The European Commission has presented its legislative proposal for a Directive as regards sustainability disclosures by certain companies.

The proposal presents several major improvements which are essential to help companies focus and report on meaningful information and channel finance to activities and projects needed to meet the objectives of the European Green Deal and make the European economy sustainable. 

The most positive developments include:

1. The extension of the scope of the Directive to include all large companies...
2. A requirement to develop European generic and sector specific mandatory sustainability reporting standards...
3. Clarification of the main reporting areas and the categories of information that companies should disclose is specified in greater detail. The principle of “double materiality” is also clarified and properly enshrined in the draft proposal...
4. The proposal provides a clear mandate to report on plans to ensure the compatibility of company business models and strategies with the transition towards a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement...

However, the proposal falls short on several important points, which significantly limit its desired impact:

1. Private companies, which don’t meet the threshold of a large undertaking, are left out of the scope of the proposed Directive in contradiction to the EU Parliament’s clear call for the integration of all companies from high-risk sectors...
2. [T]he proposal fails to specify the essential aspects that EU standards need to address in particular with regard to reporting on human rights, including disclosure of salient human rights issues, key elements for supply chains disclosures, and quality criteria for KPIs...
3. [T]o ensure target setting is relevant and connected to the company’s impacts and risks, it is essential to specify that such targets must be linked to the outcomes of the company’s double materiality determination...