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Article

How Will New European ESG Reporting Standards Affect Companies?

Strategy
Published on:

The European Commission mandated a group of experts to work on new European corporate social responsibility reporting requirements. Marieke Huysentruyt, Associate Professor of Strategy and Business Policy and Academic Director of the Inclusive Economy Center at the Society & Organizations Institute of HEC Paris, was part of a group that drafted legislation on the question of equal opportunity. She describes how her working group shaped their proposals for a wide, long-lasting impact.

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Photo Credits: City Martha - Adobe Stock

Early in 2021, the European Commission mandated the European Financial Reporting Advisory Group (EFRAG) to work on new European non-financial sustainability reporting standards to amend an existing, 2014 directive. On May 19, 2022, Marieke Huysentruyt presented an overview of the draft EU sustainability reporting standards. Secretariat member of Cluster 4 who has been appointed by EFRAG and the European Commission, she also provided insight into the current status of work on the social workforce standards. On June 10, 2022, Marieke presented her work at the HEC Paris S&O Institute's members. You can watch the recorded presentation below.

 

 

The new legislation, the Corporate Sustainability Reporting Directive (CSRD), will standardize non-financial reporting criteria on environmental, social and governance (ESG) factors across the European Union. Now in draft form, it is intended to update and improve on the current directive, enlarging its scope, for example, to include companies of 250 employees and more that operate in the EU. The new directive will therefore apply to some 50,000 companies (up from 11,000 previously), and will have a concomitant effect on company stakeholders, including companies’ supply chains — requiring large companies and their associated firms to report on how their activities affect both people and the environment.

The new directive has an ambitious timeline, with the aim that general guidelines be adopted in October 2023 and be applied beginning in January 2024. Sector-specific guidelines will follow one year later.

Working on social standards: Choosing criteria

Those working on the directive were divided into nine “clusters,” working on one of three broad topics: environment, social and governance. As a Secretariat member appointed by EFRAG and the European Commission, I worked on the second topic, as it applies to a company’s own workforce.

We established a set of criteria to delineate the information we would require companies to disclose: namely, information quality (how relevant, verifiable, understandable the information could be); double materiality (we want to require data not only about how societal challenges affect companies’ finances but also how companies affect societal issues); reporting boundaries (the same boundaries that companies use to create financial statements, complemented by upstream and downstream value chains); and time horizon (the same used to create financial statements, complemented by retrospective and forward-looking information). 

We began our work with an analysis of existing standards and human rights documents, such as the United Nations’ International Bill of Human Rights and documents from the UN’s International Labor Organization. This led to the identification of subtopics in the social sphere: working conditions, equal opportunity and other work-related rights.

I worked on the topic of business and equal opportunity, which included consideration of inequality, discrimination, diversity and inclusion, gender, age, disability and other vulnerable groups.

In drafting the disclosure requirements, we looked at relevant international databases, regulations, standards and frameworks, and sought to justify why we chose to adopt — or adapt — existing norms. Our goal was to push toward the internationalization of any valid existing standard.

Social reporting standards: Aiming for quantifiable information

In our requirements for social reporting regarding a company’s own workforce, we ask that companies report on how they affect their own workforce, both positively and negatively, regarding working conditions, equal opportunity and other work-related rights. 

We ask for information about the principal actual or potential adverse impacts on a company’s own workforce connected to its operations; any actions taken to prevent, mitigate or remediate adverse impacts; as well as the result of such actions. The CSRD requires disclosures of the principal risks to the company, including the company’s value chain, and how it is managing those risks.

In addition to the narratives and qualitative information, the standards also ask companies to disclose quantitative, information. For example, requested information pertaining to equal opportunity includes: the male-female pay gap, CEO pay ratio, employment of persons with disabilities, differences in benefits according to contract types and violations of equal opportunities rights.

Potential impact of the CSRD: A knock-on effect on SMEs

Based on powerful human-rights treatises, the CSRD governing social questions is asking companies to embody a vision that could have an effect not only on how companies manage social-justice issues, but on numerous other practices, such as recruiting, staffing and information gathering. We expect it to have a consequential and long-lasting impact.

It will have a knock-on effect on SMEs that are doing business with large companies, requiring them to consider ESG issues and collect necessary data.

In addition, the transparency required by the CSRD can create change and reduce inequalities. Information on the gender wage gap, for example, could serve to reduce wage inequalities by making such disparities obvious to all employees.  

Furthermore, the voluminous data generated by the reporting requirements will undoubtedly aid researchers to address the question of what companies can do and are doing to contribute to important societal challenges. 

Practical applications

When the European legislation is passed, it will affect 50,000 companies and the companies in their value chain. In its expanded requirement of the information that companies must provide, it has the potential to have not only a cultural impact, but also to affect recruiting, staffing, information gathering, and how companies manage their actions on environmental, social and governance factors.

Methodology

The different clusters of the European Financial Reporting Advisory Group working on this draft legislation analyzed existing references and documents, identified relevant subtopics and wrote draft legislation, justifying why they changed, adapted or kept existing standards.
Based on a May 2022 presentation by Marieke Huysentruyt, HEC associate professor of strategy and business policy and academic director of the Inclusive Economy Center (S&O Institute) at HEC Paris.

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