Shift’s response to the European Commission’s Proposal for a Corporate Sustainability Reporting Directive

New York, NY

Shift – the leading center of expertise on the UN Guiding Principles on Business and Human Rights – welcomes the proposal by the European Commission to amend the Non-financial Reporting Directive (NFRD) and related Directives to develop a renewed sustainability reporting regime in Europe (the Corporate Sustainability Reporting Directive, CSRD). The legislative proposal follows the report by the Project Task Force of EFRAG (EFRAG PTF), on which Shift commented in March 2021.

In addition to supporting the statement by the Alliance for Corporate Transparency, Shift highlights the following positive points and suggests where certain elements require further attention:

Double materiality

Positive development

The current NFRD offers a unique and unprecedented approach to materiality: it requires entities to report both on impacts on people and the planet by businesses, as well as on risks to the business itself. As the EFRAG PTF pointed out, it is critical that the new reporting regime provide clear direction and guidance, so that companies report not only on where impacts and risks overlap, but on the full range of sustainability impacts and risks, in line with international standards. The proposed CSRD is “removing any ambiguity” (p. 13) that this should be the case. Moreover, it makes clear that the materiality assessment should include risks and impacts across the full value chain (p. 43, among others) and that reporting entities should disclose the process that they use for determining their material issues (p. 43).

Points needing further attention

It is critical that the EU and its member states find coherence between what they are mandating companies to do on human rights and environmental due diligence (HREDD), and what they are expecting them to report on. While the explanatory memorandum of the proposal refers (p.5) to the Sustainable Corporate Governance Initiative (which is due to issue Commission proposals on mandatory HREDD this summer), the need for alignment with this forthcoming legislation should be strengthened in the CSRD itself (once the mandatory HREDD proposals are issued) if it is to be translated into the standards. This is particularly important where it relates to prioritization, and the new reporting regime should establish clear methodologies to prioritize sustainability issues under an impact materiality lens that are in line with the EU and international standards referenced in the proposal.


“Social” Issues

Positive development

The proposed CSRD includes a new list of more detailed sustainability topics and subtopics that entities would be required to report on, organized around the three ESG pillars. The Commission did not follow GRI in re-naming the second pillar “People” rather than the often misunderstood and misrepresented category of “Social”; however, it is noteworthy that issues critical for addressing inequality and vulnerability of workers and others in company operations and value chains, will now need to be reported on by all companies. This includes:

  • Equal opportunity, including related to gender, equal pay for equal work and people with disabilities;
  • Working conditions, including wages, social dialogue and collective bargaining;
  • Respect for human rights broadly with a reference to core international and EU standards.

The proposal also identifies several sub-topics under the “governance” pillar (e.g., lobbying activities, payment practices) that are often critical for understanding human rights performance.

Points needing further attention

While the current NFRD positions human rights in a problematic way (separating ‘social and employee matters’ as a distinct category rather than as a subset of human rights), the new proposal does not necessarily provide more clarity and structure. Shift encourages the CSRD to adopt the EFRAG PTF’s recommendation to organize the people/social pillar on the basis of who could be affected, which would provide a much-needed organizing construct: starting with the stakeholder groups that can be impacted and then articulating sub-topics for the types of impacts those people can experience. At a minimum, it should recognize that they are not abstract ‘sub-topics”, but represent impacts on actual people that need to be explicitly identified by the reporting entity in order to be appropriately managed and reported on.

Excerpt from the EFRAG report, p. 102

EFRAG Governance

Positive development

If and when the CSRD would be adopted by the EU, EFRAG would be tasked with developing the more specific EU Sustainability Reporting Standards (level 2), building on the parameters set out in the proposed legislation (level 1). To this end, EFRAG has proposed an update of its governance, which according to the proposed CSRD, should include, “a balanced representation of experts from national authorities, civil society and the private sector,” (p. 9) and that its advice to the Commission for adopting new sustainability reporting standards should be, “developed…with the expertise of relevant stakeholders” (p. 53).

