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Clifford Chance

Clifford Chance

Business and Human Rights Insights

European Commission seeks views on proposals for Mandatory Due Diligence and Responsible Governance

The European Commission has launched a consultation on a Sustainable Corporate Governance initiative which explores its plans for mandatory human rights and environmental due diligence as well as broader governance reforms.

The European Commission has launched a consultation on a Sustainable Corporate Governance initiative which explores its plans for businesses to be subject to mandatory human rights and environmental due diligence (mHREDD) of their operations and supply chains as well as broader governance reform, as a follow-on to the Commission's European Green Deal which states that sustainability should be embedded into corporate governance. The Commission considers that sustainability in corporate governance involves businesses taking a long-term view of their purpose and impacts when developing corporate strategy and decision-making; meaning that account should be taken of environmental impacts (which includes climate and biodiversity) as well as social, human and economic impacts.  The Commission also sees corporate sustainability as an important factor in the global response to Covid-19 and recovery from the pandemic.

Due diligence

Having trailed its intentions for mHREDD over the last few months (see our previous blog here), the consultation formally kicks off the Commission's political process towards a formal legislative proposal which is expected in early 2021.

Commissioner Reynders has previously indicated that the Commission intends to establish a cross-sectoral duty on businesses to carry out due diligence on human rights and environmental impacts in their operations and supply chains, backed up by at least civil, and potentially also criminal, liability. The initiative would build on international standards on responsible business including the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.  While detailed formal proposals are not made in the consultation, the questions asked give a sense of options being considered.  In particular, the consultation seeks views on whether the proposed regime should be mandatory or, for example, simply based on existing guidelines or standards; whether it should be applicable across all sectors and themes, or targeted at particular sectors and themes (e.g. modern slavery or child labour).  The Commission is also considering whether  mHREDD duties should apply to entities domiciled outside the EU but carrying on activities within the EU – potentially giving the regime global impact. 

On 2 December 2020, the European Parliament will vote on a proposal made in September by its Committee on Legal Affairs to make far-reaching recommendations to the Commission for a Directive on mHREDD and, in particular, it is proposed that due diligence obligations in the Directive be extended to 'governance' risks within a business's value chain (see our previous blog post here). The recommendations intend 'governance risk' in this context to mean risk relating to adverse impacts on the good governance of a country, region or territory (including, among other things, by illegal corruption, non-compliance with the OECD Guidelines on bribery of foreign officials, or tax evasion).  It is interesting that, although the Commission's consultation seeks views on other areas that could be included in a due diligence obligation, it does not expressly suggest the option of including due diligence on governance risks.

Other Governance issues

The questions posed by the consultation reflect issues raised in a study on directors' duties and sustainable corporate governance produced for the Commission in July 2020.  In particular, the study recommended various reforms aimed at encouraging directors to abandon historical tendencies to pursue short-term financial interests.

The Sustainable Governance Initiative runs in parallel with, and is complementary to, the Commission's review of the Non-Financial Reporting  Directive (NFRD) and its focus on reporting on non-financial information about businesses' impact on environmental and social matters (among others).  The indications are that the Commission intends for its Sustainable Governance Initiative to impose new requirements on companies and directors to take action on sustainability issues which go beyond the NFRD's simple disclosure and reporting duties.

The consultation floats a number of possible new duties upon companies and/or directors, including:

  • to take into account environmental and human rights issues and stakeholder interests in their corporate decision-making, and to set related targets;
  • to incorporate sustainability matters into the company's strategy, decisions and oversight;
  • for directors to balance the interests of all stakeholders  (instead of focusing purely on short-term financial interests); and
  • rights for employees and other stakeholders to have a role in enforcing directors' duty of care.

The wide-ranging consultation also explores related possibilities for improving stakeholder engagement, controls on directors' remuneration and share buybacks, and enhancing sustainability expertise on boards. A key focus is the imposition of duties upon directors to consider stakeholders' longer term interests, and the removal the incentives which encourage them to focus on short term financial interests of their companies.  

Significance of the initiative

It is clear that these proposals regarding mHREDD and measures relating to governance that are being considered by the Commission could have a significant impact on companies' and directors' duties and responsibilities.  The creation of a level regulatory playing field in this area, and the certainty it brings, will be attractive to those businesses which want to take a strong stand on sustainability action, but are concerned about possible impacts on their bottom line.  However, at this stage the consultation leaves the options open and presents little detail as to which direction the Commission will wish to take on the proposals. This is the ideal opportunity for businesses to provide their detailed input to help shape the proposals.

Responses to the consultation must be received by 8 February 2021 (Midnight Brussels time).

If you would like assistance in responding to the consultation on behalf of your organisation, please get in touch with one of the contacts listed opposite.