EU proposal fails to make business models sustainable

Posted on 23 February 2022

After several delays, the European Commission has published its much-awaited Sustainable Corporate Due Diligence legislative proposal.  This directive is meant to hold businesses accountable for harming human rights and the environment, and in WWF’s view is critical for the success of the sustainable finance agenda and the European Green Deal.

However, WWF is concerned that since it was initially announced, the proposal has lost its ambition. Notably,  it will only apply to a tiny fraction of EU companies. What’s more, the directive’s name has been changed from Sustainable Corporate Governance to Sustainable Corporate Due Diligence, which reflects the fact that its focus has been reduced. 

“We had great hopes when Commissioner Reynders committed to publishing a proposal on Sustainable Corporate Governance. It is urgent to move from corporate obligations to disclose, to corporate obligations to do: this would be a real game-changer. We deeply regret that the Commission surrendered on the issue of directors’ obligations to the pressure of conservative corporate lobbies and the Danish, Swedish and Finnish governments (1), among others,” said Julia Linares Sabater, Senior Sustainable Finance Policy Officer at WWF European Policy Office.

WWF is particularly alarmed that directors’ obligations are so vague. Now Member States, not directors, have to ensure that companies set up a plan to align their business model with the transition to a sustainable economy and the Paris Agreement 1.5°C goal. Unlike in earlier versions leaked to the media, there is no mandatory obligation to ensure that directors’ variable remuneration will be linked to the contribution of a director to the company’s sustainability. 

The directive will apply to companies above 500 employees and high-risk sector companies above 250 employees, leaving small and medium-sized enterprises (SMEs) out of the scope. SMEs represent 99.8% of the EU economy, and even those in high-risk sectors are not included despite their impact on the environment. In addition, the list of high-risk sectors is extremely narrow (2).  For example power production, the sector with the largest emissions in the EU, is left aside. Surprisingly, this scope is very inconsistent with the one proposed by the Commission for the Corporate Sustainability Reporting Directive that includes listed SMEs.

“The proposal excludes 99% of EU’s businesses, even those in high-risk sectors. The businesses included in the directive represent a drop in the ocean of the EU’s total economy. The EU needs to be far more ambitious to successfully tackle the climate and biodiversity crises” said Julia Linares Sabater, Senior Sustainable Finance Policy Officer at WWF European Policy Office.

The Commission's proposal integrates a mandatory framework on environmental and human rights due diligence together with civil liability, which is essential because companies will need to assess and mitigate the sustainability risks and impacts identified across their value chain. However, WWF regrets that climate due diligence is not explicitly mentioned. In addition, the proposal fails to require companies to set environmental science-based targets to align their business model with the relevant environmental goals.  

WWF calls on the European Parliament and Council, who will review the proposal in the coming months, to require companies to set environmental and climate science-based targets, to link variable remuneration of directors to the achievement of such targets,  and to improve the scope of the directive. This means aligning the definition of high-risk sectors with climate and environmental science (all sectors identified by the OECD and much beyond) removing the four year phase-in clause for high-risk companies and including all large companies and high-risk SMEs. 


Notes:
(1) Politico, 23 February 2022
(2) High-risk sectors only include three sectors: 
(i) the manufacture and wholesale trade of textiles, leather and related products; 
(ii) agriculture, forestry, fisheries, the manufacture of food products, and related wholesale trade;
(iii) the extraction of mineral resources, manufacture of basic metal products and non-metallic mineral products and related wholesale.
This means that sectors like high-carbon power production (coal and gas-fired power plants), high-carbon transport (aviation), high-carbon industry (steel, cement, chemicals) and construction are not included in high-risk sectors. In addition, trade services are included above but not financial services while they make these activities feasible in the first place.

Contact: 
Ines Abbas 
Communications Officer 
+32 488 99 27 65
iabbas@wwf.eu