REGULATORY SCRUTINY BOARD OPINION Proposal for a Directive of the European Parliament and of the Council on Sustainable Corporate Due Diligence and amending Directive (EU) 2019/1937

EUROPEAN COMMISSION
SEC(2022) 95
26.11.2021
REGULATORY SCRUTINY BOARD OPINION
Proposal for a Directive of the European Parliament and of the Council
on Sustainable Corporate Due Diligence and amending Directive (EU)
2019/1937
COM(2022) 71
SWD(2022) 39
SWD(2022) 42-43
Offentligt
KOM (2022) 0071 - SEK-dokument
Europaudvalget 2022
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This opinion concerns a draft impact assessment which may differ from the final version.
Commission européenne, B-1049 Bruxelles - Belgium. Office: BERL 08/010. E-mail: regulatory-scrutiny-board@ec.europa.eu
EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Sustainable Corporate Governance
Overall 2nd
opinion: NEGATIVE
(A) Policy context
The EU corporate governance framework combines EU rules, national rules and soft law.
International bodies, EU, Member States and private actors have made efforts to support
the mainstreaming of sustainable governance practices in companies. This initiative aims
to codify such practices as legal obligations in the EU corporate governance framework. It
is closely linked to a series of ongoing sustainability initiatives, including on sustainable
finance (i.e. the taxonomy and the Sustainability Reporting Directive).
(B) Summary of findings
The Board notes the significant revision of the report in response to the Board’s
opinion. However, the Board maintains its negative opinion, because the revised
report still contains the following significant shortcomings:
(1) The problem description remains vague and does not demonstrate the scale and
likely evolution of the problems the initiative aims to tackle. It does not provide
convincing evidence that EU businesses, in particular SMEs, do not already
sufficiently reflect sustainability aspects or do not have sufficient incentives to do
so.
(2) The presented policy options remain too limited in scope. Key policy choices are
not identified nor fully assessed.
(3) The impacts are not assessed in a sufficiently complete, balanced and neutral
way. Uncertainty related to the realisation of benefits is not sufficiently reflected.
(4) The report does not sufficiently demonstrate the proportionality of the preferred
option.
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(C) What to improve
Problem definition
(1) The report continues to provide little specific evidence on the scale and evolution of
the environmental and sustainability problems directly linked to the apparent
absence or insufficient use of corporate sustainability management practices by EU
companies to be tackled by this initiative. While the assessment of benefits provides
ample evidence on the competitive, financial and reputational advantages that
companies achieve by applying corporate sustainability practices, the report should
identify, and substantiate with evidence, the obstacles that may prevent companies
from pursuing sustainable corporate management practices. It needs to demonstrate
more convincingly why the market and competitive dynamics together with the
further evolution of companies’ corporate strategies and risk management systems are
considered insufficient. Moreover, it needs to substantiate better the assumed causal
link between using corporate sustainability tools and their practical effect in tackling
the problems.
(2) The report should present a sufficiently developed and more balanced dynamic
baseline scenario that integrates (i) the increasing trend of take up of corporate
sustainability practices, (ii) the large number of related measures already adopted and
parallel regulatory measures being developed (including sectoral and sustainable
product due diligence), (iii) the comprehensive package of measures to promote
sustainability under the Green Deal and (iv) the developments expected in third
countries with sustainability sub-standards resulting from own commitments as well
as substantial EU and international trade and development support measures.
Options
(3) The report is not clear about why it is necessary to regulate directors’ duties on top
of due diligence requirements. It should better explain and assess the value- added of
regulating directors’ duties, considering that the due diligence option already requires
risk management and engagement with stakeholders’ interests. It should justify why
stand-alone options covering directors’ duties or due diligence requirements only were
not identified and subsequently compared with the combination options.
(4) As regards enforcement, the report discards mandatory due diligence policy options
that do not include a civil liability regime without providing evidence of their
apparent lack of effectiveness. Given that stakeholders consider administrative
supervision as the preferred option (and this seems a solution also introduced at
Member State levels), the report should better assess and compare all feasible
enforcement options, including a stand-alone administrative supervision option. The
report should also include more detail on the functioning, efficiency and effectiveness
of the envisaged sanction regimes (e.g. withdrawal of products from the market,
exclusion from public procurement), in particular with respect to non-complying third
country undertakings. It should be clearer on the feasibility and impacts of possible
overriding mandatory provisions as regards applicable law and assess any unintended
consequences.
