Corporate Sustainability in the EU

Door Lara Wolters op 21 februari 2020

Good afternoon, and thank you for having us. I am very happy to be here, in Residence Palace. I’ll introduce myself quickly, my name is Lara Wolters. I am a newly elected member of the European Parliament for the S&D Group. I am a member of legal affairs committee, where I am spokesperson for company law and due diligence.

And to dive straight in, I will start with an anecdote for those who don’t read Belgian newspapers. In December, it was reported that the building right next door, the Egg building, was partly  constructed by undocumented workers. In the subcontracting chain, there were construction workers from Brazil, Bulgaria, Moldova, Russia, Morrocco and Guinea, put to work without employment contracts. Those workers were paid in cash, or not at all, and they didn’t have social security coverage – presumably to avoid liability claims. In other words, they were exploited.

It is of course baffling and outrageous that a situation such as this can arise in the heart of the European project. My colleague Agnes Jongerius from the Employment Committee immediately called for remedy for these workers and for stronger rules on social dumping, I raised the issue in the budgetary control committee.

Apparently, behind the main contractor of the Council, there were 12 subcontractors, who in turn subcontracted. And of course, looking into an entire chain of subcontractors is a herculean task.

And that makes you pause and wonder. If abuse and negligence can take place in our own backyard, then they can take place in any EU jurisdiction. And indeed, anywhere in the world. As long as there is no clear and binding disincentive against environmental, social and human right abuses, there is room for corporates that prefer the P of Profit, over the P of People or Planet.

Therefore we must create an overarching and mandatory framework against exploitation. Not only the exploitation of employees, but also the exploitation of the environment and of natural resources, within and outside the EU.

This is especially key in the context of the Green Deal, as businesses can play a decisive role in avoiding ecological escalation. And also because our transition to green energy will continue to require resources, for instance to manufacture rechargeable batteries for electric vehicles. Therefore, as a part of any Green Deal, we must increase the transparency and sustainability of global supply chains.

 

The good news is, that momentum seems to be emerging.

 

  • In December, as you are of course aware, over 100 civil society organisations called for EU human rights and environmental due diligence legislation
  • Customers and employees, have increasingly high standards for the companies they buy from and work for
    • For instance, at Amazon more than 8,700 workers signed a list of demands for Jeff Bezos, including getting to zero emissions and eliminating donations to climate-denying legislators.
    • On the consumer side, the appetite for sustainability-marketed products is growing

 

  • Huge amounts of young people are taking to the streets, and a global Deloitte survey show that up to 87% of the under-40 crowd — the Millennials who will make up 75% of the global workforce in five years — believes that a company’s success should be measured in more than just financial terms. And nine in 10 members of Gen Z agree that companies have a responsibility to engage with environmental and social issues.

 

  • There are calls from business itself to do good, with recent examples from BlackRock and Goldman Sachs as well as the 200 largest multinationals in the US that recently declared, through the Business Roundtable, that they will no longer focus solely on shareholders or on the short run, that they are committed to transparency and will deal fairly and ethically with their suppliers.

But these well-intentioned initiatives are still niche, not mainstream. However laudable, Goldman Sachs and BlackRock can still not be called sustainable firms – and being sustainable is still not the norm. Many of the efforts we see, are partial and fragmented and there is gap between what companies say, and what they do – as you point out in your report. As recently as 2016, McKinsey found in a survey that half of the managers of big corporates looked no further than three years ahead, and 80% were primarily seeking short term profit. This type of ‘quarterly capitalism’ brings business at odds with the goals of the Green Deal and the Sustainable Development Goals.

For a real mind-set shift and the mainstreaming of sustainability, political leadership is required. I think Commissioner Reynders was very right when he said during his hearing that the time of voluntary standards for corporations is over.

Voluntary standards are good for the good guys. What we need is a system that is also bad for the bad guys.

