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Corporate lobbyists have scored a big win in Brussels after the European Commission was forced to delay a landmark proposal on making companies more accountable for human rights and environmental abuses in their supply chains.
The European Commission was due to launch its proposal on new due diligence rules for companies in June, covering EU companies’ ties to practices such as Chinese forced labor in the western region of Xinjiang and child workers in cocoa harvesting. After a concerted lobbying effort, however, Brussels is putting its proposal on ice until the fall.
In a further move that worries campaigners for a harder-nosed approach to corporate responsibility, the file is no longer the exclusive preserve of Justice Commissioner Didier Reynders but will now be shared with Internal Market Commissioner Thierry Breton, a former executive in several top French boardrooms.
The Commission’s package not only covers abuses in supply chains but also corporate governance rules on the duties of board directors. Leading businesses and Nordic countries disliked the interference in boards, while small and medium-sized enterprises fretted that the administrative burden of monitoring supply chains would be too great.
A Commission spokesperson confirmed that the package was now being put back, saying “the adoption of the proposal can be expected after the summer … It is important to ensure a comprehensive preparation of this proposal, taking into account the various aspects and striking a balance between the diversity of views of the stakeholders.”
Bullish on Breton
Another Commission official struck a positive note on Breton’s inclusion on the file, saying that the “co-lead [by Reynders and Breton] is reasonable because both can contribute with their perspective.”
But the addition of Breton’s perspective did not come as welcome news to the non-governmental organization Global Witness. “Changing leadership on the file risks reverting back to the old approach, which puts short-term profit first and prioritizes perceived ‘administrative burdens’ for business. That approach gave us the climate crisis,” said Richard Gardiner from the NGO.
Activists and progressive lawmakers warned the Commission not to give in to pressure from businesses. “The European Parliament has been very clear what it expects from the Commission,” Green MEP Heidi Hautala said. “We’re at the verge of introducing world-class standards. It would be damaging for the entire EU if we lost this ‘Brussels moment.’ Let’s hope this delay doesn’t mean that we are somehow falling back to the old reality, where we trust that all sorts of voluntary mechanisms will make businesses accountable and responsible. That simply doesn’t work.”
The legislative procedure should move forward as quickly as possible “to avoid a sort of regulatory patchwork between the different member states,” said Lara Wolters, the Socialist lawmaker in charge of the file in the European Parliament. She stressed that human rights concerns and the climate crisis must be addressed as soon as possible. “Those things cannot be done without companies, and that’s why we need legislation that … makes clear what kind of business conduct we expect [from them] as soon as possible,” Wolters said.
Still, Marc-Olivier Herman of Oxfam EU was cautiously optimistic that this reshuffle would not affect the ultimate goal. “Frankly, I’m not overly worried, as long as the commissioners don’t forget the key objective,” he said. “This initiative is an important part of the European Green Deal. We hope the Commission keeps its eye on the ball.”
The immediate reason for the delay is that the Commission’s internal “regulatory scrutiny board” — a five-person team that conducts “quality control” — gave the future law’s impact assessment a red card last Friday, according to industry officials and activists.
Herman cautioned about the significance of this red light, saying it’s not unusual that a file goes through the regulatory scrutiny board twice, or even three times. The body gave 15 red cards on first opinions, out of a total of 39 initiatives, according to its 2020 report.
Nordic nerves
This veto from the scrutiny board is good news for governments and business organizations in free-market-minded Nordic countries, which are calling on the Commission to drop the part of the proposal on corporate governance, as they believe it interferes too much with the internal organization of EU businesses.
“This is the wrong path to follow. We shouldn’t disempower companies and shareholders who are doing all the right things,” Simon Kollerup, the Danish minister for industry, business and financial affairs, told POLITICO.
The Danish minister and business organizations are calling on the Commission to split the legislative proposal to move forward with the part on due diligence and drop rules on corporate governance.
“There are different traditions, structures and models for corporate governance across the EU. In light of this, I find it hard to see how harmonized EU regulation would work in a positive manner,” Kollerup said.
Lars Sandahl Sørensen, head of the Confederation of Danish Industry, said: “We hear DG JUST’s Impact Assessment got the red card from the Regulatory Scrutiny Board. This is good news.”
According to business organizations from Sweden, Denmark, Finland, Estonia, Iceland and Norway, new rules “will make management responsibilities unclear and will create internal conflicts of interests as well as potentially paralysed or unaccountable boards and lawsuits.”
In any case, it should be up to member states, not the EU, to adopt rules on companies’ governments, they say, while arguing that a study by audit and consulting company EY that fed into the Commission’s thinking on sustainable corporate governance is “built on baseless assumptions.”
But activists think that corporations shouldn’t be this afraid of integrating sustainability into their operations.
“Of course, we can expect the worst offenders to panic — being held accountable is uncomfortable, and some powerful businesses have ignored their obligations for far too long,” said Gardiner of Global Witness. “They are trying to scare the EU into inaction using familiar arguments about profit margins, but most businesses support the legislation as the consultation report shows.”
Other activists, however, noted that a delay did not necessarily pose a grave concern if it meant a stronger proposal. “It would be a huge hit to their [the Commission’s] credibility if, because of some alarmist voices, they would question the initiative itself,” Herman said.
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