The EU and the Future of Non-Financial Reporting

Summary of the EU’s recent law requiring CSR reporting.

By Michael Kourabas

In a historic vote on April 15, the European Parliament adopted the most significant corporate social responsibility measure, anywhere, to date.  Once passed at the European Council and country level, the directive will require certain large “public-interest” organizations operating in the EU to report on the environmental, social (including human rights) and governance (together, ESG) impacts of their work.  What exactly affected companies’ non-financial reporting will look like in practice has yet to be determined, as the directive does not mandate the inclusion of specific language or information; however, the potential impact of the law is clear.

As The Chicago Tribune put it in its coverage of the EU law:  “Investors looking for companies with good environmental, social and governance track records will [now] find the job easier….”  In other words, capital is at stake and, among other things, non-financial reporting requirements will make it more difficult for investors to plead ignorance–and, therefore, avoid questions of potential divestment–when it comes to the social responsibility (or not) of the investments in their portfolios.  Divestment is a powerful tool, and large funds have made clear that they are increasingly willing to put their money where their mouths are when it comes to certain ESG issues.  For instance, in early May, in the face of mounting pressure from the student body, Stanford University’s Board of Trustees announced that it would divest from all holdings in the coal industry.  Norway’s Sovereign Wealth Fund is another well documented socially-responsible investor that, from time to time, will divest from holdings in particularly problematic industries, such as cluster munitions, nuclear arms and tobacco.  (The Business & Human Rights Resource Center has, unsurprisingly, put together a helpful compilation of other ESG-related divestments.)

Yet, the long road to the EU law resulted in a broad compromise and, as such, the directive has certain shortcomings.  For starters, the law utilizes the so-called “comply or explain” standard common to certain European compliance regimes, which holds that companies need not comply with the law’s requirements if they can sufficiently explain why they didn’t.  There is also no single standard against which behavior is measured (and no specific reference, for instance, to the U.N. Guiding Principles on Business & Human Rights).  Rather, companies may use international, European or national guidelines as they themselves deem appropriate.  Likewise, the law applies only to large “public-interest” entities with more than 500 employees, and will impact roughly 6,000 companies operating in the EU, as opposed to the 17,000 as initially proposed.  (According to the European Coalition for Corporate Justice, just one in seven large companies in the region will be required to report.)  Finally, as Caroline Rees of Shift points out:

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