Points needing further attention

EFRAG’s traditional constituent stakeholders come from different institutional backgrounds (business, audit/assurance, investor etc) and have experience in financial reporting. Many of those same organizations have experience with financially material sustainability issues. But expertise in the material impacts of business on people and the environment, and what makes for meaningful reporting about them, often sits elsewhere. ‘Balanced representation’ therefore needs to mean more than just equal numbers from each constituency if it is to cover the very issue that makes the CSRD a holistic reporting proposition – the concept of impact materiality. Getting this right will determine whether the pioneering concept of double materiality succeeds or fails once it moves from paper to practice.


Ensuring relevant reporting

Positive development

Throughout the proposal, it is emphasized that the new sustainability reporting standards, “shall require that the information to be reported is understandable, relevant, representative, verifiable, comparable, and is represented in a faithful manner” (p. 45, emphasis added). The word “relevant” is critical here, since earlier communications around the NFRD at times overemphasized comparability (as many current reporting initiatives still do), often at the expense of ensuring relevant and meaningful reporting on people matters.

Points needing further attention

To give real substance to this criterion, the new reporting regime should build on the EFRAG PTF’s proposals that it, “should develop guidance on principles governing the quality of information”, including by setting criteria for the quality of indicators, “that test the validity of the insight the resulting information can provide to users and the potential for unintended consequences from their application” (proposal #14 & 15, p. 66-67). 

Human Rights Due Diligence: the State of Play in Europe

Where things are at in the debate

Shift’s Vice President, Rachel Davis, shares a quick summary of where things are at in the debate on mandatory HRDD in Europe

The map

This map illustrates the state of play of mandatory Human Rights Due Diligence initiatives, legislation and movements, across different countries in Europe. It is based on this resource by the Business and Human Rights Resource Centre, and was last updated in March 2021.


Previous updates

Statement on recommendations by EFRAG to the European Commission on sustainability reporting standards and governance

New York, NY

Shift – the leading center of expertise on the UN Guiding Principles on Business and Human Rights – welcomes the report published this week by EFRAG following the mandate from the European Commission, that sets out recommendations for European sustainability reporting standards. The report contains a range of critical recommendations for the work of a future standard-setter for EU-mandated sustainability reporting:

  • First, it highlights the principles and the process for implementing ‘double materiality’ to determine what information a company should report: both information about the company’s most significant impacts on people and the environment (impact materiality); and information about sustainability matters that affect the company’s ability to create value (financial materiality). The Task Force recognizes from past experience that companies need clear guidance on implementing double materiality, so they report fully on their material impacts, and not only on those that are also financially material.
  • Second, the report proposes a welcome shift away from a vague category of ‘social’ information to an approach that starts with the stakeholders most at risk (“affected stakeholders“) and then looks at how the company’s business may affect them – for instance through health and safety, forced labor practices or loss of access to clean water. This gives companies a clear way to prioritize the issues they need to report on, in line with international standards.
  • Third, the recommendations highlight the need for indicators and metrics that offer genuine insight to the users of reporting (“characteristics of information quality”). Too few of the typical ‘social’ indicators do so today. The report underlines the need for all indicators to be assessed against some key criteria to avoid perverse consequences and false conclusions. And it emphasizes the value of companies setting and reporting against good quality, outcome-oriented targets that reflect the change they intend to make and enable them to measure and disclose progress.

David Vermijs, who co-chaired the Task Force’s workstream on conceptual guidelines, commented, “These are critical recommendations that need to be front and center in the work of the future EU standard-setter. They set the foundation for ensuring that sustainability reporting both helps companies focus on what matters most when it comes to their sustainability performance, and enables their stakeholders to get a true picture of how well they are progressing.”

Shift notes that some of the Task Force’s recommendations will benefit from continuing consultation, including how the new standard-setter can support and accelerate greater ambition and convergence in reporting standards at the international level – including the integration of impact materiality and with regards to “reporting areas” – and the extent to which ‘intangibles’ can be brought within the framework of sustainability reporting.

“Perhaps most important at this point,” commented Caroline Rees, Shift’s President, “is the matter of the standard-setter’s future composition. While we welcome the separate report published on this issue, it leaves open some critical questions as to whether and how the new body will include the necessary deep expertise in the full range of sustainability issues, including and in particular regarding impacts on people. Getting this right will be key to the success of the whole endeavor.”

