Getting corporate disclosure right
With the European Green Deal, the EU has drafted an ambitious roadmap that includes much needed legislative changes and defines the roles and responsibilities of public and private actors to enable the climate and just transition. One of the key action areas concerns the integration of sustainability (encompassing Environment, Social and Governance) in the governance and management of companies, investors and wider financial market community. These reforms are channelled through the European Commission’s Sustainable Finance Action Plan (which should be updated in Autumn 2020 after the input provided in a public consultation that sought feedback on the various reform plans).
One of the building blocks of the Action Plan is the reform of the EU Non-Financial Reporting (NFR) Directive. This law aims to provide investors, consumers and other stakeholders with an overview of corporate performance in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery.
Yet, as highlighted by the research of the Alliance for Corporate Transparency, due to the vague nature of its requirements, it fails to do so. The project has assessed the sustainability disclosures of 1000 EU companies and proved that the quality of information is poor and does not provide meaningful or comparable data. This leaves investors and other stakeholders without access to relevant information and effectively blocks the efforts to redirect capital flows to support sustainable activities. The evidence provided by the Alliance has been instrumental in supporting the plans of regulators to reform the EU NFR Directive (you can listen to the Head of Unit in charge of the reform of the Directive at the Alliance event here). A reform proposal is expected in early 2021 which will include the creation of EU standards on sustainability reporting.
The Sustainable Finance agenda has also advanced in other key aspects such as investor obligations and transparency requirements, the development of a taxonomy to classify sustainable activities and the clarification of ESG benchmark methodologies. However, without useful, consistent and reliable data from companies, all of the above developments risk being left in an impasse.
The reform of the Directive and development of sector-specific standards represent a unique opportunity to improve the quality of corporate disclosure. This process must be ambitious and based on international agreements, connected with EU public policy objectives and ensure regulatory coherence. Most importantly, the EU needs to clarify key sustainability matters that companies should report on and set mandatory reporting obligations. Other jurisdictions are likely to follow the EU’s example and prominent voices are pushing for the creation of international standards on non-financial information. However, such developments will take time to be concretised. The EUreform, due to its political and economic relevance is a crucial milestone on the route towards global standards.
How to ensure the success of this reform
The complexity of the issue, and the variety of stakes at hand, pose a threat to successfully reforming the EU legislative reporting framework. The technical nature of the discussion, and the differences in reporting on climate, environmental matters (such as natural resource use or biodiversity) as well as social, labour and human rights issues (including in supply chains) require expert collaboration. The reform of the law and development of standards also affect multiple actors, so it will be important to avoid the discussion being taken over by specific vested interests.
As part of the Alliance for Corporate Transparency, Frank Bold is now developing multi-stakeholder consensus on the specific legal changes and definition of sector-specific mandatory reporting obligations. Around 30 large companies have already been engaged in the discussions.
Through bilateral exchanges, web-meetings and online roundtables, the Alliance is bringing together leading actors to address key questions and priorities for the reform and development of standards. For those interested, you can read the summary of discussions of ourlatest web-roundtable in June here or download the webinar followed by over 400 participants in May here.
The engagement of civil society, leading companies and investors will enable the development of proposals that reflect the much needed ambition that should characterise the reform, while ensuring feasibility and actionability. As Richard Howitt (senior associate at Frank Bold, former CEO of the IIRC and MEP in charge of the negotiation of the original Directive) states in his latest article “my appeal to all in leadership positions within companies is to recognise that Europe’s new commitment on non-financial reporting is a potential watershed moment in worldwide efforts to bring standardisation to ESG reporting”.
In addition to the research provided by the project, the success in the collaboration of progressive actors including companies, investors, trade unions and NGOs will be key to ensure a constructive debate at EU level in the coming year.