Dear listeners,
I’m happy to be invited to give the keynote speech today on creating value and managing impact through integrated sustainability reporting. There is no question that a systemic transformation of our societies and economies is an imperative. Biodiversity loss, pollution, chemicals and climate change, poverty, modern slavery and other grave human rights violations demand comprehensive and systemic action. And integrated thinking.
Business is necessarily an integral part of the systemic transition of societies. As frontrunner companies have already understood, there is a need to adopt a new way of looking at value creation. So what is value creation today? Many of us have read about the revolt of responsible investors of Exxon-Mobil in recent days. These investors have a justified fear that Exxon Mobil is nearing the edge of a cliff and keeps destroying its value.
The company has lacked the willingness and, it seems, the competence to revise its strategy and to integrate sustainability into its business model. Now this expertise is installed in the company board alongside demands that the company provides transparency over its energy transition. Concretely Exxon-Mobil is called to disclose the metrics and milestones for transition, as well as to disclose its lobbying payments and partners. The planetary boundaries are real, and they demand companies across the board to change their structures. A new corporate culture is needed.
Thomas Friedman says in the New York Times that the revolt in ExxonMobil used the tools of democratic capitalism. I would suggest it is time to use democratic lawmaking, to level the playing field and make sustainability the norm for private sector across the board. Sustainability starts at the top, and to start with, board oversight is a crucial element of sustainable business conduct.
Another example is Royal Dutch Shell. The court in the Netherlands ruled that Shell has the obligation to reduce its carbon emissions by 45% by 2030. We can see that the Paris Climate Agreement already has legal effects for companies. This is a tectonic shift. Climate case law increases by the day. It could already be argued that carbon neutrality is customary international law.
Climate change is intrinsically linked to Human Rights. The UN Guiding Principles on Business and Human Rights, that were unanimously adopted exactly 10 years ago, reaffirm that states have the duty to protect human rights. Companies on the other hand have a duty to respect human rights. Thirdly, victims of corporate abuse need to have access to justice. Also on this front, case law is piling up. Companies’ responsibilities reach across their value chains. Cases have been brought by victims to the courts against company headquarters in many jurisdictions.
The evolution we can now observe in the corporations` international climate legal obligations as well as in their human rights obligations is a clear sign that it is time to create a level playing field at the global level. Here the EU has the role of leading by example and showing the required level of ambition. For this, I do believe, we as the EU do possess the “market power”. I dare to say that a Brussels revolution is underway. We are moving towards a “21st century business model”: towards a Transparent, Accountable and Sustainable Business.
Yesterday the rules for public country-by-country-reporting were finally agreed. The outcome is a major, first step towards tax transparency and an end to aggressive tax planning. In the coming months the Commission will also finally give its proposal on Sustainable Corporate Governance. The upcoming proposal on a mandatory human rights and environmental due diligence obligation will give a major part of the substance to the Corporate Sustainability Reporting.
The work of the European Parliament and the Council is now starting on the Commission’s proposal on Corporate Sustainability Reporting directive. The new reporting requirements are foreseen to come into effect already in less than 2 years from now, in 2023.
They are to be groundbreaking in many ways. They foresee to oblige companies to integrate forward looking information on medium and long term time horizons in their reporting. They set financial and sustainability reporting on equal footing and incentivise their integration. Companies will be required to report on their planning and progress towards 1,5C reality.
And the reliability of the sustainability reporting is to be verified by auditors, as is done with financial information. The upcoming EU Standard on sustainability reporting has to provide the necessary consistency, relevance and comparability of information. However, integrated sustainability disclosure is the last step on the path of sustainability.
A large part of the information that forms sustainability reporting is provided by a company’s human rights and environmental due diligence action. The expected legislative proposal on Human Rights and Environmental Due Diligence will contain the tools and obligations of companies across the board to take these steps.
Due diligence is ongoing work that has to be embedded in companies’ structures. Consumer facing companies and companies in close contact with communities have had to learn this lesson the hard way.
They are now the champions for this legislation. There has been a repeated call from the biggest chocolate companies of the world for a swift adoption of hard legislation instead of failed voluntary standards.
Due Diligence starts from researching and analysing the value chain. It is possible to manage impact only once the relevant information is available. The core of the task is ceasing, preventing and mitigating the adverse impact. The company’s and its value chain’s footprint should progressively diminish and move into a positive handprint on society and the environment.
This of course does not happen overnight. The work needs prioritisation. The most salient impacts, those that are most severe, likely and urgent, are those that need to be the focus. They also need to be the central topics of the company’s sustainability reporting.
The CSRD proposal also contains the necessary double materiality principle. Looking at the ESG risks to the company itself is a very narrow part of the picture. At least equally important is to take stock and to manage the impacts of the company and its entire value chain, on society, environment and enjoyment of human rights
Managing impact, managing risk – those are two sides of the same coin. A further fundamental change in company mindset that, I would say, needs to take place, is that stakeholders are an integral part of the whole.
In companies´ due diligence work, stakeholder consultation is a source of vital information for the company. A dialogue with stakeholders is also a building block for resilience and value creation. Local communities and human rights defenders are invaluable allies for companies in challenging environments.
At the same time sustainability reporting is not meant to serve only investors and the world of finance. Stakeholders are an equally important audience to the information provided by sustainability reporting. This is crucial to bear in mind. Continuing in the same vein, reporting and auditing are no longer the exclusive realm of finance experts. Therefore we need to make sure that the advice of all the expert bodies is taken on board when we work on this legislation in the European Parliament.
The EU Fundamental Rights Agency, the European Institute for Gender Equality, the European Environmental Agency, various civil society actors, to name just a few, all have an invaluable input to give alongside the expertise of the EFRAG.
To conclude, what we are witnessing today, is nothing short of a revolution, as also Professor John Ruggie, the father of the UN Guiding Principles on Business and Human Rights also has stated as he is observing what the EU is now coming up with. The new framework will bring sustainability into the core of the private sector across the board. Systemic challenges need systemic solutions. Single companies cannot alone solve these issues.
This truly is a Brussels moment. The EU is in a position to lead the way to eventually even a global standard for sustainable business.