EU Commission’s new rules on sustainable value chains risk creating a tick-the-box exercise

“By addressing due diligence and corporate governance, the European Commission’s proposal represents an important piece of the corporate sustainability puzzle. However, it risks proposing a default solution to companies, that relies on tick boxing and pushes the responsibility further down the supply chain,” said Frank Bold policy officer Julia Otten.

The legislation proposes a long awaited EU standard on human rights and environmental due diligence, based on global standards that define it as a risk-based approach: If a company identifies potential or actual severe impacts in its business relationships across its full value chain, it needs to determine appropriate action, track implementation and results, and communicate them to affected stakeholders. “This responsibility cannot be fulfilled by adding clauses in contracts with suppliers as proposed by the Commission,“ said Julia Otten: “This risks becoming a nominal compliance exercise as the one seen with the Data Protection Regulation, generating bureaucracy, whilst falling short of providing effective protection for stakeholders.”

Following fierce lobbying by industry groups, the proposal initially referred to as 'Sustainable Corporate Governance' has been presented with only a few elements to foster integration of sustainability and long-term thinking in corporate governance rules. The Commission’s proposal clarifies company directors’ duty of care to take into account human rights, the environment and climate in their decisions. Companies have to adopt a climate transition plan in line with the 1.5 degree target of the Paris climate agreement, however, no legal consequences are foreseen for breaching this obligation. Linking bonuses of company executives to sustainability objectives remains voluntary.

Directors will also have to oversee due diligence actions. However, the Commission refers to Member States to ensure enforcement and that directors ‘take steps’ to take into account the identified impacts in corporate strategies.

“We welcome the specification of the directors’ duty of care, but it is essential that directors are clearly responsible for the approval of strategies that react to problems. The Commission should not leave this up to national law,” said Frank Bold policy officer Julia Otten.

The proposed legislation requires EU and non-EU companies in the single market with more than 500 employees and revenues of 150 million Euros to prevent human rights and environmental abuses along their full value chains. In high-risk industries such as agriculture, garment and extractives, only companies with more than 250 employees would be covered, while SMEs would be exempted. Over 100 companies and investors have recently shown strong support for such a European due diligence legislation and have called on the EU Commission to move this process forward including “all businesses operating in the EU market, regardless of sector and size”.

The Commission’s proposal will now be handed over to the European Parliament and the EU Member States for negotiations and agreement on the final legislation.