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21 Apr 2021

Sigurt Vitols, Social Europe

Commentary: A long-overdue step on EU sustainability reporting

Today the European Commission published a proposal for a directive on sustainability reporting... 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.

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...

A second weakness is that the draft is vague on how reporting standards will be developed... 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...

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...