09 October 2020

Accountancy Europe: EC roadmap on sustainable corporate governance

Environmental risks also entail significant financial risks for businesses, markets, investors, and the economy. To deliver on the goals of the Paris Agreement on climate change as well as the EU Green Deal, it is imperative to instil businesses’ accountability for their impacts on the environment and society.

There is strong empirical evidence that voluntary initiatives are, at least, insufficiently effective. Companies need to address their sustainability impacts on environmental and human rights issues. These impacts need to be properly measured, factored in and accounted for by business. Corporate governance mechanisms within the company should properly underpin corporate accountability through appropriate processes and governance arrangements, which should be subject to independent verification.

Sustainable finance has a key role to play in the transition. Clear, consistent and evenly enforced legislation across countries is key to ensure that sustainability is truly and fully embedded into corporate decision making. We propose the following key points to be addressed in priority in the sustainable corporate governance agenda:

• Integrate sustainable value creation into the duties of the board: Members of the board have a particular responsibility when they define a business strategy and oversee its execution. Sustainable value creation for the company without material harm to environment and society should be at the heart of the undertaking’s purpose and the duties of the board (cf. the French law “loi pacte”). This entails adapting relevant company law legislation i.e. the EU Company Law Directive 2017 or the Shareholders’ Rights Directive.
• Set effective mechanisms to verify due diligence disclosures are trustworthy: We support the Commission’s decision to proceed with a legislative proposal on due diligence duty. It is key to rigorously monitor the compliance and ensure the enforcement of the rules, including through penalties and sanctions. The Commission should couple this with a level playing field in the single market to foster change and legal certainty.
• Expand the scope to all companies that significantly impact the environment and society: Corporate governance should not be only an issue only for larger corporations. Ultimately, it is not about the size of a business, but about its risks and sustainability impacts. Enterprises operating in high risk sectors can have substantial external impacts regardless of their size. It will be important to ensure that regulatory measures are proportionate to the companies’ size but also to their sustainability impacts and risks.
• Align NFI reporting with sustainable corporate governance: Transparency and disclosures on how environmental and social risks and impacts are tackled and integrated in the governance and risk management processes in the short, medium and long-term will be critical to consistently address short-termism in financial markets. The board will play a key role in this by remaining accountable for their company’s disclosure of material impacts on society and environment as detailed in the NFR Directive.

The accountancy profession has an important role in advancing effective corporate governance. Auditors can add value by providing assurance services in respect of corporate governance, internal controls, and sustainability reporting.

We are committed to engage in the discussion and further contribute our expertise and thought leadership.

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