Traditional conceptions of private business have often relegated sustainability to the sidelines, let alone consideration for planetary boundaries. As a result of growing concern around climate and other environmental macro-crisis, these concepts have been increasingly integrated into financial and business regulations, though with limited success so far. Two landmark sustainability-related reforms currently discussed at European level (namely, the Corporate Sustainability Reporting Directive – “CSRD” – and the Corporate Sustainability Due Diligence Directive – “CSDDD”), might imply major changes, by introducing a strengthened consideration for corporates’ negative impacts on sustainability factors. Provided the final versions of these reforms achieve their highest level of ambition, they may represent a significant move towards corporates accountability for the harmful consequences of their activities.

Corporates are often perceived as rational agents, whose pursuit of individual preferences, notably guided by markets (information, price determination), is supposed to allow for optimal decisions, maximizing the profit for the benefit of their owners/shareholders while allowing the greatest possible societal well-being.  

This belief has deeply influenced the main regulations adopted up to now to align the financial sector with new sustainability concerns. Most of the policy tools developed are embedded in market logics, focusing on transparency with at best an attempt to assess non-financial risks. These regulations had little effects in practice and if pursued, will fail providing more results (1).

The Corporate Sustainability reforms underway could be the first step towards a strengthened regulatory response to this situation and, at the very least, an essential tool to for the EU to reach its sustainability-related policy objectives. 

The CSRD sets out an obligation for companies* to publish granular information on their negative impacts on sustainability factors. This information is placed on an equal footing with financially-relevant sustainability information (as in sustainability risks and opportunities for instance), following a “double materiality” approach.  

While it remains only a transparency tool, the CSRD framework must be read in combination with the other main piece of Corporate Sustainability legislation currently discussed at EU-level, namely the CSDDD (2), to understand its full potential and why this piece is key. The CSDDD introduces into EU “hard” law (3) an obligation for companies* not only to identify their negative impacts along their value chain but also to act to mitigate their consequences or incur liability if they fail to do so.  

This is a huge step ahead. Double materiality has been discussed for a while but this reform is the first to really embrace it fully, going beyond a focus on what has a financial impact on financial institutions and markets to aim at enhancing their accountability while forcing them to disclose and act on what matters for civil society stakeholders (4). It opens avenues, way beyond previous regulatory initiatives, to monitor corporates negative impacts and, possibly, sanction malpractices.  

This could lie down the legal foundations for vulnerable communities, to seek redress through the law for sustainability-related harms (5) and for stakeholders to make a climate case. Indeed, article 15 of the draft CSDDD requires from companies to“adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement”.  

There is still some way to go before these possibilities become reality. The European Financial Reporting Advisory Group (“EFRAG”) is responsible for drawing up the technical proposal and the indicators to be covered within the standardized framework of CSRD reporting. The standards still need to be finalized and then adopted by the European Commission. The CSDD text is at a very early stage of the legislative process. And, given the stakes, these reforms are subject to intense lobbying. 

While all might not perfectly anticipate these developments yet, European financial institutions – particularly those belonging to the investment world (6) – generally welcomed the integration of a ”double materiality” approach into the regulation, as it would provide them with crucial data to abide by their own disclosure obligations and better inform their allocation decisions. 

However, the approach followed by the EU in its Corporate Sustainability reforms is being challenged by a competing sustainability-related reporting initiative under the IFRS’ umbrella: the International Sustainability Standards Board. The “ISSB”’ has for ambition to become the “global baseline” of so-called “sustainability” reporting, with an exclusive focus on financial materiality (i.e.: the impact of sustainability issues on enterprise value). As raised by Reclaim Finance (7) and many stakeholders (8), this choice would block all attempts to make finance work in line with sustainability concerns, to say the least. 

The risk that ISSB’s limited aspirations may become the reference to the detriment of the more ambitious concepts now introduced in EU law is real, given the global dominance of the industry-led IFRS over financial standards.  

The EFRAG has developed 14 draft standards for the CSRD, which are currently undergoing a public consultation (until August 8th). At this stage, the proposed indicators are a – perfectible – first step towards an actual sustainability reporting framework, as they introduce numerous real-world data points on companies’ activities, but do not necessarily link them, through a science-based approach, to their systemic impacts (i.e., for instance, how they relate to physical limits or planetary boundaries when it comes to environmental concerns) (9). 

