Investors such as pension funds with more than 500 employees are in the scope of a European Commission proposal for mandatory corporate due diligence on sustainability and human rights, the Dutch pension fund association has noted.
Released on Tuesday, the much-anticipated proposal sets out a duty to identify, and, where necessary, prevent, bring to an end or mitigate adverse impacts on human rights and on the environment in a company’s own operations, its subsidiaries and value chains.
This builds on the UN’s Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises and responsible business conduct.
The Commission’s proposal also introduces directors’ duties to set up and oversee the implementation of due diligence and integrate it into the corporate strategy. It provides for victims to be allowed to bring a civil liability claim before the courts.
In the Netherlands, the pension sector has an agreement to implement the OECD guidelines, adapted for the role that pension funds play as investors, through the so-called IMVB Covenant.
The Pension Federation said it would assess whether the Commission’s proposal took sufficient account of the different roles of investors and companies.
It said obligations must be clearly and sharply formulated, so that it is clear in advance what companies and investors must do to comply with the Directive.
“We will study the proposal closely in the coming period to further determine our position,” Pensioenfederatie said.
The Commission’s proposed directive defines a company as also including asset managers and Institutions for Occupational Retirement Provision (IORPs).
One of the triggers for the proposed Directive to apply to a “company” is that it has more than 500 employees on average and a net worldwide turnover of more than €150m in the last financial year for which annual financial statements were prepared.
Although there are few to no pension funds with more than 500 employees in the EU, asset managers who hit this threshold could conceivably pass on costs associated with due diligence, or be owned by pension funds.
Clarity needed
The Commission said the Directive may help investors in providing them with more information, with companies being required to identify their “adverse risks” in all their operations and value chains.
“It therefore complements the Taxonomy Regulation as it has the potential to further help investors to allocate capital to responsible and sustainable companies,” it said.
The Commission also said the due diligence rules would underpin the Sustainable Finance Disclosure Regulation, under which various investors have to publish a statement on due diligence policies with respect to principal adverse impacts of their investment decisions on sustainability factors.
The next step in the legislative process for the Commission’s proposal is for it to be reviewed by the European Parliament and Council. Since the rules have been proposed as a directive, individual Member States have to transpose them into national law.
Accountancy Europe said the co-legislators would need to make certain aspects of the proposal more clear, such as the concept of “established business relationships”.
“To measure their impact throughout the entire value chain, companies will need more clarity on the extent of their responsibility and the concept of “established business relationships” that seems to underpin the depth of the due diligence obligation,” it said.
This may also be a concern for investors, to the extent that they can also be “companies” and have the proposed rules apply to them. According to the Commission’s text, a business relationship can be a relationship with a contractor, subcontractor or any other legal entities “with whom the company has a commercial agreement or to whom the company provides financing, insurance or reinsurance”.
NGOs see ‘watering down’
For several campaign groups, the Commission’s proposal is disappointing compared with its initial thinking.
ShareAction said the final proposal did include some positive measures, such as obliging companies to adopt a transition plan to ensure their business model and strategy are compatible with the Paris Agreement.
However, Maria van der Heide, head of EU policy, lamented that the mandatory due diligence rules only apply to large companies.
“Human rights and environmental risks occur in operations and value chains of companies of all sizes,” she said.
She also bemoaned that special exemptions had been given to the financial industry, which would only need to execute simplified due diligence rules.
Earlier this month more than 100 companies and investors, including some asset managers and pension funds, put their name to a statement calling for all businesses in the EU and/or active on the internal market, “including financial actors and regardless of size,” to be covered by mandatory human rights and due diligence legislation.
FinanceWatch, another non-profit, said the Commission had abandoned its plans for a sustainable corporate governance directive due to heavy lobbying, and that the Directive it had adopted included weak provisions on a corporate transition plan and consideration of sustainability matters as part of directors’ duty of care.
It bemoaned the scope of the proposals on mandatory corporate sustainability, saying they left out 99% of companies.
Or game-changer?
At the Commission, however, Didier Reynders, Commissioner for Justice, said the proposal was a “real game-changer in the way companies operate their business activities throughout their global supply chain”.
“With these rules, we want to stand up for human rights and lead the green transition. We can no longer turn a blind eye on what happens down our value chains. We need a shift in our economic model.
”The momentum in the market has been building in support of this initiative, with consumers pushing for more sustainable products. I am confident that many business leaders will support this cause.”
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