Sustainability is a difficult task for European companies

Sustainability is becoming a difficult task for European companies

From 2024. The new mandatory sustainability reports no longer have anything to do with the cunning marketing product “CSR report”.

The EU wants to achieve climate neutrality by 2050. The way to get there is the so-called Green Deal, which brings on board not only EU states but also European companies and companies operating in Europe to combat man-made climate change . As a way of doing this, the Commission and Parliament have formulated new legal transparency requirements for companies, which are far-reaching: Large companies with a turnover of €50 million or more and/or 250 employees – other companies follow in a staggered manner depending on their balance sheet total, turnover and number of employees – they have had to do so since the beginning of this year to provide extensive “non-financial reports”, which will be published together with the management report of the next year.

Based on the Corporate Sustainability Reporting Directive (CSRD), large companies will now provide a behind-the-scenes look at January 1, 2024, which is not without consequence: they must provide a full view of the extent of their consumption of water, energy and land and the direct and indirect impacts on biodiversity, the health of the company's anti-corruption system, the degree of communities affected by the company's activities and much more. A lot more. Because the new legally required sustainability reports no longer have anything to do with the brilliant “CSR report” marketing product of recent decades, but are a compendium of hundreds of data points.

The European legislator's idea: to use “forced” transparency to encourage companies to recognize and neutralize ecological, social and ethical risks in their own actions and thus contribute to environmental protection. This will also be crucial for business financing in the future. In the corridors of Brussels institutions, people are convinced that the market will follow regulations and that investors would prefer to invest their money in companies that present the lowest possible environmental and reputational risk.

Complex care in the supply chain

The new “European Supply Chain Due Diligence Directive” comes from the same school of thought, which was approved by the European Parliament in late 2023 and still requires formal confirmation by the European Council. The FDP, as part of the German government, does not seem willing to concede this now. She argues that the documentation effort is too high and bureaucratic obstacles cannot be overcome, especially for medium-sized companies, which will also be indirectly affected by the new regulations as part of global supply chains. This criticism is not new. So what's behind the combative politics?

Companies operating in the EU will be required to check and ensure that no supplier across the entire supply chain violates environmental standards or commits human rights violations. At first this sounds like a “no, it’s not bad” argument. Looking closer, it's more complicated, because the requirements of the new supply chain law in its current form are based on a large number of agreements: specifically, European companies are now responsible for implementing 22 human rights conventions. , seven environmental conventions and the climate protection plan across its entire supply chain – including its suppliers' suppliers' suppliers, etc.

Given the flagrant human rights violations in the Asian textile sector, for example, it is positive that the International Labor Organization's (ILO) core labor standards are mandatory. If companies fail to comply, they will face fines of up to five percent of their global net sales.

However, given the breadth of the scope, the question arises as to whether Brussels is really asking too much of European companies by privatizing intergovernmental agreements: whether a European company with production facilities in Pakistan will be able to guarantee “freedom of conscience and religion” there or whether legal certainty and freedom of expression will be applied in China is questionable.

In order to protect workers in the Global South and protect resources and the climate, while promoting European competitiveness, it would be ideal for a pragmatic approach to prevail in the final version of the Supply Chain Due Diligence Directive. The motto “What applies in Europe must apply in the global supply chain” included in the new regulation is difficult to implement for European companies with production sites outside Europe.

But regardless of the specific form of the supply chain directive, what is certain is that the new transparency requirements in the area of ​​ecological, social and ethical sustainability for European companies are here to stay. Companies will not be spared from facing this new reality.

The author:

Mage Anna Vetter (*1982) works in the area of ​​tension between politics and economics. She is a managing partner at strategy and crisis consulting firm Vetter & Partner and a certified ESG manager.

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