However, the high-level principles established by the draft CSRD – which are mandatory for the standard-setting body – leave room for improvement, especially as to climate-related obligations (10). 

Reclaim Finance recently submitted a response to the EFRAG’s consultation, focusing on the climate-related draft standard, in which we mainly ask for: 

• Introducing additional mandatory indicators related to climate mitigation actions; 
• Strengthening the disclosures related to climate transition plans, especially in relation to the scientific basis on which they rely; 
• Clarifying concepts related to scope 3; 
• Improving disclosures on GHG removals; 
• Excluding any reference to avoided emissions; 
• Integrating more granular and precautionary scenarios to assess transition and physical risks. 

The Corporate Sustainability reforms represent a major opportunity to bring about a profound transformation of societal practices and of the conception of corporates’ purpose. They still have a long way ahead, and it is essential that stakeholders from diverse backgrounds and geographical origins make their voices heard at all stages of the process. This is the condition for these reforms to achieve their full potential and become a privileged and effective tool for climate and sustainability-related action.

* exceeding certain turnovers and workforce thresholds. 

Take Action: you can still submit your responses to the ISSB’s consultation until July 29th and the EFRAG’s consultation until August 8th.

Notes :

1. See CHENET (H.), ZAMARIOLI (L.) (2021), Les sous-jacents théoriques de la « finance durable » au défi des objectifs climatiques, esp. p. 19 et s. ; GUNNIGHAM (2020), A Quiet Revolution: Central Banks, Financial Regulators, and Climate Finance, Sustainability, esp. p. 17.
2. The legislator expressly invites a combined reading of CSRD – as a reference to appreciate the relevance of climate-related plans – and CSDDD. See esp. CSDDD Explanatory Memorandum, p. 4 et s.
3. A few member-states have recently included similar mechanisms, like the “devoir de vigilance” in France in 2017 (a first set of proceedings on this basis is currently underway), in the wake of previous voluntary frameworks like the UN Guiding Principles on Business and Human Rights and OECD Guidelines for multinational enterprises.
4. See e.g.: Trilogue Draft CSRD, Recital 12 ; ABELA, (M.) (2022), A new direction? The “mainstreaming” of sustainability reporting, Sustainability Accounting, Management and Policy Journal.
5. See Global Witness Webinar (2022), How a new EU law could protect people and the planet.
6. See in particular: collective letter Eurosif co-signed in particular by EFAMA, ESG Today (2021), Amundi, Morgan Stanley among major Investors supporting EU Sustainability Reporting proposals ; EFAMA’s response the consultation on the CSRD reform (2020) ; Eurosif-PRI letter April 2022. See however, conversely, EFAMA’s attempt to obtain derogations for AMs, based on their obligations under SFDR.
7. See our own response to the recent ISSB consultation on a first set of Exposure draft standards.
8. ADAMS (C.) et a. (2021), Academics and policymakers at odds: the case of the IFRS Foundation Trustees’ consultation paper on sustainability reporting, Sustainability Accounting, Management and Policy Journal ; RAMBAUD (A.) et a. (2022), La double matérialité, pierre angulaire de la démarche d’impact, Revue Banque ; See also this recent interview of E. FABER (Chair of the ISSB), and reactions it triggered on social networks in and under a LinkedIn post by P. ZAOUATI (CEO Mirova).
9. For an introduction to context-based approaches to sustainable reporting see e.g.: BAUE (B.) (2019), Working Paper 2019-5: Compared to What? A Three-Tiered Typology of Sustainable Development Performance Indicators, United Nations Research Institute for Social Development; See also: Impact Management Platform, Thresholds and allocations
10. See esp. art. 19a as amended, which requires an undertaking to disclose:
    1. Its plans “including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050 as established in Regulation (EU) 2021/1119 (European Climate Law), and where relevant, the exposure of the undertaking to coal, oil and gas-related activities” ;
    2. “a description of the time-bound targets related to sustainability matters set by the undertaking, including where appropriate absolute greenhouse gas emission reduction targets at least for 2030 and 2050, a description of the progress the undertaking has made towards achieving those targets, and a specification of whether the undertaking’s targets related to environmental matters are based on conclusive scientific evidence”