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<\/a><\/span> \u2013 \u201cCSRD\u201d \u2013 and the Corporate Sustainability Due Diligence Directive<\/a><\/span> \u2013 \u00ab\u00a0CSDDD\u00a0\u00bb), might imply major changes, by introducing a strengthened consideration for corporates\u2019 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. <\/b><\/span><\/p>\n<\/div><\/div><\/div> 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.\u00a0<\/span>\u00a0<\/span><\/p>\n 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<\/span> (1)<\/span>.<\/span><\/p>\n 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.<\/span>\u00a0<\/span><\/p>\n<\/div> 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 \u201c<\/span>double materiality<\/span><\/i>\u201d approach.\u00a0<\/span>\u00a0<\/span><\/p>\n 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<\/span> (2)<\/span>, to understand its full potential and why this piece is key. The CSDDD introduces into EU \u00ab\u00a0hard\u00a0\u00bb law<\/span> (3)<\/span> 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.\u00a0<\/span>\u00a0<\/span><\/p>\n 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<\/span> (4)<\/span>. It opens avenues, way beyond previous regulatory initiatives, to monitor corporates negative impacts and, possibly, sanction malpractices.\u00a0<\/span>\u00a0<\/span><\/p>\n This could lie down the legal foundations for vulnerable communities, to seek redress through the law for sustainability-related harms (5)<\/span> and for stakeholders to make a climate case. Indeed, <\/span>article 15 of the draft CSDDD requires from companies to<\/span>\u201c<\/span>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 \u00b0C in line with the Paris Agreement<\/span><\/i>\u201d<\/span>.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n<\/div> There is still some way to go before these possibilities become reality. The European Financial Reporting Advisory Group (\u201c<\/span>EFRAG<\/a><\/span>\u201d<\/span>) 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.<\/span>\u00a0<\/span><\/p>\n While all might not perfectly anticipate these developments yet, European financial institutions \u2013 particularly those belonging to the investment world<\/span> (6)<\/span> \u2013 generally welcomed the integration of a \u201ddouble materiality\u201d 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.<\/span>\u00a0<\/span><\/p>\n 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\u2019 umbrella: the International Sustainability Standards Board. The \u201c<\/span>ISSB<\/span><\/b>\u201d\u2019 has for ambition to become the \u201c<\/span>global baseline<\/span><\/i>\u201d of so-called \u201csustainability\u201d reporting, with an exclusive focus on financial materiality (i.e.: the impact of sustainability issues on enterprise value). As raised by Reclaim Finance<\/span> (7)<\/span> and many stakeholders<\/span> (8)<\/span>, this choice would block all attempts to make finance work in line with sustainability concerns, to say the least.<\/span>\u00a0<\/span><\/p>\n The risk that <\/span>ISSB\u2019s 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.\u00a0<\/span>\u00a0<\/span><\/p>\n<\/div> The <\/span>EFRAG<\/a><\/span> has developed 14 draft standards for the CSRD, which are currently undergoing a <\/span>public consultation<\/a><\/span> (until August 8<\/span>th<\/span>). <\/span>At this stage, the proposed indicators are a \u2013 perfectible \u2013 first step towards an actual sustainability reporting framework, as they introduce numerous real-world data points on companies\u2019 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)<\/span> (9)<\/span>.<\/span>\u00a0<\/span><\/p>\n However, the high-level principles established by the draft CSRD \u2013 which are mandatory for the standard-setting body \u2013 leave room for improvement, especially as to climate-related obligations<\/span> (10)<\/span>.<\/span>\u00a0<\/span><\/p>\n Reclaim Finance recently submitted a response to the EFRAG\u2019s consultation, focusing on the climate-related draft standard, in which we mainly ask for:<\/span>\u00a0<\/span><\/p>\n The Corporate Sustainability reforms represent a major opportunity to bring about a profound transformation of societal practices and of the conception of corporates\u2019 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.<\/b><\/span><\/p>\n<\/div>A key opportunity to move beyond transparency, towards accountability<\/h1><\/span>
Focusing on financial materiality, a major threat to progress<\/h1><\/span>
Embedding sustainability indicators within planetary boundaries<\/h1><\/span>
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