EEA YouTube Show Recap: EU Sustainability Reporting Directive Will Have Significant Impact

A US legal expert on ESG and stakeholder governance and a European Union specialist on human capital reporting agree with the US legal and management consulting community that the new European Corporate Sustainability Directive (CSRD) will have far more impact on US businesses than the EU GDPR (General Data Protection Regulation) privacy rules because of the breadth of the disclosure requirements.

Is it an exaggeration to say that the new European Union Corporate Sustainability Directive will have a significant impact on many businesses, even in the US? No, is the answer from Carmen X. W. Lu, Corporate Counsel specializing at Wachtell, Lipton, Rosen & Katz, considered one of the world’s leading law firms, at which she advises public and private companies and boards of directors across industries on ESG (Environmental, Social, Governance); corporate governance matters and evolving market trends, expectations, and practices. She has written widely on ESG and stakeholder

governance issues. She is joined by Dr. Heiko Mauterer, Board Member for 4 C Group Management Consulting Group, a Germany-based EU human capital advisory firm and auditor of ISO 30414 human capital reports for Allianz, DWS, and Deutsche Bank. They agree that even major corporations in Europe, the US and elsewhere have yet to grasp the implications of this new law that imposes financial penalties and negative publicity on companies that fail to disclose the treatment of their stakeholders in terms of practices, metrics, and outcomes.

Since this article was published and YouTube show created, the Enterprise Engagement Alliance has published a detailed primer on the new law and its use as a framework for Corporate Sustainability Reports.

In creating these new disclosure requirements, the directive says pressure for the disclosure rules came from investors and other stakeholders seeking a more comparable, transparent, and standardized approach to human capital standards that include all stakeholders.

Click here for the YouTube Show. Click here for the podcast version.

The European Union’s General Data Protection Regulation had an enormous impact on companies in the US and countries throughout the world that do business with European Union countries because they must comply with privacy rules at the risk of significant penalties and bad public relations. These new rules, which go way beyond GDPR, take effect in 2023 with tracking to begin in 2024 for reporting in 2025 for large companies and 2026 for smaller firms. They apply to all organizations that do business in or with EU companies with more than 250 employees, and or at least 40 million euros in annual sales or a balance sheet of 20 million euros in assets. All reports will have to be audited by certified auditors in each country. More abridged disclosure requirements are anticipated for smaller companies for 2026.

For more background on the new laws, see ESM: New EU ESG Rules Likely to Affect Many US Companies.

Here are links to the details on the draft disclosure regulations related to the “S” of ESG.
Consumers
Own workers
Workers in the value chain
Communities

Here are highlights of the EEA YouTube Show.

EU CSRD marks a turning point for Stakeholder Capitalism. Says Lu, “I think we are experiencing a kind of a key inflection point in the shift to Stakeholder Capitalism. The movement has been going on for many years but with the rise of ESG and now the CSRD law, corporations will be forced to make the shift.” Mauterer notes that larger companies will in effect have to publish annual stakeholder management reports, along with annual reports if they are public companies. That said, he says that the term “capitalism” is rarely used in Europe, so he cannot predict how well the name Stakeholder Capitalism will take off on the continent, regardless of the CSDR stakeholder management requirements.

The disclosures embed stakeholder management principles into business practices. Lu and Mauterer agree that the specificity of disclosures related to employee metrics, including turnover, safety, diversity, as well as those of supply chain and distribution partners, and the specific information required of customer and community management practices is of unprecedented scope anywhere in the world. The draft requirements far exceed anything anticipated from the Securities and Exchange Commission in the domain of any further human capital disclosures.

The law will affect thousands of US companies. Every US company that does business with a European company that meets the size thresholds (based on number of employees, annual sales, and balance sheet numbers) will have to comply. Smaller US companies that do business with these larger US companies likely will have to publish Corporate Sustainability Reports addressing many of the key issues but will not be required by EU law to have them audited, Lu adds.

Compliance will require a CEO-led strategic and systematic approach involving all business unit leaders. “It’s all hands on deck,” says Mauterer, who is among the few people who have conducted a human capital audit anywhere in the world. Lu believes many large companies already have developed a level of expertise in human capital data and that the effort will require involvement of management across the organization to both create and manage the data, business practices, and write the formal report.

Lawyers will need to review all public disclosures to address potential risks. Lu believes that businesspeople must develop the strategic stakeholder management, metrics, and reporting plans and that lawyers can add significant value by reviewing the reports in advance. The level of specific disclosures required in the new law will potentially open companies up to risk, particularly in the litigious US business world, so will require careful review before publication.

There is little recourse for anti-ESGers. The options will be very limited for those who are eager to litigate CSRD in the US, says Lu. “For the longest time, the US and the EU had very different approaches to antitrust laws, and that did not stop the EU from imposing significant penalties on US companies, and I think we’re looking at a similar situation here.” Companies that meet the threshold of compliance in the EU will have to comply as will the companies in their distribution and supply chains.

The new law has yet to receive business press coverage or much action yet. Mauterer says there is no business coverage yet in the European business media and not much evidence that CEOs and boards are yet taking action. Lu agrees that most US companies are just beginning to focus on the implications. Similarly, there is no coverage yet in the US business media outside of ESM, which first reported on the new law last year. On the other hand, the management consulting and legal fields have widely covered the topic in their communications.

The time for action is now. Lu points out that while the first reports are not due from large companies until 2025 and smaller companies in 2026, it will be for the years 2024 or 2025 respectively. Mauterer notes that companies want to have some idea of what the metrics look like as soon as possible so they have time to act before they must publish results.

A new burden or opportunity? Both agree that many companies will view the new law as a burden and will do as much as possible to take a "check-off-the-box" approach, while some percentage will view the disclosures as an opportunity for marketplace differentiation.

The law will generate a demand for new subject matter experts. Boards, C-suite executives, front-line management, and educators will need to grasp a stakeholder approach to management, metrics, and reporting, both agree.

The law will force business and legal educators to address a stakeholder approach to management. Business, management, and law schools will have to rethink their education to help the next generation of management bake stakeholder management thinking into their education and case studies, Lu and Mauterer conclude.

The requirement for audited reports presents a significant talent quandary. While the certification bodies exist in most countries to certify auditors, the lack of expertise in stakeholder management reporting and audits is a huge impediment to creating the legion of experts and auditors needed to help tens of thousands of organizations comply with the new law n the next three years.

For More Information

Dr. Heiko Mauterer, Board Member
4 C Management Consulting
heiko.mauterer@4cgroup.com

Carmen Lu, ESG Corporate Counsel
Watchtell, Lipton, Rosen & Katz
cxwlu@wlrk.com

Bruce Bolger, Founder
The Enterprise Engagement Alliance
Bolger@TheEEA.org
914-591-7600, ext. 230

Subscribe to ESM's weekly newsletter.

Click here to learn about the EEA’s bi-partisan Change.org petition to keep politicians out of business management.