Our response to the EU proposal for a Directive on Corporate Sustainability Due Diligence

First published on May 23, 2022

On May 23, 2022, B Lab Europe and the Interdependence Coalition submitted a formal response to the EU commission on their proposed directive for Corporate Sustainable Due Diligence. It was our chance to make the powerful case for incorporating into the proposed legislation the concept of stakeholder governance for all companies, in line with the tenet of the Interdependence Coalition.

Question: What is the key response of the Interdependence Coalition to the draft CSDD Directive?

Answer: Mandatory inclusion of stakeholder interests by the boards of ALL companies operating in Europe.

Question: What changes does this require to the draft Directive?

Answer: It requires ensuring that Article 25 on the Duty of Care remains in the Directive text, and that the scope is extended to cover directors of ALL companies (not limited to larger companies and specific sectors). The Interdependence Coalition has also drafted certain proposals for improving the draft.

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What are the reasons for resistance to the EU’s modification of directors’ duties?

  1. The modification of Directors Duties is unnecessary because EU companies can already consider stakeholder interests according to their own corporate laws.
    • We say it is urgently needed. Evidence shows that most companies are not stepping up to consider the impacts of their businesses on people and planet. We have now passed the point of relying on voluntariness. ALL companies need to consider their stakeholders. Our future on this planet is at stake.
  2. Directors Duties should be regulated at the Member States level – not by Brussels.
    • The EU should act as the current approach does not not work – the current state of the environment is the ultimate evidence of this. Member states will be the ones in charge of defining the method of implementation, oversight and enforcement of these new the duty of care of directors. A better business operating system for people and planet is at stake 
  3. Such regulation will be costly and bureaucratic for smaller companies to introduce.
    • We believe that the benefits will outweigh the costs. This change is about aligning a mindset to cultivate a broad perspective on the impact of business on society and the environment. The Duty of Care sits with the Directors and their decisions resonate through the company. There should be aligned incentives and mechanisms for ensuring that companies understand the impact their businesses are having on stakeholders. Balancing the interests of all those affected by the company is at stake
  4. It’s more important to focus on Due Diligence for the big companies, and not to confuse it with Directors’ Duty of Care.
    • The Duty of Care of Directors is the North Star of corporate governance. It underpins the ripple effect of the Due Diligence requirements. Weakening or removing from the Directive the modifications to the Directors’ duties would create a  loophole that will threaten the interpretation of the entire directive. ALL businesses’ directors should have a duty to consider stakeholders when undertaking decisions. This is not the same as for Due Diligence obligations in supply chains. The revised Duty of care of Directors is fundamental for the EU to transition to a sustainable economy

The Interdependence Coalition (IC), representing over 100 Certified B Corporations, systems change and impact driven organisations, was established to advocate for board directors of companies registered within the EU to be mandated to consider the interests of all the company’s stakeholders in their decision-making process. It offers the experiences of B Corps as a proof of concept to support this case. B Corps are companies that have met high standards of social and environmental performance, and which have voluntarily embedded in the companies’ governing articles a commitment to run the company with consideration of the interests of all stakeholders.

To this end, the IC fully supports the Commission’s efforts to pass a Directive that would include a broader duty of care of directors. The growing demand for B Corp certification (over 6,000 companies globally sought certification in the last 2 years) and the tracked evidence on increased revenue growth of the European B Corps (on average over 30% p.a for each year of certification), indicate that such regulation would be a sum gain for climate, society and for sustainable growth.

The IC welcomes Art. 25 of the draft Directive which addresses the directors’ duties in corporate governance (the core area of focus for the IC). We recommend three changes to the framing of the article. Firstly, to expand the scope of its application to all companies (not just to those within the scope of the Due Diligence obligations). Otherwise, this regulation will have a limited effect covering, for example, only 20 companies of the 830 in the European B Corp community and an estimated 1% of all EU businesses. Secondly, Art. 25 should also refer specifically to the stakeholders’ interests alongside sustainability matters, and define clearly what is encompassed by consideration of “sustainability matters”. This would ensure consistency with the framing and criteria of the CSRD and mitigates the risk of greenwashing, through misalignment between reporting and performance requirements. Thirdly, the Directive should clarify that directors while undertaking decisions are free to weigh appropriately the interests of the different stakeholders (including shareholders) and sustainability matters. Without this clarification, directors may not feel at liberty, when the situation requires, to make decisions favoring stakeholders and sustainability matters over shareholder interests.

The arguments that such an expansion of duties is either unnecessary or anti-competitive are contrary to all evidence facing us: B Corps that have voluntarily adopted such governance practices are outperforming against their peers in terms of revenue growth (on average over 30% p.a), are attracting and retaining the best of talent and are driving change in their own spheres of influence through supply chains, investors etc.  However, it is no longer appropriate or possible for those that voluntarily adopt a broad duty of care in considering all stakeholders in the running of their companies to carry the load for all the other companies not covered by this directive.

This is a unique and critical moment to reset the role of business in tackling our global climate related challenges. Without an expansion of the scope and a clearer definition of the directors’ duties in Article 25, it is hard to see how business will step up to play its most important role needed in line with the ambitions of the EU Green Deal.

For more information, please contact policy@bcorporation.eu  and explore resources on https://interdependencecoalition.eu