"What needs to be reported on Governance (of ESG)", 8 March 2021

In 2021, the European Commission will present two intertwined legislative proposals aiming to foster integration of sustainability in corporate strategies. The first one, the reform of the EU Non-Financial Reporting Directive (NFRD), aims to ensure transparency on companies’ sustainability performance to improve corporate accountability and enable sustainable finance (see our previous article here). The second one, the sustainable corporate governance initiative, will clarify corporate obligations to identify, prevent and mitigate severe human rights and environmental impacts, and Board oversight over sustainability risks, strategy and targets. Such a combination of transparency and governance incentives, together with the push of responsible investors, will reinforce the market pressure for companies to elevate the consideration of sustainability among managerial and Board priorities, whilst granting companies considerable flexibility in how they do this...

...Access to the right data is the key for companies and their Boards to consider material sustainability risks and opportunities in their strategic decision-making, including those linked to the transformation of the European economy towards a low-carbon model.

Currently, a vast majority of companies do not show signs of considering such data, as evidenced by the state of reporting on sustainability from a strategic business perspective. For instance, the analysis of 1000 large EU corporations’ non-financial (sustainability) reports by the Alliance for Corporate Transparency revealed that, on average, only 14% of companies provide insights on the integration of sustainability in core business strategy, Board discussions, and performance incentives. A follow-up study on the climate reporting of 300 Southern European and CEE companies from high risk industries showed an even bigger gap, with results between 7.2% and 10.6%. Forward-looking information on companies’ strategic targets and progress is disclosed by less than 10% of companies for climate transition plans, and less than 4% with respect to human rights risks identified by the company.

In the first part of this article, we explain how the governance of sustainability matters helps companies to identify material sustainability information, and how such data enables companies and their managers to properly consider risks and opportunities and make strategic decisions.

In the second part, we provide an overview of the three areas of information on governance and integration of sustainability that the reform of the EU Non-Financial Directive will seek to clarify (in line with leading existing standards), which are critical for the success of company’s reporting and communication with investors:

1. Company strategy and targets and Board oversight over their adoption and implementation.
2. Determination of relevant risks and salient issues (double materiality).
3. Organisation and integration of sustainability in governance...