February 20, 2020
Landmark research on 1000 European companies shows troubling poor quality of reporting on sustainability issues

The Alliance for Corporate Transparency, which is a collaborative initiative launched by Frank Bold, analysed disclosures from companies relating to their environmental and societal risks and impacts. This was done following the requirements that have been introduced by the EU Non-Financial Reporting Directive. The research arrives at the same time that the EU Commission initiates the process to reform the law and after Executive Vice President Vadis Dombrovskis announced plans to create EU standards for corporate sustainability reporting.

The poor quality and comparability of corporate disclosures put the brakes on efforts to scale up sustainable finance, because investors struggle to make informed decisions based on unreliable information. There are major financial risks that arise from sustainability challenges (particularly climate change), which are unaccounted for in investor and corporate strategies, as well as important social and environmental impacts that are left unaddressed.

Research from the Alliance for Corporate Transparency provides clear insights into where key gaps lie in corporate reporting practices that need to be addressed.

Key findings

Common problems:

  • Disclosures are not specific enough in order to understand a company’s position or future developments. Reports focus on presenting general policies and commitments (80-90% for key issues such as climate, human rights, and anti-corruption), rather than concrete targets, outcomes of their policies with respect to targets set, and specific information on risks and impacts (20% on average).
  • Only 22% of companies provide key performance indicators as part of their summarised statements; a stark contrast to the way financial indicators are normally presented.
  • The aforementioned percentages focus on whether disclosures are specific, but not whether they include relevant information. Examples of qualitative criteria which provides insight into the relevance of disclosures can be found below.
 

Climate

  • 9% of companies report an alignment between their individual climate targets and the Paris agreement goals (i.e. to keep global warming well below 2∘C. This number is higher in the Energy & Resource Extraction sector (23.5%), but over 75% of the most impactful companies don’t report on their targets and plans in this context.
  • Just 23.4% of companies provide specific information that facilitates reader understanding of the climate-related risks they are facing. Furthermore, only 53.8% reporting claim to recognise the existence of such risks and only 6.6% consider the climate risks of a transition to a below-2∘C scenario. The term ‘climate risks’ encapsulates so-called ‘transition risks’ (technological challenges and regulatory risks) and physical risks.
  • Only 13.4% of financial companies provide detail on the exposure of their portfolios to the most polluting sectors.
 

Human rights

  • 2% of companies provide any information on their human rights due diligence process, despite 82.8% reporting that they have a human rights policy. Human rights due diligence is a basic element of corporate responsibility at the core of respecting human rights. It is recommended by the UN, the EU, and a number of individual American states.
  • 5% of companies disclose specific human rights risks that they face. That is out of 56.6% which actually acknowledge the existence of any risks at all, yet only 14.6% report actual impacts. Merely 3.6% explain the outcomes of their risk management strategies.
  • 6% of companies in the Apparel & Textiles industry (including footwear) do disclose their suppliers in countries which are deemed high-risk for human rights. This is a notable improvement.
 

Anti-Corruption

  • 1% of companies report on their anti-corruption policies, but only 33.7% describe how these policies have been implemented.
  • 5% of companies specify how their policies apply to their business partners, and 25% report to agents that are authorised to act on behalf of the company.
  • Just 18.3% of companies disclose if they conduct risk assessment of potential areas for corruption.
 

Country conclusions: There is no major difference between the different regions of Europe, with the exception that companies from Eastern Europe are playing catch up. Nordic companies are statistically more likely to report more specific information than others, but not by a great margin. In fact, the biggest margin is only in certain human rights indicators: 33.4% of Nordic companies disclose actions taken to address risks compared to 19.4% average. On average, French companies provide slightly better information for climate change strategy, where 24.41% report on their climate targets in relation to Paris Agreement goals, compared to an overall average of 13.9%.

Full results are available within the public database:

allianceforcorporatetransparency.org/database

“The results of the research show that existing EU legislation is not meeting its objectives and it seems that the only way to address the problem is to specify what companies should be reporting. We need to be careful not to provide criteria that are too detailed or to over-regulate companies, but there is a clear space and need for very targeted sector-specific clarifications on mandatory requirements for reporting” Filip Gregor, the Head of Responsible Companies at Frank Bold

More expert video testimonials about the future development of the EU Non-Financial Reporting Directive are available here.

Background:

Under the EU Non-Financial Reporting Directive, EU large-listed companies, banks, and insurers are all obliged to report information which is necessary to understand their policies, risks, and impacts with regard to sustainability matters. The law entered into effect in 2018, but failed to provide the required specificity to ensure that useful and relevant disclosures are made by companies.

Reliable sustainability information is indispensable as we enable European banks and investors to factor climate, environmental, and social risks in their decisions. In turn, this creates the foundation for the EU’s ability to transform the economy in order to address climate change, stop the degradation of our environment, and avoid capitalising on human rights violations in global value chains.

The European Commission is expected to draw up and present a renewed sustainable finance strategy later this year. That strategy will build on its previous Sustainable Finance Action Plan, reorienting capital flows and mitigating financial risks that the European economy faces, which stem from climate change. Corporate transparency is the first level of ensuring these plans are successful.

The Alliance for Corporate Transparency is a civil society-led project that is coordinated by Frank Bold, a public interest law organisation. The objective of the project is to provide data and evidence-based recommendations which can be used to support the development of EU legislation, driving the debate on the normalisation of corporate sustainability reporting.

Project members include: Frank Bold, WWF, Transparency International, Business and Human Rights Resource Centre, CORE Coalition, Future-Fit Foundation, Sustentia, ClientEarth, Shift, CDP Europe, Stockholm Environment Institute, Themis Research, Oxfam, ShareAction, Germanwatch, SOMO, Climate Disclosure Standards Board.

Download the full report (pdf)

Source: Sustainability Reports