Supply chain due diligence should address environmental issues

EU action in the area of sustainable corporate governance provides an opportunity to address global environmental issues recognizing the significance of corporate decision making and its impact on global supply-chains.

Policymakers should focus on strengthening the role of directors in pursuing their company’s long-term interests and improving the accountability of directors concerning the sustainability of their business conduct, comments CDP Europe on European Commission proposal for an initiative on sustainable corporate governance.

The EU’s legal framework should clearly direct companies towards integrating long-term environmental risks into corporate decision-making and providing analysis of the risks embedded in company supply chains. Establishing a single standard on mandatory due diligence at EU level with cross-sectoral impact and which applies to all companies placing products on the EU market would help to mitigate ‘imported emissions’, also referred to as carbon-leakage and deforestation.

Non-profit organization recommends that:

-The Director’s duty of care should be linked to and be guided by corporate sustainability reporting, notably by information covering all sustainability matters and required by the Accounting and the Corporate Sustainability Reporting Directive, as well as the Sustainable Finance Disclosure Regulation. Accounting Directive should be extended/revised to include specific references to internal control and governance systems addressing sustainability factors.

– Short-termism should generally and broadly be replaced by long-term risk management along with long-term investment strategies embedded in the fiduciary duties of asset owners and managers to support directors’ duties to implement sustainable business models over longer time-horizons. European investors should explicitly integrate climate and environmental risks into their legal fiduciary duties and consider risks over the timeframes of their clients’ assets.

– To mitigate ‘imported emissions’ (also referred to as carbon leakage and ‘imported deforestation’) all companies based anywhere in the world, but that are placing products in the EU market, should need to comply with the due diligence rules as a condition of their access to the EU single market.

– Corporate directors should be required to set up adequate procedures and to set measurable, science-based targets to ensure that possible risks and adverse impacts on climate and the environment can be identified and mitigated, including company-wide risk-assessments of the risks deforestation poses to the company, as well as a commodity-specific, public forest-related corporate policy.

– A legislative proposal for mandatory due diligence should take a horizontal approach across climate change, forests, biodiversity, and water to reflect the dependencies between environmental issues.

– EU policymakers should encourage the harmonization of measures for deforestation-free value chains among consumer countries to prevent the shift of the trade of forest-risk commodities (FRCs) from Europe to other markets and further develop public-private partnerships in producing countries to monitor no-deforestation commitments and to unlock sustainable finance for forests.

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