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Consultation Document Proposal for an Initiative on Sustainable Corporate Governance Fields marked with * are mandatory. Disclaimer This document is a working document of the Commission services for consultation and does not prejudge the final decision that the Commission may take. The views reflected on this consultation paper provide an indication on the approach the Commission services may take but do not constitute a final policy position or a formal proposal by the European Commission. Please note that in order to ensure a fair and transparent consultation process only responses received through the online questionnaire will be taken into account and included in the report summarising the responses. Introduction Political context The Commission’s political guidelines set the ambition of Europe becoming the world’s first climate-neutral continent by 2050 and foresee strong focus on delivering on the UN Sustainable Development Goals[ 1], which requires changing the way in which we produce and consume. Building on the political guidelines, in its Communication on the European Green Deal[2] (adopted in December 2019) and on A Strong Social Europe for Just Transition[3] (adopted in January 2020) the Commission committed to tackling climate and environmental-related challenges and set the ambition to upgrade Europe’s social market economy. The European Green Deal sets out that “sustainability should be further embedded into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects.” Sustainability in corporate governance encompasses encouraging businesses to frame decisions in terms of their environmental (including climate, biodiversity), social, human and economic impact, as well as in terms of the company’s development in the longer term (beyond 3-5 years), rather than focusing on short- term gains. As a follow-up to the European Green Deal, the Commission has announced a sustainable corporate governance initiative for 2021, and the initiative was listed among the deliverables of the Action Plan on a Circular Economy[4], the Biodiversity strategy[5] and the Farm to Fork strategy[6]. This initiative would build on the results of the analytical and consultative work carried out under Action 10 of the Commission’s 2018 Action Plan on Financing Sustainable Growth and would also be part of the Renewed Sustainable Finance Strategy. 1 The recent Communication “Europe's moment: Repair and Prepare for the Next Generation” (Recovery Plan)[7] (adopted in May 2020) also confirms the Commission’s intention to put forward such an initiative with the objective to “ensure environmental and social interests are fully embedded into business strategies”. This stands in the context of competitive sustainability contributing to the COVID-19 recovery and to the long-term development of companies. Relevant objectives are strengthening corporate resilience, improving predictability and management of risks, dependencies and disruptions including in the supply chains, with the ultimate aim for the EU economy to build back stronger. This initiative is listed in the Commission Work program for 2021 [8]. EU action in the area of sustainable corporate governance will complement the objectives of the upcoming Action Plan for the implementation of the European Pillar of Social Rights, to ensure that the transitions towards climate-neutrality and digitalisation are socially sustainable. It will also strengthen the EU’s voice at the global scene and would contribute to the respect of human rights, including labour rights– and corporate social responsibility criteria throughout the value chains of European companies – an objective identified in the joint Communication of the Commission and the High Representative on the Global EU response to COVID-19[9]. This initiative is complementary to the review of the Non-Financial Reporting Directive (NFRD, Directive 2014/95/EU[10]) which currently requires large public-interest companies to disclose to the public certain information on how they are affected by non-financial issues, as well as on the company’s own impacts on society and the environment. The NFRD also requires companies to report on their social and environmental policies and due diligence processes if they have them, or otherwise explain why they do not have any (comply or explain approach). Whilst the NFRD is based on incentives “to report”, the sustainable corporate governance initiative aims to introduce duties “to do”. Such concrete actions would therefore contribute to avoiding “greenwashing” and reaching the objectives of the on-going review of the NFRD too, in particular the aim of enhancing the reliability of information disclosed under the NFRD by ensuring that the reporting obligation is underpinned by adequate corporate and director duties, and the aim of mitigating systemic risks in the financial sector. Reporting to the public on the application of sustainability in corporate governance and on the fulfilment of directors’ and corporate duties would enable stakeholders to monitor compliance with these duties, thereby helping ensure that companies are accountable for how they mitigate their adverse environmental and social impacts. The initiative would build upon relevant international standards on business and human rights and responsible business conduct, such as the United Nations’ Guiding Principles on Businesses and Human Rights and the OECD Guidelines for Multinational Enterprises and its Due Diligence Guidance for Responsible Business Conduct. As regards environmental harm linked to deforestation, the Commission is also conducting a fitness check of the EU Timber Regulation and an impact assessment. Finally, Covid-19 has put small and medium sized companies under financial pressure, partly due to increased delay in the payments from their larger clients. This raises the importance of the role of board members of companies to duly take into account the interests of employees, including those in the supply chains as well as the interests of persons and suppliers affected by their operations. Further support measures for SMEs also require careful consideration. 