Our Director of Strategy and Policy, Otilia García-Rivero, publishes an article on the draft sustainable corporate governance directive within the legal framework for company law.

Sustainable corporate governance

The long and winding road to a European framework for company law

The draft directive, Ares (2020) 4034032, on sustainable corporate governance

Otilia García-Rivero

Strategy & Business Transformation / Compliance & Sustainability

November 2020

The draft directive, Ares (2020) 4034032, on sustainable corporate governance

A potential new directive on sustainable corporate governance (1), which is in the pipeline, could come out in the second quarter of 2021:

  • It would have as its objectives:
    • improving the regulatory framework European company law, creating legal certainty and a level playing field in the management of sustainability-related opportunities and risks;
    • aligning interests of companies, shareholders, managers and other groups;
    • encourage the sustainable value creation in the long term.
  • It would be part of the Renewed strategy on sustainable financeThe Commission's proposal for a new regulation, which complements previous plans and regulations, in particular the Directive 2014/95 on disclosure of non-financial information and diversity.
  • In addition, it would involve the amendment of other Directivesas the 2017/1132 on certain aspects of company law relating to limited liability companies or the 2007/36 on the exercise of certain rights of shareholders of listed companies.

Building a legal framework for European company law 

The harmonization of company law of the EU Member States, with different traditions, devotions and interests, is an arduous and complex task, as illustrated by the many twists and turns in the negotiations and developments under the Action Plan European Company Law and Corporate Governance December 2012.

8 years after its implementation, the European Commission continues to insist on the need to improving the regulatory framework European societies, looking for new ways of strategies to move forward on the road to harmonization.

However, in spite of the difficulties, this Plan has given rise to relevant directives such as the Directive 2014/95 on disclosure of non-financial information and diversity (under review) or the Directive 2017/828 amending Directive 2007/36 as regards the encouragement of long-term shareholder engagement.

The renewed Sustainable Finance Strategy 

The European Commission has been working on the Renewed strategy on sustainable finance (2) to leverage public and private investments in sustainable projects. Its publication will be made before January 2021, as part of the European Green Deal and of the plan Repair and Prepare for the Next Generation in the face of the COVID-19 pandemic.

The renewed Strategy will move forward along the lines outlined by the Action Plan Financing Sustainable Development of 2018The new law, which is still in force and is materializing in the much-talked-about but little-known avalanche of regulations and delegated acts:

  • Regulation 2019/2088 Sustainable Finance Disclosure Regulation -SFDR- and delegated regulation on technical disclosure standards;
  • Regulation 2019/2089 on Benchmarks and delegated regulations on the standards, calculation methodology and disclosure requirements of the indices;
  • Regulation 2020/852 on the classification of economic activities environmentally sustainable and delegated regulation of technical classification criteria;
  • ... 

The potential scope of the new directive 

The Inception impact assessment (3) provides for the use of existing corporate governance instruments for companies to "do no harm", integrate sustainability into their management and mitigate potential adverse impacts:

  • directors' duty of due diligence The company's corporate governance system has been applied in the identification and prevention of sustainability risks and mitigation of impacts (considering, among others, the Guiding Principles on Business and Human Rights and the recommendations of the United Nations General Assembly and the Due Diligence Guidance for Responsible Business Conduct of the OECD);
  • definition of corporate strategy addressing opportunities, risks and impacts arising from sustainability and of the procedures for setting, measuring and achieving objectives to ensure sustainability by considering the interests of all relevant groups, in addition to shareholders;
  • other measures, such as, for example, systems of damage repair, diagrams of remunerationetc.

Preliminary assessment of the impacts of the proposed directive

The most relevant positive impact would be to have harmonised rules, allowing levelling out and cost savings in the internal market of the EU.

In the Inception impact assessment the Commission refers to two studies:

  • Due diligence requirements through the supply chain (4), published in February 2020, focused on requirements to identify, prevent, mitigate and account for human rights abuses and environmental harm. It proposes four possible policy options:
    • do not make any changes;
    • provide voluntary guidelines or directives;
    • introduce additional reporting requirements;
    • require new due diligence procedures, considering different options depending on the sector of activity and the size of the company.
  • Directors' duties and sustainable corporate governance (5), published in July. It has two objectives:
    • evaluate the causes of the persistent "short-termism" in the governance of European listed companies, still focused on maximising shareholder value to the detriment of long-term investment and sustainability, as well as their relationship with regulatory frameworks and market practices;
    • identify solutions that contribute to the achievement of the United Nations Sustainable Development Goals and the objectives of the Paris Agreement.

These studies point out the following as posibles impactos of the directive:

  • From the point of view of the costs:
    • the derivatives of the new due diligence dutiesThe taxable income, which could be less than 0.14% of revenue in the case of SMEs and 0.009% in the case of large companies;
    • derivatives of the adoption of procedures for setting sustainability objectives and actions to mitigate potential adverse impactswhich could be higher for certain sectors or company sizes.
  • From the point of view of the benefits:
    • would contribute to a greater productivity, profitability and attractiveness of European companies;
    • would improve your resilience;
    • would provide competitive advantagesby positioning themselves as pioneers in sustainability;
    • would increase the investment in innovation, research and development.

The status of the draft directive on sustainable corporate governance

The initiative was formally launched on July 30. Sustainable corporate governancewith the aim of improving the framework of company law and corporate governance through the publication of a new directive to strengthen the integration of sustainability in European companies.

The Commission plans to adopt the new directive in the second quarter of 2021. To this end, it has opened two successive consultations to assess its impact, Inception impact assessment, as a basis for defining the scope of the standard:

  • stakeholder consultation, closed on 8 October 2020; and
  • public consultation, open until 8 February 2021

One more step in "The long and winding road" towards harmonization of European company law.


(1) https://eur-lex.europa.eu/legal-content/EN/PIN/?uri=PI_COM%3AAres%282020%294034032 

(2) Legislative train schedule : European Parliament (europa.eu) 

(3) Have your say (europa.eu) 

(4) Study on due diligence requirements through the supply chain - Publications Office of the EU (europa.eu) 

(5) Study on directors' duties and sustainable corporate governance - Publications Office of the EU (europa.eu) 

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