New EU reporting requirements will force firms to ‘get serious’

The European Commission will force companies to get 'serious' about due diligence and non-financial reporting as it prepares to table key legislation in the coming months.

This article is part of our special report Putting due diligence at the heart of sustainable business.

The European Commission will force companies to “get serious” about due diligence and non-financial reporting as it prepares to table key legislation in the coming months.

“Responsible reporting is clearly part of responsible business,” said the EU’s financial stability Commissioner, Mairead McGuiness. “We are not doing this to impose new burdens on companies but to ensure that our companies are sustainable,” she added. 

The EU executive will ensure coherence between new corporate due diligence legislation and the revised non-financial reporting directive to increase companies’ accountability, McGuinness and Justice Commissioners Didier Reynders said at a webinar on Monday (15 March).

“My colleague Commissioner Reynders and I work together to build a consistent framework on corporate reporting, and on sustainable corporate governance,” said McGuinness.

“We’ll ensure that there is coherence between the two proposals, and we continue to make sure that throughout the legislative process with the Council and Parliament we keep that coherence in mind,” she added.

This year the EU is tightening its legislation to expand corporate due diligence requirements, revising the non-financial reporting directive and drawing together a list of green finance criteria, known as the EU taxonomy.

Reynders has promised to table the due diligence legislation in June.

The aim of the bill, which is the product of a decade of campaigning by EU lawmakers and civil society, is to create legal certainty and increase environmental and human rights protection across European supply chains.

The draft law is expected to take account of all internationally agreed human rights conventions and agreements on environment and governance, including corruption. Companies are set to be required to look at all possible adverse impacts on human rights, environment and governance across the whole of their value chain.

They will then need to mitigate, prevent and remedy any failures and breaches, or face possible sanctions if they fail to do so.

Time is running out, said Heidi Hautala, one of the shadow rapporteurs on the European Parliament’s recent report on due diligence and co-founder of the Responsible Business Conduct Working Group, pointing to the need to have environmentally sustainable business. 

“These and other global challenges cannot be solved without full engagement for the private sector and alongside other sectors,” she added.

Last week, EU lawmakers endorsed a report by Socialist MEP Lara Wolters calling on the Commission proposal to increase access to justice for citizens in third countries.

“I think that the sort of mainstreaming effort there that we have to do together is only just getting started,” said Wolters.

EU lawmakers say there has been a shift in attitude among many companies, which now support due diligence laws, citing consumer and client demand for ethical business practices.

“We need to be able to distinguish the companies that are serious from those that just say they are serious,” added Wolters.

Corporate due diligence

Under the proposal, due diligence requirements would be proportional to companies’ size and resources, but those operating in riskier sectors would need to do more. 

One controversial question which remains unanswered is whether and how small firms would be included in the scope. Reynders said the EU executive was still looking at ways to give small businesses financial and technical support so that they have the resources to be able to comply.

MEPs have called for EU budget lines to be used to provide financial support to small firms.

For his part, Axel Voss, spokesman on the due diligence file for the centre-right European People’s Party, suggested that a sector-specific approach could be a more effective way of targeting the companies with greater risks in their supply chains.

The Commission is also examining the rules for third countries and enforcement and liability, a tricky issue since judicial competences typically lie in the hands of member states.

Part of the logic behind the planned legislation is that it will create a level playing field and harmonise rules following a range of laws and voluntary schemes covering modern slavery, child labour and supply chains in a handful of EU states including the Netherlands, France, and, in the coming months, Germany.

The Commission is working on an impact assessment and analysing the almost half a million responses from the public consultation, 

“The Commission strives for a horizontal legislative initiative on sustainable corporate governance at the European level, in view of supporting a fair and sustainable transition in the economy,” Reynders said.

“EU companies should make all reasonable efforts to make sure that practices against human rights, labour and social rights that are not tolerated within the union do not take place in their supply chain,” he added.

Non-financial risks

The non-financial reporting directive (NRFD) is also up for revision this year to reflect the EU’s increased climate ambition. It will look to strengthen the rules without imposing unnecessary burdens on SMEs.

“it’s no good saying what you’re doing, we need to be able to verify that that is the case,” said McGuinness, adding that data will need to be audited and verified.

“Sustainability is not integrated enough into our financial and our economic systems, and I think it’s a lesson we should do well to learn as we adapt to mitigating the effects of climate change and indeed environmental and biodiversity and other issues,” she said, warning risks will only grow as climate change worsens.

Julia Linares from WWF said the Commission must ensure coherence and consistency between legislation and include clear climate targets.

“Without a target, companies will not deliver randomly,” she added, saying the taxonomy could act as a guide but is not a complete solution.

[Edited by Zoran Radosavljevic]

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