2 Results of two studies conducted for the Commission To integrate properly sustainability within corporate strategies and decisions, the High-Level Expert Group on Sustainable Finance[11] recommended in 2018 that the EU clarifies corporate board members´ duties so that stakeholder interests are properly considered. Furthermore, they recommended for the EU to require that directors adopt a sustainability strategy with proper targets, have sufficient expertise in sustainability, and to improve regulation on remuneration. In its 2018 Action Plan on Financing Sustainable Growth[12] the Commission announced that it would carry out analytical and consultative work on the possible need to legislate in this area. The Commission has been looking at further obstacles that hinder the transition to an environmentally and socially sustainable economy, and at the possible root causes thereof in corporate governance regulation and practices. As part of this work, two studies have been conducted which show market failures and favour acting at the EU level. The study on directors’ duties and sustainable corporate governance [13] evidences that there is a trend in the last 30 years for listed companies within the EU to focus on short-term benefits of shareholders rather than on the long-term interests of the company. Data indicate an upward trend in shareholder pay-outs, which increased from 20% to 60% of net income while the ratio of investment (capital expenditure) and R&D spending to net income has declined by 45% and 38% respectively. The study argues that sustainability is too often overlooked by short-term financial motives and that to some extent, corporate short-termism finds its root causes in regulatory frameworks and market practices. Against these findings, the study argues that EU policy intervention is required to lengthen the time horizon in corporate decision- making and promote a corporate governance more conducive to sustainability. To achieve this, it spells out three specific objectives of any future EU intervention: strengthening the role of directors in pursuing their company’s long-term interest by dispelling current misconceptions in relation to their duties, which lead them to prioritise short-term financial performance over the long-term interest of the company; improving directors' accountability towards integrating sustainability into corporate strategy and decision-making; and promoting corporate governance practices that contribute to company sustainability, by addressing relevant unfavourable practices (e.g. in the area of board remuneration, board composition, stakeholder involvement). The study on due diligence requirements through the supply chain[14] focuses on due diligence processes to address adverse sustainability impacts, such as climate change, environmental, human rights (including labour rights) harm in companies’ own operations and in their value chain, by identifying and preventing relevant risks and mitigating negative impacts. The study shows that in a large sample of mostly big companies participating in the study survey, only one in three businesses claim to undertake due diligence which takes into account all human rights and environmental impacts. Therefore voluntary initiatives, even when backed by transparency do not sufficiently incentivise good practice. The study shows wide stakeholder support, including from frontrunner businesses, for mandatory EU due diligence. 70% of businesses responding to the survey conducted for the study agreed that EU regulation might provide benefits for business, including legal certainty, level playing field and protection in case of litigation. The study shows that a number of EU Member States have adopted legislation or are considering action in this field. A potential patchwork of national legislation may jeopardise the single market and increase costs for businesses. A cross-sectoral regulatory measure, at EU level, was preferred to sector specific frameworks. 3 Objectives of this public consultation This public consultation aims to collect the views of stakeholders with regard to a possible Sustainable Corporate Governance Initiative. It builds on data collected in particular in the two studies mentioned above and on their conclusions, as well as on the feedback received in the public consultation on the Renewed Sustainable Finance Strategy[15]. It includes questions to allow the widest possible range of stakeholders to provide their views on relevant aspects of sustainable corporate governance. About you * Language of my contribution Bulgarian Croatian Czech Danish Dutch English Estonian Finnish French German Greek Hungarian Irish Italian Latvian Lithuanian Maltese Polish Portuguese Romanian Slovak Slovenian Spanish Swedish * Surname 4 * I am giving my contribution as Academic/research institution Business association Company/business organisation Consumer organisation EU citizen Environmental organisation Non-EU citizen Non-governmental organisation (NGO) Public authority Trade union Other * First name * Email (this won't be published) * Scope International Local National Regional * Organisation name 255 character(s) maximum * Organisation size Micro (1 to 9 employees) Small (10 to 49 employees) Medium (50 to 249 employees) 5  Large (250 or more) Transparency register number 255 character(s) maximum Check if your organisation is on the transparency register. It's a voluntary database for organisations seeking to