Our key takeaway: The responsibilities of the board to oversee sustainability are an integral part of corporate governance. In its upcoming draft, the European Commission can look to clarify the procedural obligations directors should follow to meet their existing duties, align director incentives with sustainability objectives and strengthen board composition and expertise.
An NGO Policy Briefing (supported by Anti-Slavery International, Business and Human Rights Resource Centre, Economy for the Common Good, European Coalition for Corporate Justice, Fair Trade Advocacy Office, Finance Watch, Frank Bold, Global Witness, Oxfam, ShareAction, Themis Research and WWF) stresses the importance of the involvement of directors with regard to management of sustainability risks, and provides suggestions to the European Commission on how corporate governance can foster sustainability and long-term thinking (to feed into the upcoming EU legislation):
- The European Commission should clarify existing Board oversight over sustainability strategies, risks and impacts. Establishing and effectively implementing the envisioned mandatory human rights and environmental due diligence (mHREDD) legislation, as well as the proposal for a Corporate Sustainability Reporting Directive (CSRD), requires effective governance and oversight from the company’s senior management and the board. Although this would already be viewed as part of directors’ duties, the NGOs find that the overwhelming majority of boards currently fail to play this role. They recommend that the upcoming EU law clarify the following procedural obligations for directors: directors are to (1) approve a forward-looking corporate strategy integrating sustainability considerations (including a number of specified components), (2) oversee the quality of, and regularly discuss, the double-materiality determination and due diligence processes, (3) monitor progress and challenges linked to the implementation of the sustainability strategy, and (4) be equipped to provide meaningful oversight – including with appropriate expertise and stakeholder perspectives.
- The European Commission could also look to align director incentives with sustainability objectives. Specifically: (1) Any flexible components of Board and executive remuneration should be significantly linked to the achievement of measurable sustainability targets (time-bound and science-based in the case of environmental targets) set in the company’s strategy (with a dedicated separate portion based on emission reduction targets), (2) Stock options granted to directors should not form a disproportionate part of their remuneration, (3) Shareholder payouts should be subject to meeting the company’s sustainability targets, and (4) Remuneration policies should endeavor to limit the wages gap between CEO to median worker.
- The European Commission could also look to strengthen board composition, expertise and consultation processes. Specifically, the law “should set principles that can be implemented with respect to composition, expertise, representation and engagement that are based on and adapted to the company’s specific circumstances.” This includes considerations related to (1) composition of the board, and diversity of gender, ethnicity and expertise, (2) expertise on the company’s sustainability risks and impacts and (3) consultation with workers on key strategic matters, including the development and monitoring of the implementation of the company’s sustainability strategy and targets.
For more, see Sustainable Corporate Governance: NGO Policy Briefing