Speech by Commissioner Reynders in RBC Webinar on Due Diligence

Speech by Commissioner Reynders on 29th April 2020 in the webinar on due diligence hosted by the RBC Working Group.

Ladies and gentlemen, it is my pleasure to be here with you today.

Your participation, and the overwhelming interest for the work of the Commission throughout the past year, show that there is a real need for this discussion.

Today, our societies are facing a number of challenges. The current Covid-19 health emergency, the consequent economic crisis, but also a climate emergency, a sustainability crisis, an unprecedented biodiversity loss, etcetera. And the current crisis will unfortunately compound the existing economic inequalities, both inside the Union as well as between the most developed countries and the least developed ones.

As a consequence of the health and economic crisis, many people, especially in the developing areas of the world, will find it more difficult to satisfy their basic needs. Similarly, there is a clear risk that human rights are not respected everywhere.

We can only respond to all these challenges by upgrading our unique social market economy in order to achieve a more equal, inclusive and environmentally sustainable model.

The direction we will take on the course of recovery will determine the sustainability of our economy, society and planet.

The COVID-19 crisis painfully exposed the vulnerabilities of our economy and of unregulated global supply chains. Many argue that we should rethink our supply chains and dependency on third countries for some key products.

In the present crisis, we realised how important it is for the businesses themselves to properly integrate the interests of the society in which they operate, of the workers and those depending on the companies for their sheer survival and sustainability.

Businesses which have better risk mitigation processes across their supply chains cause less harm to people and weather the crisis better. Good environmental, social and governance practices pay off, even in the short-term, not only in the long-term.

We need to make sure that responsible business conduct and sustainable supply chains become the norm, a strategic orientation for businesses. However, as the impact of today’s difficulties may be felt for some time, companies will need to be supported and protected during this transformation.

At the same time we need to focus on the areas where most of the harm occurs and to which Europe contributes, directly and indirectly.

We will succeed only if our reforms ensure the necessary trust between economic actors and the rest of the society. Trust brings economic benefits.

This is a major task ahead of us: to work towards an economy where ideas and innovations are harvested and concerns are heard, where stakeholders’ interest is taken into account in economic decisions.

Role of corporate governance

The European Green Deal highlights the role of corporate governance in this transformation.

Achieving climate neutrality by 2050, boosting the economy, transitioning towards a more sustainable and circular economy and leaving no one behind, requires the full mobilisation of all economic sectors.

The European Green Deal recalls that it will take 25 years to transform the whole industrial sector and all value chains. We need to adopt new rules now.

We cannot renounce to the green transition, as still in this moment of crisis, we can see the consequences of degrading biodiversity.

The digital and green transitions present major opportunities.

There is indeed significant potential in global markets for sustainable technologies and products, because sustainable companies often outperform others.

This is a major opportunity for Europe and for European companies.

Although many companies are aware of the benefits of the green transition, transformation is often slow due to market failures, including in corporate governance.

Our work in the area of corporate governance has three main objectives: 1) to foster longer time horizons in corporate decision-making; 2) to incentivise sustainable business models; 3) to increase corporate accountability for human and environmental harm.

Today, there can be a temptation for companies to focus on generating financial return in a short timeframe only, sometimes to the detriment of their long-term development.

Short-term payouts have been on the rise since the 1990s, while investment and Research & Development spending relative to revenue is declining constantly in big companies. This trend affects all Europe.

87% of CEOs complain about shareholder pressure to generate short-term profit and claim that longer-time horizons would improve performance and innovation.

This tendency can hamper sustainable value creation and investments that are crucial for the green transition. It can deter companies from taking the interests of all stakeholders into account, from integrating sustainability risks into business strategies and ultimately from properly managing their impacts on people and on the planet.

With the globalization, value chains are increasingly complex. Businesses around the world recognize this trend and have made declarations – the last recently in Davos – about the need to better align business interests with the interests of stakeholders and wider society.

Commission action

Against this background, we need to provide the right incentives for sustainable business operations. Company law and corporate governance have a pivotal role to play in achieving this goal.

Besides the corporate due diligence duty, the duty of care of directors is also important, as it encourages them to integrate stakeholders’ interests into corporate decisions alongside the interests of shareholders, to embed sustainability into corporate strategies and to adopt science-based targets.

Study on due diligence requirements through the supply chain

Corporate due diligence is a process aiming to identify, prevent and mitigate adverse human rights and environmental impacts in a company’s own operations and in its value chain.

This was developed in the UN Guiding Principles on Business and Human Rights and expanded in the OECD responsible business framework for multinationals.

It is also increasingly being introduced into legal standards in the Member States.

The study examines existing market practices and regulation on due diligence, and assesses the impact of possible regulatory options.

It approaches the due diligence debate through a novel perspective of company law and corporate governance, which could provide answers to questions that could not be tackled through other approaches so far.

The study generated great interest from stakeholders.

Over 600 responses were received, out of which more than half from individual businesses and from a large sample of Member States. The aim was to have a representative and balanced sample of businesses and stakeholders.

The results show that voluntary action to address human rights violations, corporate climate and environmental harm, although incentivised though reporting, has not brought about the necessary behavioural change.

The study found that only one in three businesses in the EU are currently undertaking due diligence which takes into account all human rights and environmental impacts.

The survey asked stakeholders about their perceptions relating to possible regulatory options.

70% of business survey respondents agreed that EU-level rules on a general due diligence requirement may provide benefits for business.

Those supportive of EU rules believe it would create legal certainty and a single harmonized standard in place of different approaches in the Member States.

They indicate it would help levelling the playing field and increase leverage on supply chains in third counties.

They also saw the benefit of due diligence as a defence, should a dispute arise.

Stakeholders favoured a mandatory due diligence as a legal standard of care, and generally preferred a cross-sectoral regulatory measure, as many companies operate in multiple sectors.

The assessment of options indicates that administrative costs and burdens would be naturally highest for a mandatory approach and that the burden on SMEs need to be properly alleviated, which will definitely be taken into account in our future actions.

The findings show that the additional firm-level costs, as percentages of companies’ revenues, would be relatively low (less than 1%), while companies expect significant or very significant benefits.

No major impact is expected as regards competitiveness vis-a-vis third countries. Additional costs would for instance be much lower than average tariffs on imported goods.

The way forward

Another study on board duties, integration of sustainability into corporate strategies, targets and stakeholder engagement will be finalised soon, in May.

A possible legislative initiative on sustainable corporate governance was announced in the Circular Economy Action Plan for adoption by 2021. This action should – in my view – be part of the initiatives supporting the economic recovery.

The current crisis has reinforced the support for action: even business organisations, which have been split before the current crisis, come forward with statements in favour of EU action. Just last week, a coalition of investors managing 5 trillion US dollars of assets has asked for mandatory human rights and environmental due diligence legislation.

We have already started consulting on the main lines of
the possible initiative. The public consultation on the new sustainable finance strategy contains questions regarding sustainable corporate governance and due diligence. DG JUST will also launch its own public consultation regarding the initiative.

I will listen to all parties in the public consultation process.

I will also continue to observe the progress of actions undertaken at national level, as well as at international level, and will draw from the lessons learned from international work, including at the level of OECD and ILO. Our action would also contribute to the effective implementation of relevant international standards where developed.

I am looking forward to starting the discussions on the best design for the EU approach. Today, I am sure we will have an interesting exchange on these important questions. Thank you for your attention.

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