influence EU decision- making. * Country of origin Please add your country of origin, or that of your organisation. Afghanistan Djibouti Libya Saint Martin Åland Islands Dominica Liechtenstein Saint Pierre and Miquelon Albania Dominican Lithuania Saint Vincent Republic and the Grenadines Algeria Ecuador Luxembourg Samoa American Egypt Macau San Marino Samoa Andorra El Salvador Madagascar São Tomé and Príncipe Angola Equatorial Malawi Saudi Arabia Guinea Anguilla Eritrea Malaysia Senegal Antarctica Estonia Maldives Serbia Antigua and Eswatini Mali Seychelles Barbuda Argentina Ethiopia Malta Sierra Leone Armenia Falkland Islands Marshall Singapore Islands Aruba Faroe Islands Martinique Sint Maarten Australia Fiji Mauritania Slovakia Austria Finland Mauritius Slovenia Azerbaijan France Mayotte Solomon Islands Bahamas French Guiana Mexico Somalia Bahrain Micronesia South Africa 6  French Polynesia Bangladesh French Moldova South Georgia Southern and and the South Antarctic Lands Sandwich Islands Barbados Gabon Monaco South Korea Belarus Georgia Mongolia South Sudan Belgium Germany Montenegro Spain Belize Ghana Montserrat Sri Lanka Benin Gibraltar Morocco Sudan Bermuda Greece Mozambique Suriname Bhutan Greenland Myanmar Svalbard and /Burma Jan Mayen Bolivia Grenada Namibia Sweden Bonaire Saint Guadeloupe Nauru Switzerland Eustatius and Saba Bosnia and Guam Nepal Syria Herzegovina Botswana Guatemala Netherlands Taiwan Bouvet Island Guernsey New Caledonia Tajikistan Brazil Guinea New Zealand Tanzania British Indian Guinea-Bissau Nicaragua Thailand Ocean Territory British Virgin Guyana Niger The Gambia Islands Brunei Haiti Nigeria Timor-Leste Bulgaria Heard Island Niue Togo and McDonald Islands Burkina Faso Honduras Norfolk Island Tokelau Burundi Hong Kong Northern Tonga Mariana Islands Cambodia Hungary North Korea 7  Trinidad and Tobago Cameroon Iceland North Tunisia Macedonia Canada India Norway Turkey Cape Verde Indonesia Oman Turkmenistan Cayman Islands Iran Pakistan Turks and Caicos Islands Central African Iraq Palau Tuvalu Republic Chad Ireland Palestine Uganda Chile Isle of Man Panama Ukraine China Israel Papua New United Arab Guinea Emirates Christmas Italy Paraguay United Island Kingdom Clipperton Jamaica Peru United States Cocos (Keeling) Japan Philippines United States Islands Minor Outlying Islands Colombia Jersey Pitcairn Islands Uruguay Comoros Jordan Poland US Virgin Islands Congo Kazakhstan Portugal Uzbekistan Cook Islands Kenya Puerto Rico Vanuatu Costa Rica Kiribati Qatar Vatican City Côte d’Ivoire Kosovo Réunion Venezuela Croatia Kuwait Romania Vietnam Cuba Kyrgyzstan Russia Wallis and Futuna Curaçao Laos Rwanda Western Sahara Cyprus Latvia Saint Yemen Barthélemy Czechia Lebanon Zambia 8  Saint Helena Ascension and Tristan da Cunha Democratic Lesotho Saint Kitts and Zimbabwe Republic of the Nevis Congo Denmark Liberia Saint Lucia * Publication privacy settings The Commission will publish the responses to this public consultation. You can choose whether you would like your details to be made public or to remain anonymous. Anonymous Only your contribution, country of origin and the respondent type profile that you selected will be published. All other personal details (name, organisation name and size, transparency register number) will not be published. Public Your personal details (name, organisation name and size, transparency register number, country of origin) will be published with your contribution. I agree with the personal data protection provisions If you replied that you answer on behalf of a business, please specify the type of business: institutional investor, asset manager other financial sector player (e.g. an analyst, rating agency, data and research provider) auditor other * If other, please specify: Consultation questions * If you are responding on behalf of a large company, please indicate how large is the company: 9  Large company with 1000 or more people employed Large company with less than 1000 but at least 250 people employed * If you are responding on behalf of a company, is your company listed on the stock- exchange? Yes, in the EU Yes, outside the EU Yes, both in and outside the EU No * If you are responding on behalf of a company, does your company have experience in implementing due diligence systems? Yes, as legal obligation Yes, as voluntary measure No * If resident or established/registered in an EU Member State, do you carry out (part of) your activity in several EU Member States? Yes No * If resident or established/ registered in a third country (i.e. in a country that is not a member of the European Union), please specify your country: * If resident or established registered in a third country, do you carry out (part of) your activity in the EU? Yes No * If resident or established registered in a third country, are you part of the supply chain of an EU company? Yes No Section I: Need and objectives for EU intervention on sustainable corporate governance 10  Questions 1 and 2 below which seek views on the need and objectives for EU action have already largely been included in the public consultation on the Renewed Sustainable Finance Strategy earlier in 2020. The Commission is currently analysing those replies. In order to reach the broadest range of stakeholders possible, those questions are now again included in the present consultation also taking into account the two studies on due diligence requirements through the supply chain as well as directors’ duties and sustainable corporate governance. * Question 1: Due regard for stakeholder interests’, such as the interests of employees, customers, etc., is expected of companies. In recent years, interests have expanded to include issues such as human rights violations, environmental pollution and climate change. Do you think companies and their directors should