Europeans want companies to be accountable for their environmental impact. That is one of the reasons why revising the EU’s non-financial reporting directive is as political as it is technical, write Olivia Grégoire and Pascal Durand.
Olivia Grégoire is France’s Secretary of State for Social Economy. Pascal Durand is a Member of the European Parliament for the Renew Europe – Renaissance group.
In recent months, the EU has been concentrating on revising the Non-Financial Reporting Directive (NFRD) which currently requires large companies to publish reports on the policies they implement in relation to environmental protection, value sharing and respect for human rights in their business activities.
The aim of the revision is to draw up a common framework under which all businesses will disclose identical environmental, social and governance indicators. These indicators will establish the so-called extra-financial performance of business, to form, together with the financial performance, a more comprehensive approach to their performance.
Although it appears to be technical, this topic is, in fact, highly political.
First and foremost, it is political because it involves citizens. Owing to the urgency of climate issues, the public now requires companies to account for their environmental impact. They are not merely citizens who vote; they are also customers, employees, neighbours and savers.
In short, they are stakeholders without whom companies are unable to operate, and who by dint of how they consume, work and invest, have the power to force companies to act responsibly.
It is also a political issue as it highlights different views of what this performance should entail – and the EU is not alone in seeking to measure it. The US is in the process of preparing its own indicators. If these were to gain traction and become international standards, sustainable development would be determined by an American vision.
This would have major ramifications for European businesses’ access to financing based on these standards. Being required to impose extra-financial standards would be a major political error with serious economic consequences. Europe should not be afraid to assert its sovereignty considering that it has been a though leader on this issue for a long time.
In the early 2000s, Europe already made this mistake when it left drafting the IFRS down to an independent – yet English-American organisation. Currently, companies’ financial health is assessed against an American view of capitalism, debt and equity.
This explains American predominance over rating agencies, including, at present, those operating in the non-financial sphere (acquisitions of Oekom by ISS in 2018 and VigeoEiris by Moody’s in 2019).
Last September, the Big Four audit and financial control firms (Deloitte, Ernst & Young, KPMG and PwC) unveiled new ESG reporting standards with an eye to imposing them worldwide.
We need to urgently come up with our own standards and harmonise them, and to safeguard non-financial auditing through specific and independent (but European) expert appraisal, in the same way as financial reporting is controlled.
No less than the future of European independence and sovereignty is at stake, and the achievement of the goals of a sustainable society in which human, social and environmental rights are respected.
It is therefore the responsibility of governments, civil society and businesses to immediately take the lead.