Consultation response

20 May 2022

EC’s corporate sustainability due diligence proposal Feedback from the European accountancy profession

Accountancy Europe welcomes the much-expected proposal for a Corporate Sustainability Due Diligence Directive. The European Commission (EC) shows the necessary leadership by being the first policymaker in the world to take concrete initiative and we call on world leaders to follow this example.  

We believe that for the Directive to be effective there is a need to introduce mandatory high-level measures at EU level. This will allow: i) Member States to adjust these to their corporate governance national frameworks ii) the EC to ensure an effective enforcement mechanism is in place allowing proper implementation and introducing real behavioural changes in the corporate world. 

We are providing below some of the points that we believe deserve further assessment to achieve the purpose of the Directive.  

Scope of the supply chain

Due diligence should encompass companies posing major risks and not be limited to any specific tier of the supply chain (methodology on risk to be determined by the EC). Our paper (March 2020) on company categorisation proposes a risk-based approach to categorise companies which better reflects their impacts on the economy, environment and society. 

While we support the inclusion of third country companies, the scope only represents around 1% of EU companies. The directive should be extended to all publicly listed, and high-risk SMEs (to be defined by EC). To avoid confusion, the scope of similar legislative initiatives would benefit from being coherent. 

Due Diligence definitions

Established business relationship (article 1) 

The EC should more clearly define established business relationship since this new legal concept remains unclear for companies who need certainty on how to discharge their due diligence obligations. Logically, these obligations should encompass the entire supply chain. The EC should also consider how civil liability will apply and clarify the extent of companies’ responsibility in the supply chain. 

Contractual cascading (article 7) 

Companies should identify potential adverse impacts in their supply chain and not offload risk via contracts, especially to SMEs. Companies’ code of conducts should clearly state their policies regarding such contractual cascading. To foster compliance and verification, each business partner should comply with the company’s code of conduct, under transparent procedures. 

Due diligence verification

Due diligence verification by independent third parties (statutory auditor or another service provider) is instrumental to strengthen stakeholders’ confidence in this process. Our paper (January 2022) shows the supply chain assurance practices by mid-tier accountancy firms. To be credible and effective, such assurance requires high-quality methods, competent professionals following transparent procedures and public supervision.  

Internal Controls (article 10,11)

Companies’ obligation to periodically self-assess their operations is not sufficient to ensure compliance. Instead, we propose for companies to establish appropriate internal controls which can support allocation of duties, remediation, and the necessary safeguards. Internal controls should build on existing international frameworks (e.g. COSO framework). Regarding companies’ obligation to publish an annual statement (art 11), the EC should consult with stakeholders, before publishing the delegated acts. 

Board of Directors

Companies for combating climate change (article 15) 

The board should play a central role in deciding on the company’s long-term strategy and impact therefore, depending on national board structure models, should be responsible for the design and effective execution of transition plans. Companies need to invest in educating the board on sustainability matters and promote a more diverse members’ background.  

Variable remuneration should be linked to sustainability matters overall and not just climate (better placed under article 25, directors’ decisions).  

Directors’ duty of care and overseeing due diligence (article 25,26) 

The EC needs to clarify the term ‘board’s collective responsibility’ and provide further guidance for implementation. We are in favour of introducing collective responsibility to promote cultural change within the company. However, the EC needs to consider that Member States have different legal interpretations of board responsibility (collective or individual).  

Civil liability (article 22)

We support the proposal introducing civil liability requirements. To ensure clarity when it comes to implementation, Member States should establish additional civil procedural rules, where necessary. The EC should ensure an effective enforcement mechanism to properly implement this provision. 

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