take account of these interests in corporate decisions alongside financial interests of shareholders, beyond what is currently required by EU law? Yes, a more holistic approach should favour the maximisation of social, environmental, as well as economic/financial performance. Yes, as these issues are relevant to the financial performance of the company in the long term. No, companies and their directors should not take account of these sorts of interests. Do not know. * Please provide reasons for your answer: * Question 2: Human rights, social and environmental due diligence requires companies to put in place continuous processes to identify risks and adverse impacts on human rights, health and safety and environment and prevent, mitigate and account for such risks and impacts in their operations and through their value chain. In the survey conducted in the context of the study on due diligence requirements through the supply chain, a broad range of respondents expressed their preference for a policy change, with an overall preference for establishing a mandatory duty at EU level. Do you think that an EU legal framework for supply chain due diligence to address adverse impacts on human rights and environmental issues should be developed? Yes, an EU legal framework is needed. 11  No, it should be enough to focus on asking companies to follow existing guidelines and standards. No action is necessary. Do not know. * Please explain: * Question 3: If you think that an EU legal framework should be developed, please indicate which among the following possible benefits of an EU due diligence duty is important for you (tick the box/multiple choice)? Ensuring that the company is aware of its adverse human rights, social and environmental impacts and risks related to human rights violations other social issues and the environment and that it is in a better position to mitigate these risks and impacts Contribute effectively to a more sustainable development, including in non- EU countries Levelling the playing field, avoiding that some companies freeride on the efforts of others Increasing legal certainty about how companies should tackle their impacts, including in their value chain A non-negotiable standard would help companies increase their leverage in the value chain Harmonisation to avoid fragmentation in the EU, as emerging national laws are different SMEs would have better chances to be part of EU supply chains Other Other, please specify: * Question 3a. Drawbacks Please indicate which among the following possible risks/drawbacks linked to the introduction of an EU due diligence duty are more important for you (tick the box /multiple choice)? Increased administrative costs and procedural burden 12  Penalisation of smaller companies with fewer resources Competitive disadvantage vis-à-vis third country companies not subject to a similar duty Responsibility for damages that the EU company cannot control Decreased attention to core corporate activities which might lead to increased turnover of employees and negative stock performance Difficulty for buyers to find suitable suppliers which may cause lock-in effects (e.g. exclusivity period/no shop clause) and have also negative impact on business performance of suppliers Disengagement from risky markets, which might be detrimental for local economies Other Other, please specify: Section II: Directors’ duty of care – stakeholders’ interests In all Member States the current legal framework provides that a company director is required to act in the interest of the company (duty of care). However, in most Member States the law does not clearly define what this means. Lack of clarity arguably contributes to short-termism and to a narrow interpretation of the duty of care as requiring a focus predominantly on shareholders’ financial interests. It may also lead to a disregard of stakeholders’ interests, despite the fact that those stakeholders may also contribute to the long- term success, resilience and viability of the company. Question 5. Which of the following interests do you see as relevant for the long- term success and resilience of the company? Not I do not know/I do Relevant relevant not take position * the interests of shareholders * the interests of employees * the interests of employees in the company’s supply chain * the interests of customers * the interests of persons and communities affected by the operations of the company * the interests of persons and communities affected by the company’s supply chain * 13  the interests of local and global natural environment, including climate * the likely consequences of any decision in the long term (beyond 3-5 years) * the interests of society, please specify * other interests, please specify the interests of society, please specify: other interests, please specify: Question 6. Do you consider that corporate directors should be required by law to (1) identify the company´s stakeholders and their interests, (2) to manage the risks for the company in relation to stakeholders and their interests, including on the long run (3) and to identify the opportunities arising from promoting stakeholders’ interests? I I I do I agree I I do disagree not strongly to strongly not to some take agree some disagree know extent position extent * Identification of the company´s stakeholders and their interests * Management of the risks for the company in relation to stakeholders and their interests, including on the long run * Identification of the opportunities arising from promoting stakeholders’ interests * Please explain: * Question 7. Do you believe that corporate directors should be required by law to set up adequate procedures and where relevant, measurable (science –based) 14  targets to ensure that possible risks and adverse impacts on stakeholders, ie. human