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EU Sustainable Corporate Governance doesn’t truly address directors’ duties

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Silhouettes of people in a corporation's office. In the background there are big windows with a view to a city.
Silhouettes of people in a corporation’s office – Sustainable Corporate Governance Photo via Charles Forerunner on Unsplash.
  1. The European Commission has announced today its Sustainable Corporate Governance rules. They are an important step in the right direction, but miss the opportunity to truly support businesses’ transition to climate neutrality.
  2. Under industry and national pressure, the Commission has lowered its ambition and has mostly given up on its original plans for directors’ obligations and accountability to shareholders, now addressing only corporate due diligence issues.
  3. Mandating Member States to require companies’ transition plans is a critically important development for achieving enterprises’ decarbonisation and economy-wide transition.

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The European Commission released today its new Sustainable Corporate Governance rules covering companies’ due diligence on environmental impact and human rights across their supply chains. The proposed legislation covers large companies of over 500 employees net worldwide and turnover of €150 million. Smaller companies from high-risk sectors are covered too, but only if they have over 250 employees and or turnover of more than €40 million. 

Thus, today’s proposal is not aligned with the Corporate Sustainable Reporting Directive applicable to 250+ employee companies and some SMEs. This might result in legislative inconsistencies and reduced market ability to track and trace sustainability impacts. Moreover, the now limited scope covering only about 13,000 EU companies and about 4,000 third-country companies significantly undermine the ability of the EU to monitor and safeguard against adverse human rights and environmental impacts.

The directors’ duties, intended to be part of the Sustainable Corporate Governance legislation, are now largely missing, and only marginally covered by the obligation to conduct the due diligence. Specific requirements for linking the board of directors’ remunerations to achieving those climate transition targets are now missing from the proposal and are considered only on a voluntary basis.

Nevertheless, the EU Commission has taken important first steps towards company transition plans. Particularly, it mandates Member States to ensure that their businesses have the relevant transition strategies in place in line with the Paris Agreement. 

Reactions – Sustainable Corporate Governance

Tsvetelina Kuzmanova, Policy Advisor on Sustainable Finance at E3G said:

“Efforts to align business models and company strategies with Paris commitments is a much needed and positive initiative by the Commission. However, specific decarbonisation targets tied to executives’ accountability are a key element to meeting the EU Green Deal goals, and the Commission missed the opportunity to introduce these requirements.”

Namita Kambli, Senior Researcher on Just Transition at E3G said:

“With its new due diligence legislation, the EU has reaffirmed its commitment towards protecting human rights across global supply chains. Multiple safeguards will nonetheless continue to be necessary to prevent forced labour and ensure a just transition for all.”

Ignacio Arroniz Velasco, Researcher on Trade and Climate at E3G said:

“The Commission has responded to the need to extend due diligence rules across the Single Market but has renounced to giving them any real teeth. The proposal is first step towards addressing the global social and environmental harm inflicted by the EU economy, but a missed opportunity to recognise the particular responsibility of EU companies and their directors.”

Notes to Editors

  1. E3G is an independent European climate change think tank with a global outlook. We work on the frontier of the climate landscape, tackling the barriers and advancing the solutions to a safe climate. Our goal is to translate climate politics, economics and policies into action. About – E3G
  2. For further enquiries email press@e3g.org or phone +44 (0)7783 787 863

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