Time to invent our future

Europe must retain control of the competitive, environmental and social rules that govern trade, or risk having rules imposed by others, warns Pascal Durand.
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By Pascal Durand

Pascal Durand (FR, RE) is Parliament’s rapporteur for the Sustainable Corporate Governance report

12 May 2021

Two hundred years ago, Europe invented modern capitalism and imposed its model on a world of almost unlimited resources. However, the ‘old continent’ is now confronted with a multipolar world, where economic borders are blurred, where short-term financial horizons set the corporate rhythm, and where legal certainty and shared rules account for a rare commodity.

Finding equilibrium between the free market economy and social and environmental justice has thus become a matter of both ethics and European sovereignty. We must retain control of the competitive, environmental, and social rules that govern our trade, and not have them imposed by others.

Companies, as wealth creators and catalysts for change, should play a prominent role in this regulatory journey to responsible approach to capitalism. Three intertwined subjects currently being discussed in the EU institutions can promote this capitalism: non-financial reporting, directors’ duties, and due diligence.

“The introduction of mandatory reporting norms would give much-needed clarity to companies and investors and help the EU become a global sustainability standard-setter”

While my initiative report on sustainable corporate governance recommended improvements on the first two, my MEP colleague Lara Wolters’ initiative report on due diligence has delivered the missing piece in adapting companies’ behaviours to a sustainable society.

A sound EU non-financial reporting system, creating a common framework under which businesses would disclose comparable environmental, social and governance data, is indeed needed, particularly as many in the world race to impose their own standards. If any of these were to gain traction and become international standards, sustainable development would be determined by a foreign - most likely American - vision.

The introduction of mandatory reporting norms would give much-needed clarity to companies and investors - currently lost amid the more than 1700 Environmental, Social and Governance (ESG) accounting standards - and help the EU become a global sustainability standard-setter.

To be effective, this new framework should be based on existing tools such as the taxonomy, and subject to ESG reporting to the same requirements of content assurance as the ones applied to financial reporting. In other words, non-financial statements must fall under the scrutiny of an independent and objective audit.

Such a framework would give investors a clear notion of the sustainability of companies operating in the Single Market. But an obligation to report is not an obligation to do. When it comes to making companies part of the solution in achieving EU environmental and social goals, there is no silver bullet.

However, there are a number of levers available. One of them, also explored by the European Commission, is to redefine the notion of companies’ interests.
Companies are not abstract entities disconnected from today’s societal challenges. In fact, their long-term performance, resilience, and even survival may depend on their adequate response to environment and social matters.

Unfortunately, path dependency, corporate short-sightedness and shareholder pressure often result in sustainability concerns being poorly integrated in decision-making processes. At director level, a shift towards potentially less profitable activities is always a risky move, one that may even take you off the board.

Defining directors’ duty of care, not only in short-term profit maximisation, but also for sustainability concerns, such as environmental impacts, fair salaries, or gender equality, would  in part alleviate this pressure. Given the leading role of directors in defining company strategy and overseeing operations, they should have a duty to integrate sustainability risks and opportunities in the overall commercial plan.

While this redefinition of directors’ duties could change the decision-making processes of companies, a transition cannot happen without a real incentive (or at least no disincentive) to be virtuous. This implies creating a level playing field for companies endeavouring to produce goods and services in a sustainable manner, in a world where global trade thrives on less stringent environmental and social legislations in third countries.

However, cheap products come with hidden costs. At the same time, we cannot expect EU companies to integrate these costs into their price tags if they are faced with implacable competition. A due diligence mandatory framework would therefore allow virtuous European companies to compete on an equal footing.

This can be achieved by imposing an obligation - on all those operating in the Single Market - to identify vulnerabilities in their supply chains and  prevent and mitigate those risks. We Europeans must show our willingness to change the ugly reality of immoral economic operations by using the greatest leverage we have at our disposal: our capacity to impact trade rules through import decisions.

“Unfortunately, path dependency, corporate short-sightedness and shareholder pressure often result in sustainability concerns being poorly integrated in decision-making processes”

I do not believe the tension between long-term challenges and short-term interests can be resolved in one (or two, or three) pieces of legislation. I do know, however, that companies who have an active CSR policy are more resistant to crises, recruit talent easier and have better access to financing. Sustainable corporate governance can prevent organisations from investing in soon-to-be stranded assets, and parliamentarians from brandishing ever more coercive legislations to fight against climate change, deforestation, or human rights abuses.

Sustainable corporate governance is nothing less than shaping a new business model, an EU and sustainable one, with norms that will spin-off to other parts of the world thanks to the weight of the Single Market. It’s time to invent our future.