(5) The options extending the scope into medium-sized companies should better
account for the results of the new SME study, which shows both a significant uptake
already in exposed sectors as well as an important trickle-down effect through the
value chain of measures adopted for large companies. The report should better justify
and substantiate with evidence why certain medium-sized companies operating in
‘high-impact’ sectors should be included in the personal scope. It should present
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clear and objective criteria that would be used in determining such sectors. To the
extent that specifying the selection design comes with policy choices (including on the
legislative technique to be used, as implementing legislation is mentioned in the
annex), these should be assessed and compared in terms of costs and benefits. The
report needs to be clearer on the envisaged phasing in of the requirements for
medium-sized companies. It should also be more specific on the safeguards it would
include to prevent that large companies impose unjustified compliance burden on
SMEs in their value chain. If this comes with policy choices, it should present and
analyse alternatives.
(6) To ensure greater regulatory coherence, the report should consider aligning the
personal scope better with the scope of parallel initiatives, such as the Corporate
Sustainability Reporting Directive. It should also discuss more thoroughly how
coherence will be ensured with the parallel sectoral and product due diligence
initiatives and whether these could become (partially) superfluous.
(7) The report should be more precise which selected international environmental
conventions should be included in the material scope of the due diligence obligations
and why. It should ensure that it does not unduly extend specific EU commitments
(e.g. from the Climate Law) to third countries.
(8) Regarding the inclusion of companies without an EU establishment, the report
should specify and justify what the ‘adequate turnover’ threshold should be (the annex
mentions EUR 350 million) or assess alternative options in case the Commission
enjoys discretion on this. It should make an effort to estimate how many foreign
companies would be affected respectively, as this is important to assess the
proportionality of the measures in terms of overall benefits and costs. It should clarify
whether all worldwide activities of foreign companies would be subject to the due
diligence duty or only activities with a clear (turnover) link to the EU. Similarly, for
companies established in the EU, the report should clarify whether all their global
activities under control would be covered (e.g. products produced in China and sold
exclusively in the US).
(9) The description of the directors' duties should clarify how directors need to
incorporate conflicting interests of stakeholders and sustainability aspects. It
should clarify whether or not there is a long-term interest of the company that could
supersede particular interests of stakeholders or beneficiaries or particular
sustainability considerations.
(10) The report should justify and substantiate with evidence the need for a mandatory
science based target for climate change mitigation (and potentially also for bio-
diversity) as part of the corporate strategy of very large companies. It should clarify
which gap in climate mitigation legislation it would fill. It should explain how these
targets would be established and function and how independent validation would be
ensured. It should justify why the requirement for science-based targets is linked to
the size of a company and not to the scale of emissions it is responsible for. The report
should explain why science based target setting is part of directors’ duties and not due
diligence, which already requires companies to mitigate adverse effects.
(11) The report should better explain the precise role of public authorities in checking the
corporate strategy and the scientific targets. It should also better explain which
national authority would be best placed to act with respect to non-compliance of third-
country undertakings. It should also explain how effective coordination among
national authorities would be ensured, for instance launching ex-officio procedures or
imposing sanctions and what role a ‘mechanism of EU cooperation/coordination’
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would play.
Impacts
(12) The report should be more balanced and complete in terms of presenting potential
impacts concerning competition, innovation, agility and litigation risks. While
stricter sustainability requirements may spur innovation, there is also a risk that due
diligence will make companies less dynamic and agile – and more dependent on a set
of fixed providers, in particular in highly concentrated sectors, with only a very
limited number of suppliers. The report should assess to what extent the measures
envisaged will make it more difficult for certain industry sectors to diversify their
suppliers and to improve the resilience of their supply chain. It should assess impacts
on competition that may arise from potential increased vertical integration by
businesses as well as from the exchange of commercially sensitive information
resulting from joint company value chain due diligence efforts. It should assess more
thoroughly whether the potentially increased risk of (unsuccessful) litigation could
also make EU companies less dynamic and agile.
