The European Commission has proposed the Sustainable Corporate Governance initiative in order to ensure that environmental and social interests are fully embedded into business strategies by corporates. This initiative focusses on the need for corporates and their directors to take stakeholder interests, such as ESG, into account in corporate decisions in order to focus on long-term interests of the company.
Milieudefensie et al v Royal Dutch Shell
In May 2021, in the case Milieudefensie et al v Royal Dutch, The Hague District Court ordered Shell to reduce the CO2 emissions of the Shell Group by 45% in 2030 in comparison to its 2019 levels. The court order is based on the unwritten standard of care as laid down in Book 6 Section 162 of the Dutch Civil Code, which means that acting in conflict with what is generally accepted according to unwritten law is unlawful. Accordingly, when Shell determines the group’s corporate policy, this standard of care must be taken into account. This court order has of course drawn a lot of attention as Shell is the first company which is imposed by court to reduce its CO2 emissions, whereas previously only countries were obliged by court to contribute to reduce CO2 emissions (e.g. the Urgenda Climate Case against the Dutch government).
ESG regulations for corporates
The ruling in Milieudefensie et al v Royal Dutch Shell is a strong signal for corporates that environmental, social and governance (“ESG”) is currently one of the most important topics, and that action needs to be taken as more ESG regulations will be implemented in the near future. Accordingly, it is important for corporates to have internal policies and frameworks in place in regard to ESG performance of their company.
For regulated financial institutions whether or not having ESG policies and frameworks in place is not a question anymore, as recent regulations such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy require financial institutions to take ESG into account and to be transparent about it. For corporates there are currently some (voluntary) initiatives and regulations in place, such as the Global Reporting Initiative and the International Integrated Reporting Framework in relation to sustainable reporting. Other regulations include the Non-Financial Reporting Directive, the Shareholders Rights Directive and of course the Dutch Corporate Governance Code.
As the European Commission has the ambition for Europe to become world’s first climate-neutral continent by 2050, they are committed to tackle ESG challenges within the EU. In order to reach this goal, and to make corporate governance in the EU more sustainable, transparent and accountable, the European Commission held a consultation for a new initiative: the Sustainable Corporate Governance. This initiative has been published in the context of the European Green Deal to ensure that environmental and social interests are fully embedded into business strategies.
Sustainable Corporate Governance
The Sustainable Corporate Governance does not generally relate to reporting obligations, but introduces “to do” duties. The Sustainable Corporate Governance focusses on the need for companies and their directors to take stakeholder interests into account in corporate decisions, as many companies focus too much on short-term financial performance instead of long-term development and the ESG aspects in that matter. Accordingly, the European Commission proposed to clarify the director’s duty of care by prioritising long-term interest of the company, enhancing directors’ accountability regarding integrating sustainability into decision-making and corporate strategy, and by developing corporate governance practices that will contribute to the company’s sustainability. Furthermore, companies should carry out due diligence in relation to ESG, by identifying and preventing relevant risk, and by mitigating negative impacts in respect of operations and supply chains of the company.
What this means for you
Although the Sustainable Corporate Governance initiative is still in a preliminary phase and a proposal needs to be drafted, it is to be expected that this initiative will apply to all corporates doing business on the EU market. Accordingly, corporates should act now to future-proof its internal policies and framework in line with expected stricter regulations in relation to ESG.