For media inquiries, please contact communications [at] shiftproject [dot] org.

Letter from John Ruggie to German Ministers regarding alignment of draft supply chain law with the UNGPs

New York, NY.

Professor John Ruggie writes to German Ministers to welcome move towards a national law on corporate human rights and environmental due diligence in supply chains, while also raising questions about elements in the draft law and the need to ensure alignment with the UN Guiding Principles.

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This letter was originally written in English. An unofficial translation into German by the Business and Human Rights Resource Centre is available here

Keynote Speech by John Ruggie at Corporate Due Diligence and Civil Liability Webinar

These remarks were originally delivered on January 28, 2021 by Professor John Ruggie at the Corporate Due Diligence and Civil Liability Webinar, hosted by Nova Centre.  


“Thank you, State Secretary, and thanks to all the sponsors and participants of this seminar series. I have been in this field for a while and I am so pleased by the fact that we are having discussions at levels of detail and possibilities that would have been hard to imagine just 10 years ago, when the Guiding Principles were adopted. I know we have a lot further to go, but every once in a while, I like to remind myself that we have already come a fair way that we can build on…”

 READ THE FULL TRANSCRIPT

Shift Submission to the European Commission’s Consultation on EU Sustainable Corporate Governance

In February 2021, Shift submitted responses to the European Commission’s Consultation Proposal for an Initiative on Sustainable Corporate Governance. The feedback provided through this questionnaire will be taken into consideration as the European Commission drafts its policy position.

Shift’s key points include:

  • EU legislation establishing a new corporate duty to conduct human rights and environmental due diligence (HREDD) has the potential to help level the playing field, ensure that Boards are aware of their responsibility to oversee the management of a company’s salient human rights and environmental risks, and drive a common understanding of what “quality” due diligence looks like. Importantly, it could also help ensure greater access to remedy through the inclusion of appropriate civil liability provisions. 
  •  Directors should be accountable for overseeing how a company prevents and addresses its negative impacts on people and planet. Even without the reform of directors’ duties, the introduction of a corporate duty to conduct HREDD would make a significant contribution to this objective by requiring directors to oversee appropriate due diligence systems.
  •  The due diligence process expectations set out in the UNGPs and in the OECD Guidelines should form the core requirements on business in any new regulation. But to ensure meaningful implementation, those enforcing this new duty will need to pay attention to key features of HRDD that are indicative of the seriousness of a company’s efforts. National regulators will need guidance on how to assess whether there is an authentic intent and effort within a company to both find and reduce risks to workers, communities and other affected stakeholders. We propose what some of these “Signals of Seriousness” could be for HRDD in a draft resource attached to our submission, informed by initial testing with business, government, and civil society stakeholders. 
  •  Any new duty needs to have improved outcomes for people as its ultimate goal. As such, it is important that HREDD is not conceived of as a “tick-box” exercise, but as one that necessarily involves the creative use of leverage beyond contractual terms or commercial leverage alone – including public advocacy where appropriate and partnership with industry peers and stakeholders to drive change – as well as meaningful engagement with affected stakeholders
  • Any new legislation should have a wide scope, including both SMEs (with appropriate flexibility in implementation) and foreign companies operating in/into the single market.
  •  To ensure a level playing field in practice, there need to be meaningful consequences for companies that clearly fail to meet a new duty, involving judicial and administrative measures. This should include: 
    • creating or endowing national-level regulatory bodies with the capacity and expertise to carry out regular reviews of corporate disclosure and performance and hold companies accountable; 
    • EU regulatory oversight through a new, fit for purpose entity with its own enforcement powers that brings together national regulatory bodies and expert stakeholders; and 
    •   civil liability for certain harms with a defense where companies can demonstrate that they undertook due diligence that was appropriate and proportionate to the relevant impacts. The mere fact of conducting some form of due diligence should not be considered as a complete defense to liability, or as a safe harbor against claims being brought.
  • A new corporate duty needs to be accompanied by a range of other EU policy measures to set the right incentives and help bridge the “accountability gap” between the likely scope of liability on the one hand and the full scope of HREDD in line with international standards on the other.

