Published by Alliance for Corporate Transparency, initiative led by Frank Bold

The Alliance for Corporate Transparency, a collaborative initiative launched by Frank Bold, analysed the information that companies disclosed on their environmental and societal risks and impacts following the requirements introduced by the EU Non-Financial Reporting Directive. The research arrives at the same time that the EU Commission initiates the process to reform the law and after Executive Vice President Vadis Dombrovskis announced plans to create EU standards for corporate sustainability reporting.

The poor quality and comparability of corporate disclosures hinder the efforts to scale up sustainable finance as investors do not have reliable information to inform their decisions. This leaves major financial risks stemming from sustainability challenges, especially climate change, unaccounted for in investor and corporate strategies, as well as important social and environmental impacts unaddressed.

The research of the Alliance for Corporate Transparency provides clear insights into the key gaps in corporate reporting practice that need to be addressed.

Key findings

Common problems:

• Disclosures are not specific enough to enable understanding of a company’s position and future developments. Reports focus on presenting general policies and commitments (80-90% for key issues such as climate, human rights, and anti-corruption), but not concrete targets, outcomes of policies with respect to these targets, and specific information on risks and impacts (20% on average).
• Only 22% of companies provide their key performance indicators in summarised statements. This is in stark contrast with the way financial indicators are presented.
• The numbers above focus merely on whether disclosures are specific, but not whether they include relevant information. Examples of qualitative criteria that provide insights into the relevance of disclosures are provided below.

Climate

• 13.9% of companies report on alignment of their climate targets with the Paris agreement goals (i.e. to keep global warming well below 2 deg Celsius). This number is higher in the Energy & Resource Extraction sector (23.5%), but still more than three quarters of the most impactful companies don’t report on their targets and plans in this context.
• Just 23.4% (that is less than half of them) provide specific information that allows readers to understand the climate-related risks they are facing – out of 53.8% reporting that they recognize the existence of such risks. Only 6.6% clearly consider the risks with regard to the transition to a well below 2 deg Celsius scenario. The term climate risks encapsulates so called transition risks (technological challenges and regulatory risks) as well as physical risks.
• Only 13.4% of financial companies provide details on the exposure of their portfolios to the most polluting sectors.

Human rights

• 22.2% of companies provide some information on their human rights due diligence process, despite 82.8% reporting a human rights policy. Human rights due diligence is the basic element of corporate responsibility to respect human rights. It is recommended by the UN, EU as well as a number of individual States.
• 25.5% of companies disclose specific human rights risks facing them (out of 56.6% that acknowledge the existence of such risks), yet only 14.6% report on the actual impacts, and merely 3.6% explain the outcomes of the management of the risks
• 13.6% of companies in the Apparel & Textiles (the definition includes footwear companies) do disclose their ultimate suppliers in high-risk countries for human rights, which is a major improvement

Anti-Corruption

• A vast majority (88.1%) of companies report on anti-corruption policies, but only 33.7% describe how these are implemented.
• Fewer companies specify how their policies apply to their business partners (39.5%), and fewer to the agents authorised to act on behalf of the company (25%)
• Just 18.3% of companies disclose if they conduct risk assessment of potential areas for corruption)

Country conclusions: There is not a major difference between different European regions, with the exception that companies from former Eastern Europe lag behind. Nordic companies tend to be among the regions that report more specific information than others, but not by a great margin (the biggest margin is in certain human rights indicators – 33.4% of Nordic companies disclose actions taken to address risks compared to 19.4% average). French companies on average provide slightly better information on strategy for climate change (24.41% inform on their climate targets in relation to Paris Agreement goals compared to a 13.9% average).

Read the full report here and visit the database here.

Read also a blog by Filip Gregor and Joanne Houston presenting the results from the human rights perspective, and analysing the implications for mandatory human rights due diligence.