Forewarned is forearmed – the European Commission consults on sustainable corporate governance to foster long-term sustainable and responsible corporate behaviour

The consultation launched on 26 October 2020 by the European Commission asks how the EU can best go about helping businesses in the way they operate, towards a transformation to a more sustainable economy and to ensure that environmental and social interests are embedded in business strategies. The European Commission communicated in December 2019 its Green Deal action plan. One of its ambitions is to mainstream sustainability in all EU policies. Because it considers the private sector as key to financing the transition, it set out a number of actions: one is to strengthen the foundation for sustainable investment. This means also to further embed sustainability into the corporate governance framework, “as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects”. Other actions are the review of the Non-Financial Reporting Directive and supporting “businesses and other stakeholders in developing standardised natural capital accounting practices within the EU and internationally.” 

As a follow-up to the Green Deal, the Commission announced a sustainable corporate governance initiative to foster long-term sustainable and responsible corporate behaviour. This was also included in the Commission’s Work Programme for 2021. The initiative would build on existing work in the framework of sustainable finance.

Sustainability in corporate governance, according to the Commission, encompasses encouraging businesses to consider environmental (including climate, biodiversity), social, human and economic impact in their business decisions, and to focus on long-term sustainable value creation (beyond 3-5 years) rather than short-term financial value or short-term financial gains. Competitive sustainability will contribute to the COVID-19 recovery and to the long-term resilience and development of companies.

The public consultation, which runs till 8 February 2021, aims to gather data and to collect the views of stakeholders with regard to a possible initiative on sustainable corporate governance.

Didier Reynders, Commissioner for Justice, said: “Sustainable corporate governance can be a real game-changer in the way companies operate throughout their supply chains. We are now securing new business standards for future generations.”

The consultation will complement the findings of two studies: one on due diligence requirements through the supply chain and one on directors’ duties and sustainable corporate governance. The latter study found a clear trend of short-termism in the focus of EU companies. The study shows that, to some extent, corporate “short-termism” finds its root causes in regulatory frameworks and market practices. These trends work together to promote a focus on short -term financial return rather than on long-term sustainable value creation. The study identified the seven key problem drivers, ranging from the narrow interpretation of directors duties and the company’s interest with the tendency to favour the short-term maximisation of financial value, through growing pressure from investors and the lack of a strategic perspective on sustainability all the way to the limited enforcement of the directors’ duty to act in the long-term interest of company. In order to lengthen the time horizon in corporate decision-making and to promote a corporate governance that is more conducive to sustainability, the study on director’s duties also identified specific objectives that EU intervention could aim to reach. The study also referred to EBA and ESMA’s joint Guidelines on the assessment of the suitability of members of the management body and to EIOPA’s Report on Potential undue short-term pressure from financial markets on corporates: Investigation on European insurance and occupational pension sectors in which EIOPA recommended to encourage the application of the principles stated in the Solvency II Delegated Regulation, such as the balanced consideration of financial and non-financial criteria (e.g. ESG factors) when assessing an individual’s performance. Before replying to the consultation, the studies can be a useful inspiration or thought as it lays out for each of the seven key problem drivers possible options for solutions. Praemonitus praemunitus. Forewarned is forearmed.

Lieve Lowet