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SUSTAINABLE CORPORATE GOVERNANCE. The long and winding road to a European company law framework

"The draft directive, Ares (2020) 4034032, on sustainable corporate governance"
Otilia García-Rivero. Director of Strategy and Policies of CORPORANCE

A potential new directive on sustainable corporate governance (1), in project, could see the light during the second quarter of 2021:
It would have as objectives: 

  • improve the regulatory framework European company law, generating legal certainty and equal conditions in the management of opportunities and risks related to sustainability;
  • align interests of companies, shareholders, managers and other groups;
  • encourage the sustainable value creation long term. 
  • It would be part of the Renewed strategy on sustainable finance, completing previous plans and regulations, in particular the Directive 2014/95 on disclosure of non-financial information and diversity.
  •  In addition, it would imply the modification of other DirectivesLike 2017/1132 on certain aspects of company law relating to capital companies or the 2007/36 on the exercise of certain rights of shareholders of listed companies.

Building a legal framework for European company law

La harmonization of company law of the EU Member States, with different traditions, devotions and interests, is an arduous and complex task, as illustrated by the many twists and turns in the negotiations and developments under the umbrella of the Action Plan European company law and corporate governance December of 2012.

8 years after its launch, the European Commission continues to insist on the need to improve the regulatory framework of European societies, seeking new strategies to advance on the path to harmonization.

However, despite the difficulties, this Plan has given rise to relevant directives such as the Directive 2014/95 on disclosure of non-financial information and diversity (under review) or the Directive 2017/828 amending Directive 2007/36 with regard to promoting the long-term involvement of shareholders.

SUSTAINABLE CORPORATE GOVERNANCE. The long and winding road to a European company law framework

The renewed Strategy on sustainable finance

The European Commission has been working on the Renewed strategy on sustainable finance(2) to boost public and private investments in sustainable projects. Its publication will be made before January 2021, as part of the European Green Deal and the plan Repair and Prepare for the Next Generation facing the COVID-19 pandemic.

The renewed Strategy will advance along the lines drawn by the Action Plan Financing Sustainable Development of 2018, which is still in force and materializing in the much-named, though little-known, avalanche of regulations and delegated acts:

  • Regulation 2019/2088 Sustainable Finance Disclosure Regulation –SFDR- and delegated regulation on technical disclosure standards;
  • Regulation 2019 / 2089 on Benchmark Indices and delegated regulations on the standards, calculation methodology and disclosure requirements for the indices;
  • Regulation 2020/852 on the classification of economic activities environmentally sustainable and delegated regulation of technical classification criteria;
  • ... 

The potential scope of the new directive

El Inception impact assessment(3) contemplate the use of existing corporate governance instruments so that companies "do no harm", integrate sustainability into their management and mitigate possible adverse impacts:

  • due diligence duty of administrators applied in the identification and prevention of sustainability risks and in the mitigation of impacts (considering, among others, the Guiding Principles on Business and Human Rights of the United Nations and the recommendations of the Due Diligence Guidance for Responsible Business Conduct OECD);
  • definition of corporate strategy attending to opportunities, risks and impacts derived from sustainability and the procedures for the establishment, measurement and achievement of objectives to guarantee sustainability considering the interests of all relevant groups, in addition to shareholders;
  • other measures, such as systems of damage repair, schemes remuneración, etc.

Preliminary assessment of the impacts of the proposed directive

The most relevant positive impact would be to have harmonized standards, which allow leveling and cost savings in the internal market of the EU.
In Inception impact assessment the Commission refers to two studies:Due diligence requirements through the supply chain (4) published in February 2020, focused on the requirements to identify, prevent, mitigate and account for human rights abuses and environmental damage. Proposes four possible policy options:

  • not make any changes;
  • provide voluntary guides or guidelines;
  • introduce additional reporting requirements;
  • require new due diligence procedures, considering different options depending on the activity sector and the size of the company.

Directors' duties and sustainable corporate governance(5), published in July. It has two objectives: 

  • evaluate the causes the persistent “short-termism” in the governance of European listed companies, still focused on maximizing shareholder value to the detriment of long-term investments and sustainability, as well as their relationship with regulatory frameworks and market practices;
  • identify solutions that contribute to the achievement of United Nations Sustainable Development Goals and the objectives of the Paris Agreement.

In these studies they are pointed out as possible impacts of the directive:
From the point of view of costes

  • derivatives of the new due diligence duties, which could be less than 0,14% of income in the case of SMEs and 0,009% in that of large companies;
  • derivatives of adoption of procedures to establish sustainability objectives and actions to mitigate possible adverse impacts, which could be higher for certain sectors or company sizes.

  From the point of view of benefits

  • would contribute to a greater productivity, profitability and attractiveness of European companies;
  • would improve your resilience;
  • would contribute competitive advantages, by positioning itself as pioneers in sustainability;
  • would increase the investment in innovation, research and development.

The status of the draft directive on sustainable corporate governance

On July 30, the initiative was formally launchedSustainable corporate governance, with the aim of improving the framework of company law and corporate governance through the publication of a new directive that reinforces the integration of sustainability in European companies.

The Commission plans to adopt the new directive in the second quarter of 2021. To this end, it has opened two successive consultations to evaluate its impact, Inception impact assessment, as a basis for defining the scope of the standard:

  • consultation with interested parties, closed on October 8, 2020; Y
  • public consultation, open until February 8, 2021

One more step in "The long and winding road"towards harmonization of European corporate law.

(1) https://eur-lex.europa.eu/legal-content/EN/PIN/?uri=PI_COM%3AAres%282020%294034032

(2) https://www.europarl.europa.eu/legislative-train/theme-a-european-green-deal/file-renewed-sustainable-finance-strategy  

(3) https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance

(4) https://op.europa.eu/en/publication-detail/-/publication/8ba0a8fd-4c83-11ea-b8b7-01aa75ed71a1/language-en  

(5) https://op.europa.eu/en/publication-detail/-/publication/e47928a2-d20b-11ea-adf7-01aa75ed71a1/language-en

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About the Blog

Blog Tribute Antonio Moreno

Blog Tribute Antonio Moreno

Blog tribute to Antonio Moreno Espejo, who was Director of Authorizations and Registrations, National Securities Market Commission (CNMV), co-director of the Financial Markets Forum of Fide and Member of the Academic Council of FIDE. This collective blog contains articles and reflections generated by people who regularly participate in the Financial Markets Forum of Fide.

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