Social sustainability connecting to social market economy | BST-Impact

By Kristina Touzenis, Managing Partner BST-ImpactComments on the proposed DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reportingIntroduction The current activity at EU level on requirements for financial actors and private companies to disclose on extra-financial sustainability issues must be seen as a realization that, in order for EU Member States (MSs) to live up to their international obligations, they need to focus on the activities of economic actors which - perhaps until relatively recently - were seen more as subjects of general legislations governing business, and obviously criminal legislation or legislation on e.g. social contributions, health care etc. within each MS, and not so much as a group for which specific sustainability legislation and attention was directed.This proposal consists of one Directive that would amend four existing pieces of legislation. In the first place, it would amend the Accounting Directive, revising some existing provisions and adding certain new provisions about sustainability reporting.In addition, it would amend the Audit Directive and the Audit Regulation, to cover the audit of sustainability information.Finally, it would amend the Transparency Directive to extend the scope of the sustainability reporting requirements to companies with securities listed on regulated markets, and to clarify the supervisory regime for sustainability reporting by these companies.

It is paramount to note how the EU in its reasoning

is clearly linking sustainability (understood not only as environmental sustainability but also as social sustainability and governance in line with the SDGs) to what has always been at the core of the EU: strengthening the social market economyand helping the guarantee that the Union is capableof ensuring stability, jobs, growth and investmenton a long-term basis.

The fact that COVID-19 exposed the dangers of social inequality and lack of respect for basic rights including in the Global North may well have sped up the process of focusing more on social issues of sustainability and not so exclusively on the environment as hitherto. The need for a “fair” recovery is mentioned in the reasoning for this legislative initiative.Asset managers and financial advisers are being required to report on a wide range of sustainability issues under new requirements in the Sustainable Finance Disclosure Regulation (SFDR), since March 2021.Besides requiring entities to understand the scope, severity, probability of occurrence and potentially irremediable character of the negative impact on the E that has been caused, compounded by or directly linked to its investment decisions and advice performed, the adverse sustainability impact set forth in the SFDR – mandatory for large entities and large holdings – requires considering the negative, material or likely to be material effects also on the S and the G, including requiring the publication of a statement on the entity’s website describing its due diligence policies in respect of these adverse impacts.The SFDR defines mandatory and voluntary adverse sustainability indicators and metrics in relation to social and employee matters, respect for human rights, anti-corruption and anti-bribery. If Asset Managers are to report on these issues, they in turn will need access to the required data and information.The proposed Directive compliments the SFDR in order to ensure that companies from whom investors need sustainability information report this, and that reported information is relevant, comparable, reliable, and easy to access and use. It also aims to reduce unnecessary costs for preparers.By enabling investors to better evaluate the sustainability risks and impacts of investments, it will mobilise private finance in support of the European Green Deal. It will also reinforce the social contract between companies and society, which is becoming ever more demanding on these issues, by making companies more accountable for their impact on society and the environment.There is no doubt that business enterprises can impact the entire range of human rights positively or negatively, including discrimination, health, access to education, labour exploitation, freedom of association and to form unions, freedom of expression, privacy, adequate standard of living (not in poverty), food and water, housing.So, what does it mean to “respect” human rights when one is a private enterprise? It means taking active steps to be in line with human rights obligations, often even if not always enshrined in national laws and regulations. A State has an obligation to exercise due diligence under its obligation to protect. A non-state actor has such an obligation in order to respect rights.That means first of all having internal policies which from an internal governance perspective sets up a regulatory framework safeguarding workers, communities and environment – all the way down the supply chain – as well as the more extended communities in which the enterprise operates.Being accountable does not mean never having any issues or any problems – but having processes in place that address these issues, provide possibility for redress, and ensure participation and transparency in those processes.The fact that sustainability information is taking on the same importance as financial information may seem a given to those who see the respect for national, regional and thus international law on societal sustainability issues as a given, but it is true that this has up until now not been the case. And that only recently have the benefits of sustainability reporting from financial and private actors come to the attention of those who are responsible for the effective implementation of laws.This has happened due to the need to create new and innovative regulations and reporting requirements for environmental sustainability, and this has shown that creating such requirements based on long-standing rules and standards on societal sustainability will have enormous benefits and assist those responsible for ensuring compliance with laws to actually act when laws are violated, as well as promote understanding and compliance based on clear guidance. All opinions expressed are those of the author. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.