rights, social, health and environmental impacts are identified, prevented and addressed? I strongly agree I agree to some extent I disagree to some extent I strongly disagree I do not know I do not take position * Please explain: * Question 8. Do you believe that corporate directors should balance the interests of all stakeholders, instead of focusing on the short-term financial interests of shareholders, and that this should be clarified in legislation as part of directors’ duty of care? I strongly agree I agree to some extent I disagree to some extent I strongly disagree I do not know I do not take position * Please provide an explanation or comment: * Question 9. Which risks do you see, if any, should the directors’ duty of care be spelled out in law as described in question 8? * How could these possible risks be mitigated? Please explain. * 15  Where directors widely integrate stakeholder interest into their decisions already today, did this gather support from shareholders as well? Please explain. * Question 10. As companies often do not have a strategic orientation on sustainability risks, impacts and opportunities, as referred to in question 6 and 7, do you believe that such considerations should be integrated into the company’s strategy, decisions and oversight within the company? I strongly agree I agree to some extent I disagree to some extent I strongly disagree I do not know I do not take position * Please explain: Enforcement of directors’ duty of care Today, enforcement of directors’ duty of care is largely limited to possible intervention by the board of directors, the supervisory board (where such a separate board exists) and the general meeting of shareholders. This has arguably contributed to a narrow understanding of the duty of care according to which directors are required to act predominantly in the short-term financial interests of shareholders. In addition, currently, action to enforce directors’ duties is rare in all Member States. * Question 11. Are you aware of cases where certain stakeholders or groups (such as shareholders representing a certain percentage of voting rights, employees, civil society organisations or others) acted to enforce the directors’ duty of care on behalf of the company? How many cases? In which Member States? Which stakeholders? What was the outcome? Please describe examples: * Question 12. What was the effect of such enforcement rights/actions? Did it give rise to case law/ was it followed by other cases? If not, why? Please describe: 16 * Question 13. Do you consider that stakeholders, such as for example employees, the environment or people affected by the operations of the company as represented by civil society organisations should be given a role in the enforcement of directors’ duty of care? I strongly agree I agree to some extent I disagree to some extent I strongly disagree I do not know I do not take position * Please explain your answer: * Question 13a: In case you consider that stakeholders should be involved in the enforcement of the duty of care, please explain which stakeholders should play a role in your view and how. Section III: Due diligence duty For the purposes of this consultation, “due diligence duty” refers to a legal requirement for companies to establish and implement adequate processes with a view to prevent, mitigate and account for human rights (including labour rights and working conditions), health and environmental impacts, including relating to climate change, both in the company’s own operations and in the company’s the supply chain. “Supply chain” is understood within the broad definition of a company’s “business relationships” and includes subsidiaries as well as suppliers and subcontractors. The company is expected to make reasonable efforts for example with respect to identifying suppliers and subcontractors. Furthermore, due diligence is inherently risk-based, proportionate and context specific. This implies that the extent of implementing actions should depend on the risks of adverse impacts the company is possibly causing, contributing to or should foresee. * Question 14: Please explain whether you agree with this definition and provide reasons for your answer. 17 Question 15: Please indicate your preference as regards the content of such possible corporate due diligence duty (tick the box, only one answer possible). Please note that all approaches are meant to rely on existing due diligence standards, such as the OECD guidance on due diligence or the UNGPs. Please note that Option 1, 2 and 3 are horizontal i. e. cross-sectorial and cross thematic, covering human rights, social and environmental matters. They are mutually exclusive. Option 4 and 5 are not horizontal, but theme or sector-specific approaches. Such theme specific or sectorial approaches can be combined with a horizontal approach (see question 15a). If you are in favour of a combination of a horizontal approach with a theme or sector specific approach, you are requested to choose one horizontal approach (Option 1, 2 or 3) in this question. Option 1. “Principles-based approach”: A general due diligence duty based on key process requirements (such as for example identification and assessment of risks, evaluation of the operations and of the supply chain, risk and impact mitigation actions, alert mechanism, evaluation of the effectiveness of measures, grievance mechanism, etc.) should be defined at EU level regarding identification, prevention and mitigation of relevant human rights, social and environmental risks and negative impact. These should be applicable across all sectors. This could be complemented by EU- level general or sector specific guidance or rules, where necessary Option 2. “Minimum process and definitions approach”: The EU should define a minimum set of requirements with regard to