Sustainability: Businesses Interests Must Align with Society Interests Says the European Parliament

On 17 December 2020, the European Parliament adopted a Resolution on sustainable corporate governance^[1].  While not legally binding, the Resolution (and its related report) highlights the strong expectation that upcoming corporate governance proposals from the European Commission will include a series of additional mandatory sustainability-related obligations and incentives for companies. The Resolution also calls for a clear set of rules for strengthening the duties of company boards regarding sustainability. The Resolution was adopted with 347 votes in favour, 307 against and 42 abstentions.

Non-financial reporting

The Parliament requests that the scope of the EU’s Non Financial Reporting Directive (NFRD) be widened to cover all listed and non-listed large undertakings established in the EU, including non-EU companies operating in the EU. In particular, it suggests targeting investments and sectors “often linked to illegal business activities, e.g. environmental crimes, illegal wildlife trade, corruption or financial crime.”  Parliament asks that the NFRD cover “a full array of sustainability issues,” which includes “social and employee matters, respect for human rights, and anti-corruption and bribery,” and that the EU ensures that “disclosures are clear, balanced, comparable between companies, verifiable, objective, include time-bound sustainability targets and are publically available.”

Requirements for company directors and stronger involvement of employees

The Parliament also believes that executive directors play a key role in defining a company’s strategy, with a “legal duty to integrate long-term interests and sustainability risks.”  According to the adopted Resolution, the Commission should therefore put forward a legislative proposal, which clearly defines director responsibilities in acting in the long-term interest of the company and society as a whole, and that such a proposal should provide that members of the administrative, management and supervisory bodies should “have the legal duty to define, disclose and monitor a corporate sustainability strategy.”  Further, Parliament stated that “the duty of care that directors owe to their company also requires abiding by the duty not to harm ecosystems and to protect the interests of relevant stakeholders, including employees, who may be adversely impacted by the company’s activities.”  Accordingly, sustainability strategies “should include measurable, time-bound and science-based targets in line with the EU’s commitments on the environment, climate change, biodiversity and deforestation. They should also incorporate policies on fair salary, gender equality, and better integration of employees’ rights determined by the companies themselves.” 

The MEPs also “stress the need for greater employee involvement in company decision-making processes in order to better integrate the long-term objectives and impacts of their companies and invite the Commission to look into the possibility of revising the European Works Council Directive and establishing a new framework on employees’ information, consultation and involvement in European companies.”

Make corporate governance more sustainability-oriented

The Resolution also calls for both incentives and disincentives so as to make the whole system more sustainability-oriented.  Thus, the Resolution:

• Considers that the Shareholders’ Rights Directive should also be amended to incentivise ‘patient’ shareholder behaviour, in particular by rewarding long-term shareholding through voting rights and tax advantages;
• Calls on the Commission to consider the introduction of new mechanisms to promote sustainable returns and the long-term performances of companies; and
• requests in the context of the ongoing revision of the Environmental Liability Directive, that companies should possess financial securities for environmental liability for environmental harm inflicted on individuals and ecosystems.

Next Steps

This Resolution constitutes another building block among the many other sustainability initiatives that the Commission will put on the table in 2021.  While the Commission’s agenda is ambitious, and it remains to be seen if it can pursue all of the initiatives in parallel, the strategy and focus of the Commission on increasing corporate sustainability obligations seems clear.