DOWNLOAD DOCUMENT

“Signals of Seriousness” for Human Rights Due Diligence

This discussion draft is intended for the consideration of the European Commission and other stakeholders as the Commission develops proposals on mandatory human rights and environmental due diligence (mHREDD) and considers how national regulators would implement any such legislation. Shift is submitting this draft together with our formal response to DG JUST’s consultation on a potential new corporate duty to carry out HREDD.

In this discussion draft, we propose some key signals that national regulators could use in assessing the seriousness or quality of a company’s HRDD, grouped into six broad areas of company practice:

  1. Governance of human rights;
  2. Meaningful engagement with affected stakeholders;
  3. Identifying and prioritizing risks;
  4. Taking action on identified risks;
  5. Monitoring and evaluating progress in addressing risks;
  6. Providing and enabling remedy

Not all these features need to be present to judge HRDD to be meaningful or serious, yet where few of them are present, it is unlikely that HRDD will achieve its purpose in practice.

This draft is intended to inform a discussion about assessment by national regulators of company compliance with potential new mandatory human rights and environmental due diligence (mHREDD) legislation by:

  • Highlighting critical features of HRDD that are often overlooked or done poorly in practice by companies (such as meaningful stakeholder engagement);
  • Identifying key practices and behaviors needed for meaningful implementation of HRDD that can help in distinguishing better from poorer quality HRDD by going beyond the ‘observable basics’ of company practice;
  • Being relevant to companies of all sizes and sectors by highlighting features of HRDD that could be demonstrated by any company in a variety of ways.

It is not intended to:

  • Replace or dilute existing guidance on the process elements of HRDD;
  • Exclude consideration of authoritative sector-specific guidance by regulators where that is relevant to a company being assessed;  
  • Define leading practice in carrying out HRDD.

We welcome feedback on this discussion draft and will be consulting further on it during Q1 2021. Please direct your feedback and inquiries to: info [at] shiftproject [dot] org

Shift and Frank Bold Submission to the Consultation on Potential Needs for Changes to the Governance and Funding of EFRAG

Shift joined Frank Bold in responding to the the consultation process on potential needs for changes to the governance and funding of the European Financial Reporting Advisory Group (EFRAG).

The submission comments on issues of due process, governance structures, representation of private sector and civil society; representation of Small and Medium Enterprises (SMEs); on cooperation with other standard setters and initiatives; on governance structure and funding.

Shift Submission to IFRS Consultation on a Sustainability Standards Board

In December 2020, Professor John Ruggie submitted his views to the IFRS Foundation for their consultation into the proposed establishment of a Sustainability Standards Board (SSB) to develop global reporting standards on sustainability. Professor Ruggie urged the Foundation not to limit the initial work of a future SSB to environmental issues and suggested that:

  • The urgency of today’s inequality crisis, including environmental justice issues, requires a parallel effort to integrate the underlying human rights issues into a new standard-setter’s work.
  • The IFRS Foundation take care to ensure that the framing and presentation of a new standard-setter are clear regarding the constraints of its mandate to issues that have demonstrated narrowly-defined financial materiality, and that they do not imply that it covers all sustainability issues of critical importance with regards to companies’ social and environmental performance.

On Mandatory Due Diligence, SMEs Don’t Need a Free Pass; they Need Flexibility

This article originally appeared in this compendium by the Business and Human Rights Resource Centre

As the debate on mandatory human rights due diligence (mHRDD) at the EU-level starts to move from the if to the what and the how, a key concern that policymakers must grapple with is the size of businesses covered by any incoming legislation.


While our work with some forward-thinking small and medium-sized businesses suggests that they boast some significant advantages over their larger counterparts when it comes to realizing their responsibility to respect human rights, legislators will need to act with care not to disadvantage them. The first step would be to anchor mHRDD in the UN Guiding Principles’ understanding that while the responsibility to respect human rights applies to all businesses, the means through which a company meets that standard will vary according to its size.  