the necessary processes (see in option 1) which should be applicable across all sectors. Furthermore, this approach would provide harmonised definitions for example as regards the coverage of adverse impacts that should be the subject of the due diligence obligation and could rely on EU and international human rights conventions, including ILO labour conventions, or other conventions, where relevant. Minimum requirements could be complemented by sector specific guidance or further rules, where necessary. Option 3. “Minimum process and definitions approach as presented in Option 2 complemented with further requirements in particular for environmental issues”. This approach would largely encompass what is included in option 2 but would complement it as regards, in particular, environmental issues. It could require alignment with the goals of international treaties and conventions based on the agreement of scientific communities, where relevant and where they exist, on certain key environmental sustainability matters, such as for example the 2050 climate 18  neutrality objective, or the net zero biodiversity loss objective and could reflect also EU goals. Further guidance and sector specific rules could complement the due diligence duty, where necessary. Option 4 “Sector-specific approach”: The EU should continue focusing on adopting due diligence requirements for key sectors only. Option 5 "Thematic approach": The EU should focus on certain key themes only, such as for example slavery or child labour. None of the above, please specify * Please specify: Question 15a: If you have chosen option 1, 2 or 3 in Question 15 and you are in favour of combining a horizontal approach with a theme or sector specific approach, please explain which horizontal approach should be combined with regulation of which theme or sector? Question 15b: Please provide explanations as regards your preferred option, including whether it would bring the necessary legal certainty and whether complementary guidance would also be necessary. * Question 15c: If you ticked options 2) or 3) in Question 15 please indicate which areas should be covered in a possible due diligence requirement (tick the box, multiple choice) Human rights, including fundamental labour rights and working conditions (such as occupational health and safety, decent wages and working hours) Interests of local communities, indigenous peoples’ rights, and rights of vulnerable groups Climate change mitigation Natural capital, including biodiversity loss; land degradation; ecosystems degradation, air, soil and water pollution (including through disposal of chemicals); efficient use of resources and raw materials; hazardous substances and waste Other, please specify 19  Other, please specify: * Question 15d: If you ticked option 2) in Question 15 and with a view to creating legal certainty, clarity and ensuring a level playing field, what definitions regarding adverse impacts should be set at EU level? * Question 15e: If you ticked option 3) in Question 15, and with a view to creating legal certainty, clarity and ensuring a level playing field, what substantial requirements regarding human rights, social and environmental performance (e.g. prohibited conducts, requirement of achieving a certain performance/target by a certain date for specific environmental issues, where relevant, etc.) should be set at EU level with respect to the issues mentioned in 15c? * Question 15f: If you ticked option 4) in question 15, which sectors do you think the EU should focus on? * Question 15g: If you ticked option 5) in question 15, which themes do you think the EU should focus on? * Question 16: How could companies’- in particular smaller ones’- burden be reduced with respect to due diligence? Please indicate the most effective options (tick the box, multiple choice possible) This question is being asked in addition to question 48 of the Consultation on the Renewed Sustainable Finance Strategy, the answers to which the Commission is currently analysing. All SMEs[16] should be excluded SMEs should be excluded with some exceptions (e.g. most risky sectors or other) Micro and small sized enterprises (less than 50 people employed) should be excluded 20  Micro-enterprises (less than 10 people employed) should be excluded SMEs should be subject to lighter requirements (“principles-based” or “minimum process and definitions” approaches as indicated in Question 15) SMEs should have lighter reporting requirements Capacity building support, including funding Detailed non-binding guidelines catering for the needs of SMEs in particular Toolbox/dedicated national helpdesk for companies to translate due diligence criteria into business practices Other option, please specify None of these options should be pursued Please explain your choice, if necessary * Question 17: In your view, should the due diligence rules apply also to certain third- country companies which are not established in the EU but carry out (certain) activities in the EU? Yes No I do not know * Question 17a: What link should be required to make these companies subject to those obligations and how (e.g. what activities should be in the EU, could it be linked to certain turnover generated in the EU, other)? Please specify. * Question 17b: Please also explain what kind of obligations could be imposed on these companies and how they would be enforced. * Question 18: Should the EU due diligence duty be accompanied by other measures to foster more level playing field between EU and third country companies? Yes No 21  I do not know Please explain: Question 19: Enforcement of the due diligence duty Question 19a: If a mandatory due diligence duty is to be introduced, it should be accompanied by an enforcement mechanism to make it effective. In your view, which of the following mechanisms