European Commission wants to oblige companies to be more sustainable

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In line with the European Green Deal, sustainability is going to be integrated deeper into the corporate governance framework according to the plans of the European Commission. A legislative proposal on sustainable corporate governance is expected in October 2021. The goal: Companies are to be legally obliged to long-term oriented corporate governance and measurable sustainability goals. In addition, EU-wide corporate due diligence for supply chains will become mandatory in the future.

The European Commission justifies the necessity of legislative intervention with unregulated supply chains and short-term profit orientation to maximise shareholder value. Both would prevent the sustainable development of European companies. The Commission sees proof of this thesis – for instance – in increased dividend payout ratios. However, the fact that distributions can and should be reinvested in other companies, not least in the interest of economic structural change, is apparently of secondary importance.

Commission considers reorientation of corporate interest

Among other things, the European Commission is considering changes in company law. Specifically, the aim is to define corporate interest under European law, taking sustainability criteria into account. Accordingly, the executive board and the supervisory board are to be obliged to balance the interests of all stakeholders of the company, including its shareholders. This is to be accompanied by a mandatory sustainability strategy as part of the general business strategy, which contains measurable and scientifically based sustainability targets. BDI expressed its criticism of these plans in the Commission's consultation at the beginning of 2021. Such a "codification" of corporate interest would run against the principle of free entrepreneurial decision-making and ultimately hinder efficient decision-making for the long-term good of the company. The transition to sustainable management, the goal pursued by the initiative, will not be facilitated by such regulation.

Towards a European supply chain law

Another focus of the initiative is the implementation of corporate due diligence obligations in global supply chains. EU Justice Commissioner Didier Reynders has already publicly announced several times that he will propose cross-sectoral rules that will oblige companies to comply with human rights and environmental standards in their global supply chains. Clear enforcement mechanisms and a system of sanctions would have to ensure that the standards are actually met. The German law on supply chains does not go far enough for Reynders. He is pushing for an even tougher approach. The European Parliament also welcomes these plans. Its members have already spoken out in favour of very ambitious due diligence requirements in the value chain with a large majority at the beginning of March 2021 and are calling on the Commission to submit a corresponding proposal. The official draft directive is expected in October 2021. It remains to be seen what will actually be in the Commission's legislative text.

Companies need practicable framework conditions

The European Supply Chain Act will come. The task now must be to create appropriate, workable and SME-friendly framework conditions for internationally active companies: A legal catalogue of criteria must clearly define what companies have concretely to do within the framework of due diligence obligations. Otherwise, there is a risk of withdrawal from countries where European companies are already contributing to higher standards, better education and thus to local growth and prosperity through their commitment.