Sustainable Corporate Governance – hit or miss?

The Commission has the corporate world in its sights with its freshly adopted proposal on Sustainable Corporate Governance. It has long been concerned that sustainability issues are not well enough embedded in the long-term thinking of companies.

This proposal is designed to remedy that and set corporations straight. But realistically, what are its chances??

The proposal, which has its roots in the Green Deal and several other initiatives has been a long time coming. It has had a bumpy road within the Commission preparation-apparatus, and it looks like the journey has taken the edge off some of the more aggressive points, like linking sustainability planning to the compensation of CEO’s.

During the process it seemed like the Commission had a somewhat cynical view of companies, portraying them as short-sighted profit seekers. Profitability is a must for any business, but many CEO’s may not recognize this short sightedness. Especially when the proposal comes at the time when companies are racing to make themselves environmentally friendly – or at least making efforts to make it seem so.

Regulating global supply chains is a demanding task. The Commission has been walking a tightrope trying to answer the calls of the noisy NGO-community, while creating something that is operational in practice for businesses. And of course, the proposed tools should function globally. Most likely because of the sheer size of the endeavor, the Commission has decided to roll it out in piece meal fashion, only focusing directly on large companies.

This means the initiative will directly affect only around 1% of European companies and their supply chains, saving others from mandatory administrative burden. The new due diligence rules apply to so called high impact sectors that include extractions of minerals, textiles and agriculture. But what is the concrete ask?

The companies affected are required to integrate due diligence into their policies, identify human rights and environmental impacts and establish and maintain a complaints procedure. They also need to monitor the effectiveness of their [?] due diligence and publicly communicate on it. In addition, larger companies are required to create a plan to ensure that their strategy is in line with the Paris Agreement target to limit global warming to 1,5 degrees of Celsius. This all sounds like classic Commission speak and one can expect the European Parliament to add more far-reaching ideas.

Still, it is a step in the right direction, but further work and diplomatic efforts are clearly needed.

While setting political direction is good for clarity, in practice much of the progress made to improve supply chain sustainability has been achieved by using voluntary market-based measures. While this proposal will affect certain big players operating with the listed commodities, the great majority of businesses will continue relying on what is being developed by the markets.