Risk body welcomes EU’s proposal to achieve more sustainable governance for large firms but warns of ’practical challenges’ 

FERMA has welcomed the EUs objective of instilling long-term corporate sustainability in corporate governance through its Corporate sustainability due diligence (CSDD) proposal. 

The risk association believes a corporate culture that embraces Enterprise Risk Management (ERM) is a fundamental factor for sustainability.

However, it warns the European Commission about two shortcomings in its proposal:

  • The practical difficulties in implementing the due diligence process in the value chain; and,
  • The uncertain implications related to the civil liability dimension of the proposal.

FERMA sees a trilemma emerging with regards to the value chain, its implementation, and practical consequences, including:

  • The likelihood of high business consequences in implementing the due diligence process to the letter (companies might have to end business with suppliers operating in countries that fail to comply with environmental or human rights requirements)
  • An information problem in terms of availability, access and processing for companies
  • An evidence problem for companies to demonstrate their compliance with the CSDD requirements

In order to better integrate sustainability into corporate practices while enabling businesses to make the most of the green transition, FERMA suggests that the focus of due diligence obligations should be more risk-based and focused on direct suppliers. 

This could be done through a “cascade process”, where each company would oblige (by contractual agreement, for example) their direct suppliers (tier I) to apply the same due diligence process on the suppliers of their suppliers (tier II), and so on.

Moreover, the European risk body is concerned about the civil liability implications for companies. The lack of clear definition of damage and the room left for Member States to elaborate the liability framework may cause uncertainties and create an unlevel playing field for companies.

It is calling on the European Commission to elaborate a minimum harmonised framework as it concerns the CSDD at EU-level in order to minimise gaps across EU Member States and to be clearer regarding the notion of damage.