rights and environmental standards.”

    The new directive is still a draft and thus remains subject to further legislative scrutiny and approval. Next, it will need to be approved by the European Parliament and the Council. After that, member states have two years to implement the directive into the laws of their respective countries. Nevertheless, a mandatory EU standard for human rights and environmental due diligence is coming. It is time to get used to the new acronym, HREDD.

     

    Image courtesy of Guillaume Perigois on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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