Connecting the dots in sustainable corporate governance
Leading NGOs working on corporate sustainability and sustainable finance have published a briefing with key recommendations to help clarify directors’ responsibilities to oversee sustainability that fully fit with existing company law and corporate governance frameworks across Europe.
The briefing follows a public letter sent by NGOs to DG Justice Commissioner Didier Reynders and Executive Vice-President Frans Timmermans in support of the EU Commission plans on Sustainable Corporate Governance (SCG) and responding to recent criticism.
The SCG initiative, which was included in the Sustainable Finance Action Plan and the EU Green Deal, is set to provide solutions to two issues:
- address the lack of a European legal framework for corporate human rights and environmental due diligence
- identify how corporate governance can foster sustainability and long-term thinking.
The NGOs are presenting detailed recommendations for the latter part of the initiative. The involvement of boards is paramount to ensure that companies are able to consider and take the necessary strategic decisions with regards to the management of sustainability risks and impacts, and integrate them in overall corporate strategies and business operations.
More specifically, our recommendations tackle the need for coherence and alignment within the corporate and financial market regulatory framework in Europe. In this regard, connecting the dots between companies’ sustainability reporting and upcoming due diligence obligations requires effective governance and oversight from the company’s senior management and the board. Our proposals are therefore divided into two categories to ensure an effective reform:
- Package 1. Board oversight over sustainability strategies, risks and impacts which is intrinsically connected to due diligence, and thus should be explored as part of a single proposal
- Packages 2 and 3 outline other supportive reforms in the field of corporate governance tackling alignment of incentives and board composition in order to promote good practice and provide safeguards against malpractice
Read the full briefing here: bit.ly/3q6P4Cf
Board members already have wide discretion to take account of sustainability matters. However, as shown by the Alliance for Corporate Transparency research on 1000 large EU corporations’ non-financial (sustainability) reports, less than 15% of companies provide insights on the integration of sustainability in core business strategy, Board discussions, and performance incentives. The solution to this gap in practice is simple. To bring sustainability on the board's agenda, withing the existing directors' duties, the European Commission's sustainable corporate governance reform should specify board's procedural obligation to provide oversight of corporate sustainability risk management and due diligence obligations."