Should EU Consider a Pause on Corporate Sustainability Reporting Directive?
With a more conservative European parliament taking over, and with only eight of the member states in compliance with their requirements to legally implement the law, there is a growing chance that the Europeans will slow down or otherwise reconsider EU CSRD implementation. Is this such a bad idea?By Bruce Bolger
The True Promise of the EU CSRD and Transparency
Using Transparency to Focus on Value Creation Instead of Compliance
Building the ESRS Framework Into Your Organization’s Operating System
Click here for links to information about EEA engagement solution providers.
As a proponent of transparency in business and society, the Enterprise Engagement has applauded and promoted the European Union Corporate Sustainability Reporting Directive, publishing news and reference information about it almost since its inception. Now, I sympathize with those who wish to take a pause to make sure that the EU has created a tool for value creation and transparency rather than another bureaucratic apparatus leading to check-off-the-box compliance that wastes money.
According to a recent Forbes article by Jon McGowan, an attorney and Forbes contributor who writes frequently on sustainability, only eight of the 27 European countries have yet incorporated the law into their own legal systems, and many are risking fines for non-compliance. The new French Prime Minister, Michel Barnier, has suggested a desire to roll back the scope of the law, even though France was among the first to adopt the new law into its legal system, which includes the potential for criminal violations for noncompliance by companies.
In my informal conversations with business executives in the US and the European Union, there is a general sense that the new law is nothing but a bureaucratic hurdle creating yet another burden for doing business in EU countries. Not one CEO or senior executive has told me that their organization views the new law as a source of value creation; in almost every case, it’s viewed as another necessary compliance task being complicated by a ready industry of advisory and technology companies with a financial interest in making the process as costly and complicated as possible. From what I’ve heard, this statutory approach to disclosures is already fostering a check-off-the-box mentality and a costly waste of resources that in the end will diminish the quality of the disclosures.
The True Promise of the EU CSRD and Transparency
The original intent of the law makes sense: reduce greenwashing and enhance business practices through a standardized approach to transparency. In theory, the EU provided an effective framework for helping organizations strategically manage their relationships with all stakeholders in a way that can create value for the organization both in terms of more holistic internal management of and communication with all stakeholders.
Under the law, all companies deemed large enough to have an impact on society, starting with those having 200 or more employees and $44 million in turnover, will have to disclose the purpose, goals, and objectives of the organization; the ways it creates opportunities and risk for employees, customers, supply chain and distribution partners, communities, and the environment; what it does to improve its processes and mitigate risks; the basic metrics it uses to run its business, and the steps taken to address opportunities and risks. The EU law requires reporting on about 80 metrics related to all stakeholders and the environment, with reports audited by the organization’s accounting firm. The reports need to be electronically tagged so that they can be automatically submitted to the EU database that will manage public access.
When reading the materials being published by the advisory and other firms selling their services, what should be a pretty straight forward process as outlined in this EEA report on human capital reporting, instead has ballooned into a mind-boggling array of flow charts, philosophical debates, training programs, technologies, and soon I am sure an association or more with annual conferences and certification programs.
It's no wonder that CEOs simply view this as another burdensome cost of doing business.
Using Transparency to Focus on Value Creation Instead of Compliance
Given the growing body of research finding a link between enhanced financial performance and high levels of engagement among employees, customers, supply chain and distribution partners, and communities, the EU law provides a modern framework for management that addresses the interests of all stakeholders.
For organizations committed to the principles of stakeholder capitalism—enhancing returns for investors only by creating value for customers, employees, supply chain and distribution partners, and communities—the EU CSRD provides the framework for an operating and disclosure system focused specifically on the principles and metrics required to achieve any organization’s purpose, goals, and objectives. Seen in this light, the EU provides an opportunity not only to establish, manage and articulate a clear operating system that seeks to harmonize the interests and expectations of all stakeholders, but an audited corporate sustainability report enabling stakeholders to compare effective practices across the enterprise against other organizations it might wish to engage with.
So, in addition to providing a stakeholder-oriented framework for better business management and metrics, the law creates a powerful marketing tool for stakeholder-oriented companies in the form of an independently audited report. For many companies, this is the equivalent or better than an award for being a great workplace, because the audited report provides a more granular view of the organization’s purpose, goals, objectives, values, and processes used to manage them.
