Introduction

In December, we wrote about how we may be entering a new era of sustainable corporate governance. Today, we provide more detail about the potential future of sustainable corporate governance in the EU.

The EU is currently considering legislation to improve sustainable corporate governance. The EU Commission is considering measures relating to directors’ duties and mandatory due diligence in the supply chain. Ardea International is pleased to have recently contributed to the EU consultation on the framework for mandatory human rights and environment due diligence. 

This EU legislation would follow in the footsteps of measures taken in some EU member states. For example, the French Duty of Vigilance Law was adopted in 2017, placing a legally binding obligation on parent companies to identify and prevent adverse human rights and environmental impacts resulting from: their own activities; activities of companies that they control; and activities of their subcontractors and suppliers, with whom they have an established commercial relationship. Meanwhile, the Netherlands has led the way on the specific issue of children’s rights by requiring companies to investigate whether their goods or services have been produced using child labour, and to create a plan to prevent child labour in their supply chains if they discover it.

Directors’ Duties

The EU Commission is evaluating whether directors’ duties of care should be more clearly defined in legislation. While directors already have a wide discretion to take into account adverse impacts on human rights and the environment, clearer definitions could help to ensure that sustainability is made a priority. Indeed, a 2020 study on the issue by the Commission considered that there is a tendency for directors’ duties and the interests of a company to be interpreted narrowly to focus on the short-term maximisation of shareholder value, rather than the long-term sustainability of the company. 

The Commission is also considering whether it should strengthen enforcement mechanisms in relation to directors’ duties.

Mandatory Due Diligence 

The Commission is also considering the introduction of a corporate due diligence obligation to require companies to identify and mitigate potential adverse impacts throughout their value chains. This could include varied issues such as climate change, human rights and health, alongside other environmental and social impacts. 

As with directors’ duties, the Commission is also examining whether an enforcement mechanism would be necessary to enforce a mandatory corporate due diligence duty. For example, the Commission is contemplating whether civil liability regimes could be used or whether public authorities should have a role.

What Does This Mean For Business? 

The current plan is for a legislative proposal to be submitted to EU legislators by June 2021. Over the next few years, the landscape is likely to change significantly for businesses who will have to adapt to new requirements. It is to be hoped that this legal change will bring about a level playing field that rewards businesses that meet best practices in relation to the environment and human rights. In order to do this successfully, businesses will need to benchmark their current processes and policies, as well as developing a corporate governance due diligence framework.

In summary, here are some practical steps that your business can take: 

• Identify the gaps in how your business manages environmental, social and governance (ESG) issues
• Address the gaps that you find in your practices in order to create a strong corporate governance due diligence framework 
• Ensure that personnel are trained in the issues relevant to their role

How can Ardea Help? 

Ardea International’s experience in environmental and human rights consulting makes us well placed to provide your business with advice on how to meet best practices as the legal background evolves. We have an ESG toolkit that will help your business to identify and address ESG gaps against international good practice.

We also have varied training resources that will help you to take action in this area: 

• How corporate boards can oversee ESG risks
• Director’s liability: climate change and human rights
• Business and the Modern Slavery Act: Risk management and due diligence