For years there has been a mix of voluntary standards, self-regulation, CSR and disclosure reporting legislation that has sought to hold business accountable to address negative impacts to people and the environment. However, as evidenced by the fallout from the pandemic, these measures have been insufficient to ensure that the most vulnerable are protected or that a level playing field is created for businesses seeking to ‘do the right thing’.
We may, however, be entering a new era of sustainable corporate governance.
Mandatory due diligence
In April 2020, the European Commissioner for Justice , Didier Reynders announced that the European Commission was committed to introducing legislation in 2021 to make human rights and environmental due diligence mandatory for all EU companies. There is a recognition that voluntary action has not brought about change at corporate level. Whilst the UNGPs provide a voluntary framework setting out a duty to respect for companies to address human rights, there has not been a significant reduction in negative impacts to people or communities. The recent Rio Tito account of demolishing the cave belonging to an indigenous group of people and the exist of their CEO and other executives highlights the incongruity between policies and practice.
Reynolds announcement was made off the back of a BICCL report commissioned by the EU and published in January 2020. The report concluded that around 70% of EU companies surveyed support the introduction of mandatory Due diligence. Our webinar discusses the some of the insights from the report with one of the authors.
There has been a significant shift as companies are themselves calling for change. In December 2019 cocoa companies called for mandatory environmental and human rights due diligence. The reason for the shift is that businesses that are investing resource into creating ethical supply chains want to ensure that there is a level playing field amongst all businesses.
A June 2020 report “Human Rights Due Diligence Legislation Options for the EU” makes recommendations on what due diligence law should cover, including suggestions on monitoring, enforcement and remedy. Of particular interest is the proposal for providing competent bodies to investigate abuses, initiate enforcement actions and support victims.
In September 2020 , the European Parliament on Legal Affairs issued a draft report setting out recommendations to the Commission on corporate due diligence and corporate accountability. The report recognises the ‘severe’ limitations of voluntary due diligence standards and states that the Union should urgently adopt measures setting out minimum standards for organisations to ensure they identify, manage , disclose ESG risk across their entire value chain. Critically this report sets out the text of the proposed directive.(I will cover this in our next blog) .
A consultation was launched on the 26th of October..
The role of corporate governance
Whilst the call for mandatory due diligence addresses the need for uniform legislation that mandates action and has appropriate penalties or enforcement provisions in place, the EU has also recognised that corporate governance plays a key role in delivering the EU’s commitment to the SDGs.
Action 10 of the: Financing Sustainable Growth puts particular emphasis on fostering sustainable corporate governance through redefining corporate board duties.
The EU commissioned EY to produce a Study on director’s duties and sustainable corporate governance in July 2020.
This study focuses on the root causes of ‘short termism’ in company law and corporate governance. Its aim is to identify possible EU level solutions, also with a view of contributing to the SDGs and the Paris Agreement. They recognise that the trend has been for companies within the EU to focus on short term benefits of shareholders and not the long term interests for the company. One of the root causes that has been identified is
the fact that companies lack a strategic perspective over sustainability and current practices fail to effectively identify and manage relevant sustainability risks and impacts.
The report proposes reforms to company law and corporate governance to help meet an objective of fostering sustainable corporate governance and contribute to accountability. Some specific objectives are proposed to achieve this goal. These are:
• Strengthening the role of directors in pursing their company long term interests
• Improving director’s accountability towards integrating corporate responsibility into decision making
• Promoting corporate governance practices that contribute to company sustainability.
The study recognised that creating a new EU directive would trigger harmonised adaptation of laws and measures focusing on the importance of directors’ duties and the requirement for directors to identify and mitigate sustainability impacts (both internal and external) connected to the company’s business operations and values chain.
The EU launched a consultation that is open until February 2021 and can be completed by filling in the online questionnaire.
The shift towards mandatory due diligence legislation as a solution to addressing human rights abuses and negative impacts on the environment is being seen as a welcome step by not only civil society but those businesses who want a level playing field.
Whist the EU still has to formalise its draft legislation, there is a raft of other domestic regulation that is either in place or being finalised across the EU addressing human rights, supply chain due diligence (such as conflict minerals ) and environmental impacts, for example the Netherland Due Diligence Child labour law, the French Vigilance Law and EU non-financial reporting directive. Companies should be familiar with these requirements and how they might affect legal liability where they fail to address these issues or potential impact to reputation. We have seen how the Boohoo scandal in the UK continues to give rise to negative press about the working conditions of the suppliers to the company and ongoing calls for the resignation of the directors. Focus by shareholders and consumers is growing.
However, the current focus to ensure that cultural reform is required at corporate governance level that encompasses the possibility of introducing a duty of care to undertake due diligence perhaps heralds a new era for human rights and sustainability. It should be recognised that beyond legislative reform that includes enforcement penalties, training and awareness is critical to the success of any changes concerning measures to improve environmental standards by business and ensuring that ‘no harm’ is done to people in their organisations and supply chains. Critically directors and executors should be aware of what information they need to make informed decisions on human rights and environmental matters.
The proposed EU reforms to the corporate governance regime may not have the same impact on UK companies where the ‘ enlightened shareholder value’ model has existed for some time. The UK Company’s Act section 172 requires that company directors have a duty to promote the success of the company for the benefit of its members as a whole and in doing so have regard to impact of the company’s operations on the community and environment. Whilst the UK has included this enlightened shareholder interest there is little enforcement of the provision.
Of course, the UK is facing the impact of Brexit at the end of December. Whilst EU legislation will no longer have to be transposed into UK domestic legislation, the reality is that for companies with global supply chains that might extend to Europe, they will have to understand the extent of these proposed reforms and legal requirements as they are likely to have an impact on how business operates it compliance and governance functions. Those companies that are already building resilient supply chains and have developed a culture of ethical behaviour will be better placed to meet the proposed changes.
Looking ahead, whether a business is based in the UK or in the EU, sustainable corporate governance will mean that a shift in culture is needed by many companies that simply work to rule/ the law. Director’s will also need to understand their role in integrating ESG into their strategic reviews and business day to day operations. Businesses that are emerging the strongest from the impact of COVID-19 are those that have been able to protect their brand and supply chains by acting ethically. Let’s remain hopeful that these proposed changes in 2021 will herald an era of accountability and responsibility by all.
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