Will EU plan open up Europe’s supply chains to sustainable reporting?

Nick Murry9 December 2013 | Nick Murry

Ugo Bassi, the European Commission’s Director for Capital and Companies recently announced that about 2,500 large EU companies currently disclose environmental and social information on a regular basis – 10% of large, listed EU businesses. The plan, according to Bassi, is to target around 18,000 large companies in 2014/15, through the provision of a more stringent set of rules. Understandably, this has not gone down well in some business circles.

As the Directive currently stands, affected companies will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

The prospect of increased measures within the EU’s Fourth Company Law Accounting Directive seems to have unsettled groups such as CSR Europe and the International Integrated Reporting Council, since its first announcement last April. Accusations of ‘red tape’, rebuffed by Bassi have followed. Bassi claims, “the Commission's proposal allows for significant flexibility and avoids undue administrative burden.”

Yet the real issue is transparency. There is a growing consensus from within the EU, the World Bank, the White House and Downing Street that transparency of sustainability information (among other things) is necessary to underpin a more efficient, responsible and accountable business community and global economy. According to Bassi: “Transparency should contribute to better long-term performance, sustainable economic growth and employment,” and the EU wants to use a top-down regulation to start that transparency ball rolling.

One problem with this, however, regardless of the potential for an additional ‘compliance burden’, is the time it will take to filter through the various supply chains and effect change in the wider economy. If the goal really is to make Europe a more accountable and sustainable economy, then SMEs -– which according to the European Commission’s own figures represent 99% of business and are a key driver of economic growth – also need to be involved. But the EU is reluctant for this to happen.

Confusion over how best to handle sustainability reporting is undoubtedly a factor in its slow uptake, and a driver behind calls, primarily by governments, for increased regulation. Part of the problem is the abundance of reporting initiatives and customer requirements, with many organisations pursuing similar information but asking for it in different formats. This fragmented reporting landscape with a range of methods, metrics and standards adds to workloads and makes comparisons more difficult. It is understandable then that industry is experiencing ‘survey fatigue’ and is fearful of yet another compliance initiative from the EU.

The underlying problem, it could be argued, is that too many businesses regard sustainability reporting as a compliance issue, whereas innovators and industry leaders see it as the economic and strategic opportunity that it really is. Many of these organisations are already requiring their suppliers to report on key environmental, social and governance issues, as a means of reducing their reputational and business continuity risk, as well as driving energy and resource efficiency in their own supply. And many of their suppliers are SMEs, which through customer pressure, are being drawn into measuring and reporting non-financial information.

In this respect, pressure from within business for suppliers to disclose key data based upon an economic imperative rather than official regulation, is already mounting. And there are established reporting methodologies, such as GRI or cloud-based platforms that assist businesses to publish once and then share consistent and comparable information with multiple stakeholders.

Reaction from the accounting bodies in the UK has been generally positive; Rachel Jackson, head of sustainability at the Association of Chartered Certified Accountants (ACCA) believes the approach “will build trust with stakeholders, attract investors and help with the transition to operating in a green economy,” however, Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England and Wales (ICAEW) warned that: “If the information is not bespoke and of relevance to investors, it will just lead to clutter and ‘boilerplate’.” In contrast to business, some NGOs have expressed concerns that the directive doesn’t go far enough and its flexibility could allow companies to avoid accountability for wider environmental and societal impacts.

As always the devil will be in the detail, but forward-thinking businesses should have nothing to fear. The economic imperative is already driving sustainable supply chains and stakeholder expectations for greater transparency will mean that this kind of disclosure will be expected in future. Moreover, a level-playing field on which all large companies are required to report consistently on key issues can only enhance efficiency.

There’s no doubt that some companies will squeal at the prospect of being forced down this path but ultimately, European business will find itself better able to manage key risks and opportunities, as a result of measuring, managing and openly reporting on these issues.

☛ Dr Nick Murry is CSO at global sustainable supply chain site Ecodesk.

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