Having studied the law and ESRS (European Sustainability Reporting Standards) disclosures, I do not believe the law requires the infrastructure and extensive training and technology investments implied by all the advisory and training firms popping up to take advantage of a once-in-a-lifetime opportunity to help large organizations comply with a new law. The only organizations for whom this should be a burden are 1) those without a business operating system or 2) those that resist strategies focusing on value creation for stakeholders in favor of those tending to extract value by shortchanging or misleading customers, employees, distribution and supply chain partners, communities, and the environment.
In addition, let’s not make the same mistake with sustainability that we did with diversity, equity, and inclusion, segregating it into a mostly meaningless task done more to check off a box than to build equity and inclusion into the business operating system.
Building the ESRS Framework Into Your Organization’s Operating System
Stripping away all the alleged complexities, the EU CSRD is a fairly simple outline for organizations that should already be part of the business operating system. Many of the requested metrics are highly relevant to any stakeholder-oriented organization. Any organization with a business operating system--i.e. a systematic process for managing the organization’s purpose, goals, objectives consistent with its values across the enterprise, including clear roles and responsibilities, communications, metrics and cross-functional collaboration, etc.—will not find it challenging because the law in most cases requires reporting on information the organization should be tracking anyway.
For an overview of how to create a corporate sustainability report, click here. This EEA report provides a model for corporate sustainability reporting consistent with ISO 30414 human capital management and ISO 10018 people engagement standards.
Below is a basic outline for a simplified approach to corporate sustainability reporting consistent with the EU CSRD framework. It can be audited by the same firm that audits your organization’s financials.
1. What is the organization’s reason for being? What is it trying to accomplish for whom, and what are its fundamental values? What governance steps does it take to ensure that the organization runs consistently with its purpose and values?
2. Customers. What are the organization’s primary products and services and opportunities and risks do they create for customers? How does its products and services create value for its customers as well as risks.
A. What risks do customers create for the organization and what is done to mitigate them.
B. What metrics does the organization use to measure the quality of its products and service delivery to customers, and what steps does it take to create new products and services and/or to address shortfalls or develop new opportunities.
3. Employees. Who are the company’s primary employees in terms of types of positions, mix of full or part-timers, demographics.
A. What opportunities does the organization create for employees.
B. What risks does the organization create for employees, and what risks do employees create for the organization.
C. What metrics does the organization use to measure the management of employees, and what steps are taken to enhance opportunities and risks for employees.
4. Distribution partners (if applicable.) What types of companies bring your organization’s products and services to the marketplace.
A. What opportunities does your organization provide to your distribution partners.
B. What risks does your organization create for your distribution partners.
C. What risks do your distribution partners create for your organization.
D. What metrics do you use to manage your distribution partner relationships and what steps are taken to enhance opportunities or reduce risks.
5. Supply chain partners/solution providers. What types of companies supply products or services to your organization.
A. What opportunities do you create for your suppliers.
B. What risks do you create for your suppliers and how do you mitigate them.
C. What risks do suppliers create for your organization.
C. What metrics do you use to measure your supplier relationships and how do you enhance them.
6. Communities. How you define the communities relevant to your business and the principles on which you manage relationships.
A. What opportunities and risks do you create for the communities they serve, and how do you address them.
B. What risks do communities create for your organization and how do you mitigate them.
C. What metrics do you use to monitor your relationships with your communities and how do you enhance them.
7. The environment. Your organization’s principles related to managing environmental impact.
A. What risks does your organization impose on the environment.
B. What risks does the environment create for your organization.
B. The metrics used to measure the three scopes of environmental upon which your organization has impact and what is done to address them.
Enterprise Engagement Alliance Services
Celebrating our 15th year, the Enterprise Engagement Alliance helps organizations enhance performance through:1. Information and marketing opportunities on stakeholder management and total rewards:
- ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
- RRN Weekly on total rewards since 1996. Click here to subscribe; click here for media kit.
- EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020
Management Academy to enhance future equity value for your organization.3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.
4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.
5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.
Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