Here are five key considerations to support such an approach being reflected in new legislative developments:

  1. Half of the world’s population works for a small or medium business

First, let’s look at the numbers: SMEs account for about 90% of all businesses and contribute up to 50% of total employment in the world. That is why, if legislation aims to drive positive outcomes for people in the context of business activity, it must reach the businesses people work for and interact with. What’s more, we see that the support amongst larger businesses for mHRDD increasingly hinges on the inclusion of SMEs in any such regimes, given the interest of multi-nationals in the level-playing field and the increased leverage with resistant suppliers that mHRDD promises.

  1. Prioritization of salient issues

Most stakeholders recognize that companies – regardless of size – need to prioritize their salient human rights issues. For small businesses with limited resources, prioritizing action on the most severe risks to people is even more crucial to get traction. For instance, we’ve spoken to businesses in the apparel, food, retail and cleaning sectors that have made progress by focusing on addressing the problem of low wages, believing this will have knock-on effects on a host of other rights. The expectations hardwired into legislation ought to reflect the need to enable businesses to prioritize action on human rights impacts based on their severity and that the complexity of company processes for identifying and taking action on impacts will be affected by the size of the company in question.

  1. A focus on the quality of relationships with business partners

In comparison to larger businesses, SMEs tend to have fewer suppliers and customers, which can enable deeper and better-quality relationships. In work that we’ve done with forward thinking SMEs, we’ve seen how they often spend a lot more time selecting business partners that are the right fit and putting more up-front investment into finding those who share their values and tend to perform well on human rights. For small businesses that aim to respect people, partnership with suppliers is a necessity not a choice.


However, there is a risk that legislation on mHRDD incentivizes an approach where a buyer ‘polices’ its supply chain through a process of monitoring and social audits. This approach would fail to encourage the right behaviors for any business, but would particularly impact SMEs. As policymakers consider how best to articulate the standard of human rights due diligence, they should encourage practices that focus on relationship-building, not policing, to work towards better outcomes for people. 

  1. Expectations on action need to move beyond commercial and legal leverage

SMEs often lack the cold, hard commercial leverage of larger multi-nationals, and must think more creatively. For instance, we’ve seen how one medium-sized business has rolled out programs on freedom of association and worker voice in the most challenging contexts, despite having less than 5% of the product buy from suppliers. This business achieved buy-in through explaining the benefits of the program, and drawing on the trusted relationship it had developed, rather than requiring suppliers to participate.

Under any form of mHRDD, the nature of a company’s involvement with a human rights impact, and the strength of the action it has taken to prevent it from occurring, is likely to determine the assessment of the consequences the company faces. Such assessments must consider the wide spectrum of avenues to effectively influence business partners, rather than honing in narrowly on the extent to which a company has deployed legal or commercial leverage, which SMEs are unlikely to possess.

  1. Respect for human rights is more than a mechanical due diligence process

One of the advantages that committed SMEs have over their larger counterparts when it comes to human rights is a greater facility to nurture a culture that supports people and their ability to speak up for themselves. For SMEs, people truly are their most important asset. The very lack of resources and stretch that skeptics cite as reasons why SMEs may find it difficult to respect human rights means that smaller businesses have to respect, trust, motivate and empower their employees to succeed. From talking to executives in SMEs, it is clear to us that committed leaders are able to instill values of empathy and empowerment through face-to-face interaction with employees, listening to them and modelling desirable behaviors. 

Experience shows that even the most sophisticated human rights risk management processes will bear little fruit if they are not fully embedded in company culture, lived by the business’ leaders, and supported by effective governance structures. Here, values-driven SMEs have an advantage and legislation should support that relative strength, setting the expectation not just for a mechanical due diligence process, but one that lives and breathes, informing company behavior and decision-making.

Structuring legislation to encourage and compel companies to adopt and scale rights-respecting business practices and behaviors is no small task. But the legislation will have limited impact for the people that need it the most if it does not consider how best to incorporate SMEs within its scope. Doing so means ensuring an adaptable framework that sets a clear standard of conduct, but allows businesses of all sizes to reach that standard drawing on their unique strengths and expertise.