Commission bends to lobby pressure on Sustainable Corporate Governance

Finance Watch statement commenting on a legislative proposal for a Directive on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 published by the European Commission on 23 February 2022.

  • Finance Watch regrets that the EU Commission gave in to the lobby pressure and watered down proposals on directors’ duties and aligning a proportion of directors’ variable remuneration with sustainability targets.
  • Proposals on mandatory corporate sustainability due diligence are welcome. However, they are too limited in scope, leaving out 99% of EU companies. Environmental due diligence should refer to EU law and include climate-related considerations.

A long-awaited initiative on sustainable corporate governance was expected to require corporate sustainability targets (science-based whenever possible), credible transition plans and address directors’ duties making them accountable for considering sustainability matters in the context of corporate strategy. The directive was also hoped to align a part of directors’ variable remuneration with corporate sustainability goals, which would set appropriate incentives for businesses to transition towards sustainability.

Bending to the pressure of heavy lobbying during the last months, the Commission abandoned its plan for a Sustainable Corporate Governance Directive. Instead, today it adopted a proposal on a Corporate Sustainability Due Diligence Directive, including weak provisions on a corporate transition plan (Article 15) and consideration of sustainability matters as part of directors’ duty of care (Article 25).

Finance Watch welcomes the requirement for companies to adopt a transition plan. However,  according to the proposal, emission reduction objectives would only be required in case climate change is identified as a principal risk for, or a principal impact of, the company’s operations. Moreover, leaving the assessment up to every company leaves too much leeway and opens the door to circumvent the rules.

Finance Watch is also strongly concerned about the narrow scope of companies covered by the proposed rules. Excluding 99% of companies from the environmental and human rights due diligence, which comes down to respecting the law, is shocking. 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 said Benoît Lallemand, Secretary General of Finance Watch.

“Impact on the environment, human rights and social matters is not per se determined by the size of a company. Small and medium-sized companies from certain sectors can deliver a profound and wide-reaching impact on the environment and society” said Aleksandra Palinska, Senior Research and Advocacy Officer. “Moreover, the scope of the Corporate Sustainable Due Diligence Directive should be at least as broad as of the Corporate Sustainability Reporting Directive, also for regulatory consistency reasons”, she added.

On a positive note, Finance Watch commends the European Commission for including non-EU companies with significant EU operations in the scope of requirements. This would improve a level-playing field for the EU companies and result in a positive impact spreading outside the European Union.

Provisions in Article 15 (3), asking Member States to ensure that variable remuneration is linked to the transition plans and emission reduction objectives, if relevant, are a step forward. However, concerns mount over making it conditional to variable remuneration being linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability. Effectively, that will enable companies to easily justify non-compliance.

Remuneration can be a powerful tool to encourage certain behaviours and corporate decisions” stressed Lallemand. To that end, Finance Watch suggests aligning half of directors’ bonuses with corporate sustainability targets. Such an approach would put financial and sustainability-related objectives on an equal footing and set companies on a path towards sustainability.

Last but not least, Finance Watch welcomes the proposals on mandatory corporate due diligence. However, EU law should be the reference for the environmental due diligence and climate-related considerations should clearly be included.

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For more information, contact Pablo Grandjean, Finance Watch, on +32 4 74 47 07 47 or at pablo.grandjean@finance-watch.org.

Notes to editors:

  • Response to Commission Consultation Document Proposal for an Initiative on Sustainable Corporate Governance (Feb 2021);
  • Joint NGOs Policy Briefing on Sustainable Corporate Governance (June 2021);
  • Joint NGOs Letter: Risking Effective Sustainable Corporate Governance (December 2021);
  • Finance Watch letter to the European Commission on sustainable corporate governance (December 2021);
  • Joint Statement: NGOs express deep concerns on the upcoming Sustainable Corporate Governance initiative (February 2022).

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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