Tuesday

6th Dec 2022

Opinion

EU beats new path on corporate responsibility

  • Firms will have to account for a number of factors, including their environmental impact and human rights (Photo: kenmainr)

To make an informed choice, customers, investors, and by extension the public at large should be aware of the real societal impacts of company activity. The EU Non-Financial Reporting Directive, which we are proud to have played our own part in getting agreed, is an important step in the right direction.

Corporate scandals,like the Volkswagen affair, the Brazil BHP-Billiton dam collapse or Exxon’s global warming cover-up took centre-stage in 2015.

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Such events paint a clear picture of the impact and influence business activities can have on society and the environment. They teach us that the true cost of goods or services extends well beyond the price tag.

The truth is that we can no longer afford to ignore the human rights and environmental repercussions of doing business, and it’s high time the public were given fuller information about the behaviour of companies.

A new European Union law enters into force at the end of the year requiring over 6,000 large, EU public-interest entities (listed companies, banks, insurance undertakings and other companies designated by member states) to report annually on the human rights, environmental and social impacts and risks linked to their operations, products and services - throughout their supply and subcontracting chains.

Awareness and accountability

NFR casts a wide net, including issues like planetary boundaries, the employment of child labour, land grabbing or risks of corruption.

Drawing on the key concept of “due diligence” from the UN's Guiding Principles on Business and Human Rights, NFR also looks at the procedures put in place to identify and mitigate these risks.

For example, companies operating in an environment prone to corruption will disclose how thorough they are in preventing it. While clothing companies will have to explain how responsibly they act throughout their supply chain, spanning from textile factories in the developing world to the European high street.

This exercise entails a shift in corporate governance, because society now expects businesses to show both awareness and accountability when it comes to their economic ventures.

Corporate reporting has for too long focused on the risks directly affecting a company’s short-term financial performance, being oblivious to future sustainability and potentially harmful externalities.

NFR is not only about listing the adverse impact of corporate activity but also about reconstructing business models towards a sustainable, long term-planning perspective. It sheds light on the many shortcomings of a system hinged on short-term gains and immediate profits, which often fails to see the big picture.

Businesses 'should start preparing'

The NFR Directive is an important step forward, but it must be seen as an integral part of broader developments. Its shortcomings will need to be addressed during the implementation and revision phases.

For one, without being over-prescriptive, there is a danger that the reporting will be too open to interpretation, may miss material factors, and not be comparable between companies. The directive’s scope was also essentially restricted to the largest EU public-interest business entities, in order to achieve the political consensus for it to be agreed.

These issues could be addressed when countries incorporate NFR into national law. EU Member States can, and should, go beyond the directive's minimum requirement regarding the size of companies covered, transforming NFR into a wider business standard. An ambitious transposition should also provide a framework of key performance indicators that would assure comparability in all reporting areas, from human rights to resource use.

The European Commission is in the meantime mandated to develop non-binding reporting guidelines for the application of the directive. Such guidance is needed to help clarify what is expected from companies, and could encourage good implementation. The consultation process ended this April, giving all interested parties the opportunity to express their opinion about the way forward.

We encourage the European Commission to take into account the opinion of all stakeholders who contributed to the consultation, and we encourage all EU-based businesses to start preparing for their first Non-Financial Reports – in the ambitious, forward-looking and holistic spirit the legislation is intended to achieve.

We believe Non-Financial Reporting could pave the way towards a fundamental shift in the way corporate performance is measured, and create a EU business sector that is better for people and the planet.

Sergio Cofferati is an Italian MEP from the Progressive Alliance of Socialists and Democrats group who serves on the internal market and consumer protection committee. Richard Howitt is a British MEP also for the Progressive Alliance of Socialists and Democrats group and serves as the parliament's rapporteur on corporate social responsibility.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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