Fears for “Derailed” EU Due Diligence Directive Following Delay

WBA Gender Benchmark highlights the continued lack of supply chain transparency on social issues.

There are concerns that apparent delays to the European Commission’s draft Sustainable Corporate Governance initiative, proposals for which were scheduled for this month, will result in a more watered-down directive. This is according to panellists discussing human rights and environmental due diligence in corporate supply chains at an event hosted by the UN-backed Principles for Responsible Investment (PRI) on Tuesday.

“We hope the delay doesn’t mean the proposal will be completely derailed, or that the Commission is no longer as confident in the [initiative] as it was in the early stages. We need an ambitious measure that can drive change for people,” said Signe Andreasen Lysgaard, Strategic Advisor on Business and Human Rights for the Danish Institute for Human Rights.

The likes of amfori – a global business association for open and sustainable trade – are anticipating the Sustainable Corporate Governance initiative will be delayed until autumn.

This is following pressure from corporates and a negative assessment from the Commission’s Regulatory Scrutiny Board. As an independent body within the Commission, the board advises the College of Commissioners on all proposed directives during the early stages of the legislative process.

The initiative aims to broaden corporate governance responsibilities of companies to cover due diligence of human rights and environmental risks within their own operations and across supply chains. However, it has been clear since the publication of the Commission’s summary report last month on the public consultation, which closed in February, that there is divergence in opinions between NGOs and business representatives.

For example, while 90.8% of NGO respondents supported the proposal, 68.9% of individual company respondents and 89.8% of business association respondents disagreed with it, according to international law firm Herbert Smith Freehills.

Need for guidance

For investors and NGOs, the guidance the Sustainable Corporate Governance initiative could offer would aid their own engagement efforts on social-related issues.

“[The initiative] will contribute to the maturation of social-related data and the measurability of human rights performance. The people pillar is much harder to measure than environment,” Lysgaard said.

Investors are increasingly looking to address social-related issues within investee companies, according to Matthias Narr, Head of International Engagement for the Ethos Foundation, a Swiss foundation for sustainable development, also speaking at the PRI event. “When looking at companies, it’s important to consider whether they have a human rights policy. How do they then put that policy into practice? Do they have specific targets?”

Work to be done

Narr said a number of social-related issues continue to be underreported by corporates, such as repayment of recruitment fees and living wage approaches, adding that investors need to be working harder to improve transparency.

“We think these are very important salient issue for many corporates and yet transparency around them is meagre,” he said.

Investors play a pivotal role in both encouraging companies to do better and holding them to account when they don’t, panellists said.

Earlier this week, the World Benchmarking Alliance (WBA) published its 2021 Gender Benchmark, ranking 35 global apparel companies on gender equality. The benchmark identified that most of these companies are failing to translate public commitments on gender into meaningful action, with an average score of 29 out of 100. The Alliance also commented on a lack of disclosure across the sector.

“Apparel isn’t walking the talk when it comes to gender equality […] we see a marked difference between what companies say and do on vital issues such as pay, gender balance in leadership and violence and harassment. This lip service has to stop,” said Paulina Murphy, Engagement Director at WBA.

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