(13) The report should better account for potential negative impacts in third countries,
notably in developing countries, by being more realistic on risks and costs and the
contribution of potential soft mitigation measures. It should better assess the risk of
‘sustainability leakage’. If EU companies will ultimately have to withdraw from
certain suppliers due to sustainability issues, third-country companies (if out of the
personal scope) could take over these suppliers and thereby gain a competitive
advantage and supply chain control, while leaving no improvement in overall human
rights and environmental performance.
(14) Based on a clarification of the personal scope, the report should assess more
thoroughly the impacts of the options on the global level playing field and
competitiveness of EU companies, in particular for SMEs in scope. While a large
number of EU SMEs active in ‘high impact’ sectors would be covered (e.g. turnover
higher than EUR 8 million), this is not the case for their ‘SME competitors’
established in (neighbouring) third countries (as they are very unlikely to be above the
indicated much higher EU turnover threshold of EUR 350 million). The report needs
to assess the potential competitive disadvantage for the affected EU SMEs. Similarly,
as directors’ duties obligations would apply only to EU established companies, the
report should assess more thoroughly the impacts on their competitiveness, including
the risk that EU companies may relocate their headquarters to (neighbouring) third
countries.
(15) The report should assess how the proposed EU corporate sustainability governance
rules would fit with the different national corporate governance models existing in
the EU, given the national focus of company law.
Comparison of options and proportionality
(16) While the report provides greater clarity on the substantial costs of the initiative, it
still does not sufficiently reflect the high uncertainty that the estimated benefits will
actually materialise on a scale to outweigh the costs. The report should therefore
further improve the proportionality assessment of the (preferred) option(s) by
reconsidering the arguments for the inclusion of medium-sized EU companies
operating in high impact sectors and the broad scope of mandatory measures.
(17) The comparison of options in terms of effectiveness should analyse the expected
achievement of the specific objectives identified in the objectives section.
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Consultation and methodology
(18) The report should present more systematically the views of different stakeholder
categories. It should find a better balance between supportive and critical views
expressed. The views of SMEs should be singled out to support the discussion on
scope and options.
(19) The report would benefit from a more precise summary of the final preferred option,
including in terms of the variation in scope across elements.
(D) Conclusion
The Board’s opinion is in principle final. The DG should seek political guidance on
whether, and under which conditions, this initiative may proceed further.
Full title Impact assessment / Sustainable Corporate Governance
Reference number PLAN/2019/5404
Submitted to RSB on 8 November 2021
Date of RSB meeting Written procedure
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EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Sustainable Corporate Governance
Overall opinion: NEGATIVE
(A) Policy context
The EU corporate governance framework combines EU and national rules and soft law.
International bodies, EU, Member States and private actors have made efforts to support
the mainstreaming of sustainable governance practices in companies. This initiative aims
to integrate such practices more firmly in the EU corporate governance framework. It is
closely linked to a series of ongoing sustainability initiatives, including on sustainable
finance (i.e. the taxonomy and the Sustainability Reporting Directive).
(B) Summary of findings
The Board notes the additional information provided in advance of the meeting and
commitments to make changes to the report.
However, the Board gives a negative opinion, because the report contains the
following significant shortcomings:
(1) The problem description is vague and does not demonstrate the magnitude and
likely evolution of the problem. It does not provide clear evidence that EU
business (including SMEs) do not sufficiently address sustainability
opportunities, risks and impacts.
(2) The policy options are too limited and do not adequately reflect the available
policy choices in terms of company and sector scope, content of measures and
range of delivery instruments. The added value and likely effectiveness of several
of the measures are unclear.
(3) The assessment of proportionality is insufficient. Costs and benefits are not
sufficiently presented.
(4) The report does not sufficiently integrate differentiated stakeholder views.