I think such a system should have multiple layers. The first layer in this system is the mandatory disclosure of information. We have had the Non-Financial disclosure directive in place for a few years now. I agree with all the assessments that regret the narrow scope of the NFRD, both in terms of information requirements and the number of companies covered. So I am happy we the NFRD will be up for revision. But even so, I think this piece of legislation has been important, as it has forced 6000 of the biggest companies that operate in Europe to look beyond profit in their annual reports.

The second layer is the mainstreaming of corporate sustainability reporting. We should standardize data, make it comparable, and make it accessible to the public, to make investors consider ESG risks before they include a company into their portfolio. This requires an upgrade of the NFRD.

And if we can achieve that upgrade, and with the precious help of NGOs and trade unions and journalists, we may be then able to bring more cases of exploitation to light, as well as push investors, consumers or clients to distance themselves from any rotten apples.

Then again, information is only one dimension of the problem. We know some companies, including Shell, Philip Morris and BP get rich from making people dependent on harmful products. We know that BNP Paribas, RWE and Samsung have been embroiled in human rights or environmental scandals. But, in spite of these, they have been able to carry on.

So however necessary transparency is, it has so far been insufficient to enforce real behavioral change of large companies.

For that, we need an extra layer. That of due diligence. Here comes the textbook definition: an overarching and mandatory framework to avoid, mitigate and report on sustainability risks and impacts. So that social, environmental and governance risks can be avoided across the entire supply chain.

What is not to like? Well as always, vested interests will say mandatory due diligence will have ‘unintented consequences’. That it will be too burdensome, too costly, too prescriptive, too disruptive, not business-friendly..

I think this is a huge straw man. Because indeed, if designed poorly, these laws can be disproportionate and burdensome. But I can assure you that flawed design is not inherent to European due diligence legislation – or the due diligence concept in itself. Indeed,

  • A number of EU countries already today have some kind of due diligence law today. [Duty of Vigilance in France, Child Labor Due Diligence in NL]

 

  • Over 2000 companies have signed up to the UN Principles of Responsible Investment and adopted the OECD Guidance for Responsible Business Conduct, which has grown to be the authoritative international reference on due diligence.

 

  • Academic evidence is piling up that companies that have in place due diligence policies have higher risk-adjusted returns than their competitors. This goes to show that short-termism and quarterly capitalism is not only devastating for people and planet, it is ultimately not conducive to profit either.

It seems to me, that current OECD due diligence guidance offers welcome clarity, and that it supports companies that are transitioning to responsible business conduct. If done well, enshrining this guidance into EU law will not only create a level playing field, it will elevate the level playing field.

A fourth layer for an effective system on responsible business conduct I think we need, is remedy. Currently I am the S&D negotiator for a European system for collective redress. This is long overdue: millions of European citizens currently don’t have access to any kind of class action system to seek redress for damage that companies may have inflicted. I am confident that the final outcome of these negotiations will mean a step forward for European consumers although we will also need to ensure access for victims from third countries.

I hope that this overview has given you an idea of how I see things at EU level. There I some things I haven’t mentioned yet that also need to be part of our framework, such as a broad revision of IFRS to make publish what you pay a reality, or a revision of the Audit regulation to make large accountancy offices behave responsibly too.

These remarks are a bird’s eye view and I will be happy to listen to experts on all of these topics go into more detail and hopefully work with all of you in the future.

I for one, am optimistic about what we can achieve in the next years.

60 % of the MEPs is newly elected, and I think there is a realisation among them that this time, it’s not business as usual. We have a unique opportunity to make sustainability and responsibility the new normal for large corporations.

Whether their activities take place in Burundi, in Bulgaria, or right here on our doorstep in Brussels.

Thank you.

 

Lara Wolters

Lara Wolters

Lara Wolters is sinds juli 2019 lid van het Europees Parlement. Hiervoor werkte ze als beleidsadviseur bij de S&D-fractie en als adviseur bij een advocatenkantoor in Brussel. Als een van de jongste Europarlementariërs zet Lara zich in voor een transparante EU, kansengelijkheid in het onderwijs en meer politieke participatie van jongeren. Daarnaast wil ze betere Europese

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