EU policies on sustainable corporate governance

Sustainable Corporate Governance

BACKGROUND

The behaviour of companies will have a substantial impact on our ability to achieve the UN’s Sustainable Development Goals. Extreme poverty and human rights violations still prevail in many global supply chains and to disrupt this trend, it is essential that companies are held accountable for their conduct. Voluntary approaches, by demonstrating best practices and encouraging companies to improve their own practices, have led to some progress. However, to achieve large scale transformational change towards fair and sustainable supply chains, voluntary approaches must be complemented by mandatory legislation.

While some legislative measures are being adopted at national level, such as the UK Modern Slavery Act and the French Due Diligence Law, a harmonised approach to mandatory regulation at EU level is required.

In 2020, the European Commission launched a Sustainable Corporate Governance initiative, aiming at improving the EU regulatory framework on company law and corporate governance. The objective is to enable companies to focus on long-term sustainable value creation rather than short-term benefits, to better align the interests of companies, their shareholders, managers, stakeholders, and society, as well as to help companies to better manage sustainability-related matters in their own operations and value chains. The initiative covers 2 main parts: the directors’ duty of care and companies’ due diligence duty, as well as other measures, such as executive remuneration, corporate strategy, composition of boards and inclusion of stakeholders.

WHAT ARE THE FTAO’S VIEWS?

The Fair Trade Advocacy Office (FTAO) welcomes European Commission’s commitment to introducing a proposal for Sustainable Corporate Governance initiative which includes Human Rights and Environmental Due Diligence (HREDD).

We support the broad civil society call for an effective and impactful legislation, as articulated in  the civil society letter to Commissioner Reynders on the announcement of EU Sustainable Corporate Governance initiative, which we co-signed.

Given that defending the interests of small farmers and workers in the Global South is at the core of our mission, we, together with Brot für die Welt, commissioned the University of Greenwich (UK) to look at how to ensure human rights due diligence frameworks have a positive impact on small farmers and workers. The report showed that HRDD frameworks and instruments need to be carefully designed and implemented, to avoid being a mere tick-box exercise, or worse, lead to a shift of burden and costs to the most vulnerable parts of value chains (see our blog here).

We believe sustainable corporate governance legislation should address the root causes of human rights violations, lead to a real shift in companies’ practices, and bring about positive change on the ground for small farmers and workers. (see our paper on Why Purchasing Practices Must Be a Part of Upcoming Due Diligence Legislation).

In order to achieve this, we believe that the HREDD component of the Sustainable Corporate Governance initiative should:

  • Be a continuous, preventative, risk-based process based on the standard set by the UN Guiding Principles on Business and Human Rights, and the OECD Due Diligence Guidance for Responsible Business Conduct, where all business enterprises effectively identify, assess, cease, prevent, mitigate, track, monitor, communicate and account for actual and potential adverse impacts.
  • Cover the entire supply chain while companies’ due diligence should cover their own activities, activities by companies under their control, and those resulting from other business relationships.
  • Be horizontal and apply to all sectors with complementary guidance for specific high-risk sectors and/or specific types of human rights risks.
  • Cover all business enterprises either domiciled or based in the EU or placing products on, or providing services in, the internal market, including financial institutions.
  • Be proportionate to the undertaking’s actual and potential impacts, while all undertakings should be required to duly exercise their leverage to ensure respect for human rights and environmental standards in their supply chains.
  • Cover at least all internationally recognised human rights including labour rights, with clear guidance on how to assess the severity of risks, including underlying risks such as a lack of living wages and living income either as rights themselves or as preconditions for fulfilment of other human rights.
  • Explicitly cover purchasing practices, including pricing, as a key factor affecting human rights risks, recognising that poor practices will often present an obstacle for their suppliers to respect human rights and environmental standards and can lead to human rights abuses.
  • Good purchasing practices should be recognised as instrumental in enabling compliance with national and international human rights and environmental standards throughout the supply chain.
  • Require companies to make sure that the price they pay to their suppliers, and ultimately to producers, enables them to produce with respect for human rights and the environment, pay living wages to workers, and, for small farmers, to earn a living income.
  • Recognise the complexity of addressing human rights violations when they are linked to structural economic, social, and cultural contexts, and the need for companies to support their suppliers in respecting human rights, rather than simply disengaging.
  • Include the obligation for business enterprises to provide for cooperation in the remediation of adverse impacts in their global value chains and within their operations and business relationships.
  • Implementation guidelines should include reference to the importance of maintaining long-term sourcing relationships with suppliers.
  • Include at least civil and administrative liability for human rights and environmental adverse impacts in companies’ global value chains and within their operations and business relationships.
  • Include access to effective remedy, including judicial remedy for victims.

FURTHER READING

Fair Trade movement
Civil society
European Union context
National context
Global context