(C) What to improve
(1) The problem definition sets out a very broad and intangible problem. The claimed
insufficient sustainability practices in companies concerns a wide range of climate,
environmental, human rights, social and health related issues and their internal and external
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impacts. The report should clarify what problem this initiative aims to tackle and why it is
not sufficiently covered by existing or planned sectoral and horizontal legislation or private
sector initiatives. The report should clarify if the problem concerns insufficient sustainable
governance in the interest of the company, or companies breaching sustainability and
human rights standards. It should describe the magnitude of the problem and how it will
evolve, taking into account expected market and societal dynamics. It should clearly
establish why the problem cannot be tackled appropriately at the level of Member States.
(2) The report is not clear about why existing sustainability strategies and corporate
management practices are considered as insufficient or what in practice companies would
have to do to have adequate sustainability governance practices in place. It should
substantiate with clear evidence that EU business (including SMEs) do not sufficiently
address sustainability opportunities, risks and impacts via their corporate management
systems.
(3) The report argues that the problems pertain to more or less all companies independent
of their size (all above 20 employees) or sector. What is the risk that SMEs are engaged in
unsustainable practices? What is the evidence that companies (particularly SMEs) in all
sectors will have the market power to generate real change on the ground through processes
of due diligence and directors’ duties?
(4) The policy options are too limited and do not sufficiently reflect the available policy
choices. Given the sensitive nature of corporate governance, the radical change of approach
from existing practise, the uncertainty in terms of effectiveness and efficiency, and
potential subsidiarity issues, the policy options should offer a broader and more nuanced
range of options allowing for more diverse policy packages, with measures including
different levels of ambition, scope and legal obligations. Soft law instruments should be
assessed in a more nuanced and balanced way, and be considered in possible combination
with selected hard law elements. The need for transitional measures, including
experimental or adaptive approaches should be considered.
(5) Overall, the options should provide more clarity on the content, added value and
effectiveness of elements included such as due diligence, target setting at company level,
directors’ nominations or the role of competent authorities. The report should also clearly
set out the added value of a very broad horizontal due diligence regime compared to
sectoral approaches focusing on clearly identified shortcomings.
(6) The report should clarify how third country businesses would be covered by the
initiative and how effective enforcement would be ensured in view of global level-playing-
field concerns. It should clarify what standards would apply to third country companies in
the value chain and how these would be aligned with international agreements, such as the
Paris Agreement.
(7) A more consistent intervention logic should be established, based on a clearer problem
definition, specific objectives expressed in SMARTer terms and a clearer link to a wider
range of policy options. Costs, benefits, trade-offs, and proportionality of options should be
brought out more clearly.
(8) The report should include a more nuanced assessment of impacts on companies,
notably SMEs, innovation and competitiveness. It should assess how this initiative impacts
on the fundamental rights to conduct a business and on property and ownership rights.
Moreover, the report needs to clearly distinguish between having certain practices (e.g. due
diligence obligations, sustainability targets) in place and the extent to which they are
effective in reaching sustainability or human rights objectives, and having a real world
impact on climate, environment and social issues. It should also convincingly show that
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these effects could not be reached by other legislation or voluntary corporate initiatives
under the baseline.
(9) Given the uncertainty that the expected benefits will actually materialise and the
substantial costs resulting from a broad set of measures that would be imposed on up to
2 million companies, the proportionality of the options needs to be significantly better
argued. In particular, the inclusion of SMEs in the scope requires a more critical
proportionality reflection. Subsidiarity issues also require more attention, given that many
SMEs operate largely within national borders and given the national focus of company law.
The comparison of options should provide a more convincing assessment of effectiveness,
efficiency, coherence and proportionality.
(10)The report should present the diverse stakeholder views better. This should be done in
the main text (notably in the problem section and when discussing options and impacts) but
also in annex 2, while more seriously addressing the criticism raised by stakeholders and
academics. More generally, the report should be revised to present the evidence in a more
balanced and neutral way.
Some more technical comments have been sent directly to the author DG.
(D) Conclusion
The DG must revise the report in accordance with the Board’s findings and resubmit
it for a final RSB opinion.
Full title Sustainable corporate governance
Reference number PLAN/2019/5404
Submitted to RSB on 9 April 2021
Date of RSB meeting 5 May 2021
Electronically signed on 26/11/2021 11:41 (UTC+01) in accordance with article 11 of Commission Decision C(2020) 4482