The Legal Affairs Committee calls for concrete obligations on sustainable governance for companies and a new framework for defining company directors’ role in the area.
In recent years, International organisations and the EU have made efforts to promote sustainable corporate governance, transparency and long-termism in companies’ financial and economic activities, however MEPs believe that more needs to be done in order to mitigate companies’ long-term impact on society and the environment.
In a non-legislative draft report adopted on Monday (with 13 votes in favour, 5 against and no abstentions) the Committee on Legal Affairs calls for a review of existing rules and a new harmonised EU approach on sustainable corporate governance through a series of mandatory obligations and incentives to act, and not solely rely on disclosure of information. MEPs also urge for a new set of rules outlining and strengthening the duties of company boards’ in terms of sustainability.
Disclosing non-financial information
The Non-Financial Reporting Directive (‘NFRD’) has marked a significant step forward to promote non-financial reporting in the EU, but its serious shortcomings need to be addressed to make it more valuable for investors and stakeholders, reduce companies’ negative environmental and societal impact, and increase accountability and trust in companies.
MEPs reiterate their call to review the NFRD and widen its scope to cover all listed and non-listed large undertakings established in the EU, including non-EU companies operating in the Union. They suggest targeting in particular those investments and sectors often linked to illegal business activities, e.g. environmental crimes, illegal wildlife trade, corruption or financial crime.
An EU comprehensive framework needs to be set up to ensure disclosures are clear, balanced, understandable, comparable among companies, verifiable, objective and include time-bound sustainability targets and publically available via an EU-wide digital platform.
Companies’ long-term interest in sustainability
Companies and their directors need to actively address sustainability concerns, as the company’s long-term performance and survival depends on their adequate response to environmental and societal matters, underline MEPs. They note the important role of executive directors’ in defining the company’s strategy and their duty to integrate long-term interests and sustainability risks. The Commission should therefore put forward a legislative proposal, which clearly defines the directors’ responsibilities when it comes to acting in the long-term interest of the company and society as a whole, among other things.
Sustainability strategies should include measurable, time-bound and science based targets, aligned with the EU’s commitments on climate change, biodiversity and deforestation. They should also incorporate policies on fair salary, gender equality, and better integration of employees’ rights. Finally, MEPs reiterate their call on Council to unblock the directive on improving gender balance among directors of companies (the so-called “Women on Boards” proposal), in order to quickly start negotiations with Parliament.
Rapporteur Pascal Durand (Renew, FR) said: "Setting clear and reliable non-financial reporting standards is essential for undertakings and investors alike to better compare and communicate on corporate sustainability performances. However, this obligation to report information should go hand-in-hand with an obligation to act.
This own-initiative report therefore calls for the establishment of a new legislative framework on directors’ duties, setting strong incentives for corporate boards to integrate sustainability in their decision-making processes."
A recent study commissioned by the Commission on directors’ duties and sustainable corporate governance underlines the positive impacts of clarifying directors’ obligations vis-a-vis sustainability and long-term considerations. It also highlights the problems associated with short-termism and recalls the need for companies to incorporate long-term interest to keep the EU on track to meet its own sustainability commitments, and points towards the need for EU legislation in this regard.
In its 2018 resolution on Sustainable finance, Parliament called for widening the scope of application of the Non-Financial Reporting Directive (NRFD), which sets out the rules on disclosure of non-financial information, related for example on how they operate and manage social and environmental challenges, human rights, anti-corruption and bribery, and diversity on boards.