MEP: EU corporate reporting blueprint should be basis of international rules

The European Commission's plans for a Sustainability Reporting directive announced on Wednesday (21 April) provides "solid ground for discussion" and should allow EU standards to determine international rules, says Pascal Durand, the European Parliament's rapporteur on the subject, as he sets out the European Parliament's plans to handle the file in the coming months.

A lawmaker with the liberal Renew Europe group, Pascal Durand was speaking with EURACTIV's Benjamin Fox.

What are the most positive elements in the Commission proposal?

The Commission’s proposal is an important step forward. It builds notably on the Parliament’s work on Sustainable Corporate Governance that was voted last December and on a large open public consultation that received many thousands of replies. Both stakeholders’ groups and MEPs expressed strong support for measures to create a common framework under which businesses would disclose comparable environmental, social and governance data. That is well reflected in the proposal.

Nevertheless, only France, Spain and Italy are today requiring independent and compulsory checks on non-financial information. So while the proposal to set up a limited assurance requirement for all undertakings operating in EU Member States is an improvement, we need to move to a higher, more demanding level of assurance, similar to what’s requested for financial information. That would mean to apply random checks on the genuineness of investments, on in situ working conditions, etc.

The directive is set to be extended to include all large companies, but there are some exemptions for companies that form part of corporate groups and some private firms. What are your views on this?

I welcome the extension of the scope of the directive to all large undertakings and listed SMEs, in line with the provisions of the Accounting Directive. New obligations should quadruple the number of companies that will need to report. In terms of the exemptions, I appreciate a lack of specific information on the impacts of subsidiaries on parent undertakings would go against the purpose of the directive review, but I don’t have a definitive position on this yet. 

Will this create a two-tier system and what will be the effect?

We need to have a better understanding from the Commission on how many undertakings would actually be potentially exempted and the underlying reasons to maintain exemptions in this new revision. 

The proposal includes a requirement for European generic and sector specific mandatory sustainability reporting. What impact will this have on companies?

The standard architecture proposed by EFRAG, the Advisory Group that has been mandated by the Commission to work on the new standards, is a great opportunity to speak the same language on sustainability reporting both for companies between them and with stakeholders.

Standards are just a tool but that will help shape internal reporting systems by moving away from a purely content-based approach and by helping companies to take the overall environmental and social contexts more into account. For companies, that means sustainability reporting should become harmonized, more relevant for the users, clearer and simpler.

While suggested standards’ architecture builds on the experience of companies in Europe, they need to be further developed. The structure of reporting categories has been worked in silo and does not realistically capture the cross-cutting impacts between the environment, social and governance issues.

Is there enough specificity in the proposal? Are there still ambiguities that companies will be able to exploit? If so, what can MEPs do to strengthen the law?

The Commission’s proposal leaves a lot of work to the delegated acts, which go under less parliamentary scrutiny than first-degree legislation. It is difficult to say at this stage if companies will be able to take advantage of the ambiguities that could arise from the content of these delegated acts. By all means, the Parliament should embrace its law-making role and try to specify as much as possible the standards in the Regulation itself.

The proposal stops short of providing a clear mandate for standards to report on the alignment of companies’ decarbonization objectives and timelines with the goals of the Paris Agreement to limit global warming to 1.5°C. Can and should this omission be corrected?

The Parliament is committed to align with the goals of the Paris agreement as shown by its position on the Climate law. The non-financial reporting directive review is already proposing to align reporting obligations with relevant EU legislation, in particular the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. This should be reflected in the indicators developed by EFRAG. Meanwhile, we can’t have comprehensive sustainability reporting standards without a Taxonomy that is fully up and running. On that matter, we know the Commission decided to put forward a separate legislative proposal in Q4 2021, specifically covering how certain economic activities, primarily in the energy sector. Whether this will impact the adoption of the two delegated acts on non-financial reporting is unclear.

What do you think about the provisions on human rights reporting? Are these strong enough?

The information currently reported by companies on their human rights policies is not always clear. The new proposal should give equal importance to the standards on environmental and social matters. There are many easy indicators that can improve human rights reporting (wages by deciles, percentage of unionized employees, percentage of woman in senior positions etc). The Parliament gave detailed definitions of provisions on human right in its report on Corporate Due Diligence that should be considered by the standard-setter to come with an accurate definition of what needs to be reported.

What will the European Parliament’s priorities be in terms of reshaping the legislation over the coming months?

With this new proposal, Commissioner McGuinness provided a solid ground for discussion. As a former MEP she took into account the Parliament’s position. We know the size of the scope, whether the new obligations should apply to non-EU companies operating in the EU, and the requirements of content assurance for non-financial will be important topics in the coming months. The review will be a priority of the French EU presidency and I am confident policymakers want to reach an ambitious deal so that EU standards can determine international standards.

[Edited by Josie Le Blond]