A long-overdue step on EU sustainability reporting

A draft directive on sustainability reporting begins to address the challenge of turning the corporate tanker towards a zero-emissions 2050.

Today the European Commission published a proposal for a directive on sustainability reporting, which would massively overhaul the current European Union framework for corporate disclosures on environmental and social issues. This is a long overdue step, essential to improve stakeholders’ ability to monitor companies’ contribution to the European Green Deal and ‘social Europe’. The draft however contains shortcomings, which will need to be remedied if genuine progress is to be made.  

The proposal is designed to respond to widespread dissatisfaction with the quality, relevance, comparability and reliability of information provided by companies under the current disclosure regime, regulated by the 2014 Non-financial Reporting Directive (NFRD). As demonstrated by the Alliance for Corporate Transparency, most companies do not provide the information that trade unions, non-governmental organisations and other stakeholders need, to understand their impacts on the environment and society and their sustainability strategies.

The proposed Corporate Sustainability Reporting Directive would require large EU companies and companies listed on an EU-regulated exchange to use the same set of standards to report on environmental, social and governance matters every year. This would repair a fundamental weakness of the NFRD, which lets companies select the reporting framework they use. Furthermore, companies would be required to report not only retrospectively but also on their sustainability strategies and targets and on the ‘due diligence’ processes used to identify negative impacts and risks—including in their supply chains.

Devil in the detail

While in principle this represents a substantial improvement, the devil is in the detail—and the draft directive lacks detail on key issues. First, it does not define specific rights of involvement for trade unions and works councils, in the identification of negative environmental and social impacts or the development of sustainability strategies and targets. It is inconceivable that the magnitude of changes needed to achieve net-zero greenhouse-gas emissions by 2050 can be realised without active input and support from workers. Hence the European Trade Union Confederation has called for a specific requirement for companies to engage with workforce representatives.

A second weakness is that the draft is vague on how reporting standards will be developed. As the directive only defines a general framework, specific guidance for the detailed information companies have to provide will need to be developed in the next few years. The commission foresees that this task will be undertaken by the European Financial Reporting Advisory Group (EFRAG), a private organisation dominated by the large accounting firms and industry associations. Although the draft directive specifies that standards should be developed through a multi-stakeholder process, this must expressly require more than symbolic trade-union and NGO involvement. The standards developed by this body must embrace the information stakeholders need, such as country-by-country reporting on collective-bargaining coverage, working conditions and taxation.

The European Economic and Social Committee, which incorporates balanced representation of trade unions, civil society and companies, provides an interesting example of multi-stakeholder governance which could be followed by the EFRAG. This advisory body should also receive adequate public funding, so it can avoid ‘regulatory capture’ by having its own staff and capacity to conduct independent research.

A third problem is that, although the number of companies covered by the draft directive would be considerably expanded, non-listed small-and-medium enterprises and non-EU companies (unless listed on an EU exchange) would still not be required to report. As the European Parliament has recognised, this is problematic because SMEs operating in sectors with high environmental and human-rights risks should also be covered. Moreover, many non-EU companies have significant operations in the union and should have to report, so that there is a ‘level playing-field’ with EU companies.

Not understated

The potential contribution to the European Green Deal and social Europe of a directive on sustainability reporting should not be understated. Comprehensive, relevant and reliable sustainability information is however needed to allow stakeholders to assess companies’ impacts on the environment and society, the extent to which they respect human rights and their efforts to become more sustainable. Furthermore, trade unions and works councils need to be involved in sustainability reporting and the development and implementation of sustainability strategies, to ensure that workers’ interests are taken into account.

The commission proposal represents a step in this direction but needs improvement if the directive’s potential is to be realised. The parliament and the Council of the EU should take up this baton in their deliberations upon it.