November 2020

By Mathilde Defarges

In 2013, over 1,000 Bangladeshi workers died when a garment factory that manufactured apparel for many major American and European brands collapsed due to the building’s egregious state of disrepair. This prompted civil society groups and citizens worldwide to demand that companies pay closer attention to the working conditions along their chain of suppliers. Since then, growing inequalities, trade wars, the coronavirus pandemic, and climate change have revealed a need for more sustainable corporate governance, focused less on short term profits, and more on long term value generation for the whole of society. Policy makers in the European Union are currently developing a comprehensive legal framework around the concept of sustainable corporate governance and more companies should embrace this paradigmatic shift that will help them stay competitive and relevant in an increasingly fast-moving world.

In April 2020, European Commissioner for Justice Reynders announced a legislative initiative on sustainable corporate governance and mandatory due diligence. In an impact assessment released in July 2020, the European Commission explains that “many companies (…) face pressure to focus on generating financial return in a short timeframe” and deplores the negative externalities caused by this race for short-term gains. Instead, the European institution suggests that companies put more emphasis on the sustainability of their business practices. In this context, “sustainability” is used as an umbrella term to cover notions such as environmental and social impact, as well as to denote a focus on long-term profit generation over the currently prevalent short-termism.

While the European Union’s sustainable corporate governance initiative seeks to synergize with some of its green aspirations, it also comes from a place of pragmatism and economic calculus. Research referred to in the July 2020 impact assessment highlights that companies performing well on sustainability factors not only tended to be more competitive than their peers, but also weathered the COVID-19 crisis better. With the EU preparing to disburse billions of euros to kickstart its battered economy, its renewed emphasis on sustainability is at least partly driven by member states’ expectations that those funds be spent as efficiently as possible.

In addition, the European Commission is not working in isolation. In late October 2020, the institution opened a public consultation to collect views from businesses and civil society on how to best promote sustainable corporate governance. In parallel to the Commission’s efforts, the European Parliament has also been following the issue closely. In particular, the European Parliament has zeroed in on the idea of mandatory due diligence as a way of incentivizing a transition to more sustainable business practices.

During Reynders’ appointment hearing in front of the European Parliament in October 2019, both parliamentarians and the then Commissioner-designate had highlighted how strengthening companies’ due diligence obligations, in particular regarding their chain of suppliers, was necessary to enable a switch away from short-term thinking and toward sustainable corporate governance. In a September 2020 report, the Committee on Legal Affairs explains that voluntary due diligence standards that are currently the norm have “severe limitations.” Instead, the Committee proposes that national authorities be imbued with new powers to both supervise corporate due diligence practices, as well as impose sanctions where necessary.

This proposal draws its inspiration from laws that already exist in France and the Netherlands where large companies can be held liable for environmental damage or human rights violations that occur along their supply chains. As with the EU’s proposals, the reporting requirements mandated by these national frameworks also have the advantage of empowering stakeholders such as trade unions and NGOs by giving them a more meaningful stake in corporate governance.

Moreover, conversations around sustainable corporate governance and ways of improving due diligence are not limited to Europe. In August 2019, Business Roundtable released its “Statement on the Purpose of a Corporation” that has since been signed by over 200 CEOs. The document acknowledges the importance of “embracing sustainable practices,” as well as the need to “generat[e] long-term value.” A quick glance through the document’s signatories reveals many of the United States’ most competitive and profitable companies.

Beyond the transatlantic community, the United Nations is also negotiating a “legally binding instrument to regulate the activities of transnational corporations and other business enterprises.” While the primary focus of the text is the protection of human rights, it taps into many of the same concerns behind the EU’s push for more sustainable business practices. Despite the disruption caused by the ongoing pandemic, notably hampering the EU delegation’s participation in the conversation, negotiations are slowly moving forward.

Much like it did on data protection, the EU wants to set a global trend on the issue of sustainable corporate governance. Growing inequalities caused by globalization are placing democratic societies under unbearable strain. However, the damage trade wars, COVID 19, and, increasingly, climate change are causing to global value chains provides a unique opportunity to reframe and reorient the trajectory of globalization towards longer term as well as fairer profit generation. By supporting and embracing this change, companies around the world stand to secure their competitiveness, reputation, and bottom line in a rapidly evolving global landscape.