would be the most appropriate one(s) to enforce the possible obligation (tick the box, multiple choice)? Judicial enforcement with liability and compensation in case of harm caused by not fulfilling the due diligence obligations Supervision by competent national authorities based on complaints (and/or reporting, where relevant) about non-compliance with setting up and implementing due diligence measures, etc. with effective sanctions (such as for example fines) Supervision by competent national authorities (option 2) with a mechanism of EU cooperation/coordination to ensure consistency throughout the EU Other, please specify Please provide explanation: Question 19b: In case you have experience with cases or Court proceedings in which the liability of a European company was at stake with respect to human rights or environmental harm caused by its subsidiary or supply chain partner located in a third country, did you encounter or do you have information about difficulties to get access to remedy that have arisen? Yes No In case you answered yes, please indicate what type of difficulties you have encountered or have information about: 22  If you encountered difficulties, how and in which context do you consider they could (should) be addressed? Section IV: Other elements of sustainable corporate governance Question 20: Stakeholder engagement Better involvement of stakeholders (such as for example employees, civil society organisations representing the interests of the environment, affected people or communities) in defining how stakeholder interests and sustainability are included into the corporate strategy and in the implementation of the company’s due diligence processes could contribute to boards and companies fulfilling these duties more effectively. * Question 20a: Do you believe that the EU should require directors to establish and apply mechanisms or, where they already exist for employees for example, use existing information and consultation channels for engaging with stakeholders in this area? I strongly agree I agree to some extent I disagree to some extent I strongly disagree I do not know I do not take position * Please explain. * Question 20b: If you agree, which stakeholders should be represented? Please explain. Question 20c: What are best practices for such mechanisms today? Which mechanisms should in your view be promoted at EU level? (tick the box, multiple choice) Is best practice Should be promoted at EU level Advisory body 23  Stakeholder general meeting Complaint mechanism as part of due diligence Other, please specify Other, please specify: Question 21: Remuneration of directors Current executive remuneration schemes, in particular share-based remuneration and variable performance criteria, promote focus on short-term financial value maximisation [17] (Study on directors’ duties and sustainable corporate governance). Please rank the following options in terms of their effectiveness to contribute to countering remuneration incentivising short-term focus in your view. This question is being asked in addition to questions 40 and 41 of the Consultation on the Renewed Sustainable Finance Strategy the answers to which the Commission is currently analysing. Ranking 1-7 (1: least efficient, 7: most efficient) Restricting executive directors’ ability to sell the shares they receive as pay for a certain period (e.g. requiring shares to be held for a certain period after they were granted, after a share buy-back by the company) Regulating the maximum percentage of share-based remuneration in the total remuneration of directors Regulating or limiting possible types of variable remuneration of directors (e. g. only shares but not share options) Making compulsory the inclusion of sustainability metrics linked, for example, to the company’s sustainability targets or performance in the 24  variable remuneration Mandatory proportion of variable remuneration linked to non-financial performance criteria Requirement to include carbon emission reductions, where applicable, in the lists of sustainability factors affecting directors’ variable remuneration Taking into account workforce remuneration and related policies when setting director remuneration Other option, please specify None of these options should be pursued, please explain Please explain: * Question 22: Enhancing sustainability expertise in the board Current level of expertise of boards of directors does not fully support a shift towards sustainability, so action to enhance directors’ competence in this area could be envisaged [18] (Study on directors’ duties and sustainable corporate governance). 25 Please indicate which of these options are in your view effective to achieve this objective (tick the box, multiple choice). Requirement for companies to consider environmental, social and/or human rights expertise in the directors’ nomination and selection process Requirement for companies to have a certain number/percentage of directors with relevant environmental, social and/or human rights expertise Requirement for companies to have at least one director with relevant environmental, social and/or human rights expertise Requirement for the board to regularly assess its level of expertise on environmental, social and/or human rights matters and take appropriate follow-up, including regular trainings Other option, please specify None of these are effective options Please explain: * Question 23: Share buybacks Corporate pay-outs to shareholders (in the form of both dividends and share buybacks) compared to the company’s net income have increased from 20 to 60 % in the last 30 years in listed companies as an indicator of corporate short-termism. This arguably reduces the company’s resources to make longer-term investments including into new technologies, resilience, sustainable business