The European Commission’s Sustainable Corporate Governance Initiative

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Maria DeBono is an Associate within the International Practice Department of Fenech & Fenech Advocates.

We live in an age where the recognition of the catastrophic effects of climate change and calls for social justice and equity have made striving to become “more conscientious” individuals, a goal dominating our to-do list.

The question, which remains is, should companies, as legal persons, strive towards this same goal or is this purely unattainable? While “corporate sustainability” may initially appear to be juxtaposed, this initiative is gaining legislative momentum at an EU level.

The Sustainable Corporate Governance Initiative launched by the European Commission in 2020, aims to improve the EU Regulatory Framework regarding company law and corporate governance. Corporate sustainability is not such a novel concept, but the European Green Deal and the EC’s Communication on the (Covid-19) Recovery Plan, have in fact propelled sustainability within the corporate governance field, to the top of the EU’s agenda.

At a very basic level, corporate sustainability is the idea that companies should have to consider what sort of impact their business is going to exert on their surrounding environment, including our climate and biodiversity as well as any social and human impact their business decisions may generate. As a result, corporate sustainability requires the implementation of a more conscientious approach to company management when taking all of these factors into account. The EC has held that sustainable corporate governance should contribute to the Covid-19 recovery and should also foster the “long-term resilience and development of companies”.

The EU will not be the first to legislate in this area. In fact, the heightening of sustainability concerns has led to the inevitable budding of sustainable corporate governance legislation at a national level within several EU member states, like France. However, until now, there has been no implementation of such legislation across the board and therefore, the EC regards the creation of pan-European harmonisation on sustainable corporate governance as one of its priorities in 2021.

As a first step and prior to getting the wheels turning in respect of the implementation of EU legislation regarding sustainable corporate governance, the EC launched a public consultation towards the end of 2020 to seek the views of a number of stakeholders including businesses and their directors as well as persons impacted by the operations of these businesses along the value chain, such as employees and consumers. It appears that many stakeholders have in fact demanded an EU law, which holds companies accountable for their impact on inter alia, human rights and the environment.

The EU has held that the impetus behind such legislation is essentially to inspire companies to incorporate sustainability as one of their prime goals and to strike a balance between short-term shareholder profit and longer-term sustainable development and investment. Currently, it is argued that the balance is weighted in favour of short-termism which is the concern that companies are too focused on their short-term financial performance rather than longer-term considerations, which would include sustainability. This is not to say that shareholder profit maximisation would be completely side-lined, rather, it is submitted that companies incorporating sustainability measures is also in the interest of shareholders and the two may co-exist comfortably.

In terms of the implementation of sustainable corporate governance legislation, the EC is inter alia considering whether specific environmental or human rights expertise should be required on the boards of certain companies, how to potentially align board remuneration structures with long-term value creation of the companies concerned and the potential need for companies to require appropriate due diligence in terms of sustainable corporate governance throughout the company’s supply chain which would inevitably impact the company’s operations and competitiveness. We will have to wait and see how EU legislative intervention eventually pans out in this regard and the willingness of member states to welcome these developments with open arms; but it is noted that this is indeed a step in the right direction.

Most recently, on 10 March, the European Parliament adopted a legislative own-initiative report promulgated by its Legal Affairs Committee on corporate due diligence and accountability. This report has made it abundantly clear that the European Parliament is backing the EC’s Sustainable Corporate Governance Initiative. The report highlights the key elements that the European Parliament deems crucial in any upcoming legislation, notably, imposing mandatory due diligence on companies in order to prevent and address human rights and environmental risks, however, the EC will be able to build on the report accordingly. This proposal is expected to be tabled in June of this year.

While it is still early days, it is surmised that any proposed legislation should seek to iron out the tensions between people, companies and the planet at large, the interests of which, could often be hard to align. 

Maria DeBono obtained her Bachelor of Laws (Honours) from the University of Malta in 2017 after having submitted her Research Project which dealt with the revival of companies after they have been struck off the register and its implications from a comparative lens. In 2018, she qualified as a lawyer with a Master of Advocacy. Maria then furthered her studies in London where she read for a Master of Laws (LLM) at The London School of Economics (LSE) specialising in Corporate and Commercial Law and her dissertation dealt with Competition Law. Maria works in the Corporate and Commercial Law Department of the firm. She also assists clients in setting up and registering Organisations as Legal Persons and enrolling with the Office of the Commissioner for Voluntary Organisations

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In 1994, the Malta Business Weekly became the first newspaper fully dedicated to business. Today this newspaper is a leader in business and financial news. Together with the launch of the MBW newspaper, the company started organising various business breakfasts to discuss various current issues that were targeting the business community in Malta.