Podcast Summary: The Sustainability Story
Episode: Leena Linnainmaa: Corporate Governance and Due Diligence in the EU: A Step in the Right Direction?
Release Date: April 7, 2024
Host: Josina Kamling
Guest: Leena Linnainmaa, Secretary General of the Directors Institute in Finland and Chair of the ICODA Advocacy Committee ECOda

1. Introduction to CS3D Legislation

Josina Kamling opens the episode by introducing Leena Linnainmaa, highlighting her role as a key voice for board members across Europe. The discussion centers on the newly proposed EU legislation on corporate due diligence, known as CS3D, which has been a subject of intense debate. The legislation aims to enhance corporate governance and supply chain due diligence, aligning with global sustainability and ESG (Environmental, Social, and Governance) priorities.

"It's a very important piece of legislation as it touches on corporate governance and also on due diligence of the supply chain... companies are needing to approach their environmental, social and governance responsibilities."
[00:29] – Josina Kamling

2. Implications for Companies

Leena Linnainmaa delves into the significant impact CS3D will have on European companies. Despite the legislation being scaled back to cover approximately one-third of the initially targeted companies, the scope remains substantial, extending influence even to SMEs through supply chain requirements.

"The implications will be huge... It will have an impact on SMEs also."
[04:11] – Leena Linnainmaa

She emphasizes the necessity for companies to allocate resources and develop expertise to meet the new due diligence standards. The directive adopts a risk-based approach, requiring companies to identify and manage adverse impacts effectively.

"The final version of the Directive will, as I believe, include that the work shall be risk based."
[04:11] – Leena Linnainmaa

3. Challenges and Concerns

The discussion highlights several challenges associated with implementing CS3D. Leena expresses concerns about the adequacy of support mechanisms like the European Commission's proposed guidelines and help desks, questioning their capacity to provide meaningful assistance.

"How high expertise will those actually have? How helpful will that be?"
[04:11] – Leena Linnainmaa

Furthermore, she raises the potential for increased litigation as companies navigate the complexities of compliance, especially given the stringent sanctions that could reach up to 5% of a company's net global turnover.

"There is lots and lots of needs to learn on every party... And also what worries us on the company side and the directors that will there be litigation."
[04:11] – Leena Linnainmaa

4. Global Alignment and Trust

Josina Kamling steers the conversation towards the global implications of EU's CS3D, questioning how the directive aligns with international standards and practices. Leena acknowledges the complexity of enforcing due diligence across diverse global supply chains, stressing the importance of trustworthy information and robust assurance mechanisms.

"It does not change overnight... Can you trust the contractual assurances?"
[10:21] – Leena Linnainmaa

She underscores the necessity for the European Commission to engage internationally, fostering similar regulatory frameworks worldwide to ensure consistency and reliability in due diligence practices.

5. Competitiveness and Innovation in Europe

Shifting focus, Leena discusses Europe's position in global markets, particularly in innovation and entrepreneurial spirit. She points out that while robust corporate governance is essential, Europe must also nurture innovation to remain competitive.

"Why, why aren't we, with all the education, all the advantages that we have, resources, et cetera, why is it so that we are lagging behind actually in this?"
[16:29] – Leena Linnainmaa

Josina adds that investor expectations for innovation and forward-thinking strategies are critical, especially within the sustainability sphere. She notes concerns that excessive regulatory focus might divert resources from innovation initiatives.

6. Recommendations to the European Commission

In response to the challenges discussed, Leena offers strategic recommendations to the next European Commission:

1. Maintain Competitiveness: Ensure that new regulations bolster Europe's competitiveness rather than hinder it.

   "First of all, the European Commission and we all need to keep in mind the competitiveness of Europe."
   [19:34] – Leena Linnainmaa

2. Regulatory Pause: Avoid introducing new regulations rapidly. Instead, assess the effectiveness of existing directives like CS3D through thorough impact assessments and reviews.

   "There is a lot of new rules coming. And the thing is that we need a regulatory pause next."
   [19:34] – Leena Linnainmaa

3. Empower Shareholders: Advocate for shareholders to have the authority to decide on board compositions and necessary expertise, rather than imposing rigid regulatory requirements.

   "Shareholders, owners of the company should be the ones who decide the board composition and whether it's certain expertise is on the board."
   [19:34] – Leena Linnainmaa

4. Leverage Corporate Governance Codes: Utilize corporate governance codes as flexible and rapid tools to implement necessary changes without the delays inherent in legislative processes.

   "Corporate governance codes are the most flexible and the quickest way to change things compared to lengthy years and years long legislative processes."
   [19:34] – Leena Linnainmaa

7. Conclusion

The episode concludes with Josina reflecting on the pivotal role of competitiveness and innovation in tandem with robust corporate governance. She emphasizes the need for a balanced approach that fosters both compliance and forward momentum in Europe's capital markets.

"We have to make sure that we're competitive. That needs to be... it is going to be a very interesting and challenging time."
[24:00] – Josina Kamling

Leena echoes optimism while acknowledging the complexities ahead, expressing confidence in the ongoing dialogue and collaborative efforts to refine and implement effective sustainability legislation.

"I really enjoyed our discussion and I'm very enthusiastic to see how will things work out in the future regarding this directive."
[25:32] – Leena Linnainmaa

This episode provides a comprehensive exploration of the EU's CS3D legislation, shedding light on its implications for corporate governance, the challenges of global due diligence, and the imperative of balancing regulatory frameworks with innovation and competitiveness in Europe's financial markets.