models and supply chains[19]. (A share buyback means that the company buys back its own shares, either directly from the open market or by offering shareholders the option to sell their shares to the company at a fixed price, as a result of which the number of outstanding shares is reduced, making each share worth a greater percentage of the company, thereby increasing both the price of the shares and the earnings per share.) EU law regulates the use of share-buybacks [Regulation 596/2014 on market abuse and Directive 77/91, second company law Directive]. In your view, should the EU take further action in this area? I strongly agree I agree to some extent I disagree to some extent I strongly disagree 26  I do not know I do not take position Question 23a: If you agree, what measure could be taken? Question 24: Do you consider that any other measure should be taken at EU level to foster more sustainable corporate governance? If so, please specify: Section V: Impacts of possible measures Question 25: Impact of the spelling out of the content of directors’ duty of care and of the due diligence duty o n t h e c o m p a n y Please estimate the impacts of a possible spelling out of the content of directors’ duty of care as well as a due diligence duty compared to the current situation. In your understanding and own assessment, to what extent will the impacts/effects increase on a scale from 0-10? In addition, please quantify/estimate in quantitative terms (ideally as percentage of annual revenues) the increase of costs and benefits, if possible, in particular if your company already complies with such possible requirements. 27 Table Introduction of these duties in binding law, annual cost linked to the fulfilment Introduction of these duties in binding of possible requirements aligned with law, cost and benefits linked to setting up science based targets (such as for /improving external impacts’ Non-binding guidance. Rating 0-10 example climate neutrality by 2050, net identification and mitigation processes zero biodiversity loss, etc.) and possible Rating 0 (lowest impact)-10 (highest reorganisation of supply chains impact) and quantitative data Rating 0 (lowest impact)-10 (highest impact) and quantitative data Administrative costs including costs related to new staff required to deal with new obligations Litigation costs Other costs including potential indirect costs linked to higher prices in the supply chain, costs liked to drawbacks as explained in question 3, other than administrative and litigation costs, etc. Please specify. Better performance stemming from increased employee loyalty, better employee performance, resource efficiency 28 Competitiveness advantages stemming from new customers, customer loyalty, sustainable technologies or other opportunities Better risk management and resilience Innovation and improved productivity Better environmental and social performance and more reliable reporting attracting investors Other impact, please specify 29 Please explain: Question 26: Estimation of impacts on stakeholders and the environment A clarified duty of care and the due diligence duty would be expected to have positive impacts on stakeholders and the environment, including in the supply chain. According to your own understanding and assessment, if your company complies with such requirements or conducts due diligence already, please quantify / estimate in quantitative terms the positive or negative impact annually since the introduction of the policy, by using examples such as: - Improvements on health and safety of workers in the supply chain, such as reduction of the number of accidents at work, other improvement on working conditions, better wages, eradicating child labour, etc. - Benefits for the environment through more efficient use of resources, recycling of waste, reduction in greenhouse gas emissions, reduced pollution, reduction in the use of hazardous material, etc. - Improvements in the respect of human rights, including those of local communities along the supply chain - Positive/negative impact on consumers - Positive/negative impact on trade - Positive/negative impact on the economy (EU/third country). 30 31  Meie 12.11.2020 nr 10-4/6669-1 Äriühingute kestlik juhtimine Lugupeetud huvigruppide esindajad! 26. oktoobril 2020 avaldas Euroopa Komisjon avaliku konsultatsiooni: Äriühingute kestlik juhtimine. Algatuse eesmärk on suunata ettevõtjaid oma tegevuses lähtuma mitte vaid lühiajalistest finantseesmärkidest, vaid pikemaajalisest mõjust kliimale, sotsiaalvaldkonnale ja inimõigustele. Saadame Teile avaliku konsultatsiooni materjalid tutvumiseks ja tagasiside andmiseks. Konsultatsiooni küsimustikule saate vastata siin. Kuna Vabariigi Valitsus kujundab äriühingu kestliku juhtimise teemal Euroopa Komisjonile esitamiseks seisukoha, siis ootab huvigruppide tagasisidet ka Justiitsministeerium. Ootame teie arvamusi 11. detsembriks 2020 e-posti aadressile [email protected]. Lugupidamisega (allkirjastatud digitaalselt) Heddi Lutterus Asekantsler Lisa: Euroopa Komisjoni avaliku konsultatsiooni küsimustik Aadressaadid: Eesti Advokatuur Eesti Arengufond Avatud Eesti Fond Eesti Juristide Liit Eesti Kaubandus-Tööstuskoda Eesti Pangaliit Eesti Väike- ja Keskmiste Ettevõtjate Assotsiatsioon Nasdaq Ettevõtluse Arendamise Sihtasutus Suur-Ameerika 1 / 10122 Tallinn / +372 620 8100 / [email protected] / www.just.ee Registrikood 70000898 Finantsinspektsioon Maksu- ja Tolliamet Vabaühenduste Liit Riigikohus Teenusmajanduse Koda Õiguskantsleri Kantselei Eesti Äriinglite Assotsiatsioon Eesti Era- ja Rsikikapitali Assotsiatsioon Tehnopol Garage48 MTÜ Asutajad Eesti Koostöö Kogu Eesti Võlausaldajate Liit Eesti Pereettevõtjate Liit Sotsiaalsete ettevõtete võrgustik Eesti Väikeaktsionäride Liit Startup Estonia Kodanikuühistkonna Sihtkapital [email protected]