Corporate responsibility? Reporting required!
4 July 2023
The bill for the Responsible and Sustainable International Business Conduct Act (Wet verantwoord en duurzaam internationaal ondernemen) has elicited much discussion and indeed consternation in recent months. The question is whether those responses focus on the right aspects. Some explanation might be in order, if only to ensure that the risks receive proper scrutiny.
To achieve the Paris Climate Agreement goals, a set of policy initiatives has been initiated – the Green Deal – which aims to make the EU climate neutral by 2050. This cannot be done without investing in sustainable operations.
To enable the financial sector to make well-informed investment decisions and thereby achieve the climate goals, companies are required to disclose their degree of sustainability, their policies and strategies in that regard and the actions and measures they are taking.
CSRD: Corporate Sustainability Reporting Directive
The Corporate Sustainability Reporting Directive (CSRD) regulates this corporate disclosure. Large undertakings must include a non‑financial statement in their annual reports that covers in any event environmental, social and employee matters. The CSRD aims to improve non‑financial reporting.
Sustainability reports must give insight into the impact of sustainability on the undertaking but also into the impact of the undertaking on its surroundings. In other words, there are two perspectives here.
The sustainability standards to be covered in the report are clearly defined. Some standards apply to all undertakings, while others depend on the company's impact or are sector specific. On the aspect of environment, for example, all undertakings must report on climate change, but the need to report on the topics of pollution, water consumption, biodiversity and ecosystems, raw material use and circular economy depends on materiality.
CSDDD: Corporate Sustainability Due Diligence Directive
The draft Corporate Sustainability Due Diligence Directive (CSDDD) is similar to the CSRD in that it aims to induce companies to identify their operations' adverse impacts on people and the environment, but it takes this a step further. This Directive requires certain large companies not just to identify but also, in so far as possible, to prevent or remedy the actual or potential adverse impacts of their own operations and those of their international value chain.
The bill for the Responsible and Sustainable International Business Conduct Act shares many aspects with the CSDDD. Although the bill does not yet have government backing, given the draft Directive this can only be a matter of time; we have not seen the end of the bill yet.
Implications of the changes
The bill for the Responsible and Sustainable International Business Conduct Act has drawn much criticism. First of all because of the general duty of care, which some say is too vague. I disagree. The general duty of care is consistent with current guidelines of international organisations such as the OECD and the United Nations. Moreover, general duties of care already apply, for example those laid down in the Environmental Management Act (Wet milieubeheer). And the reporting obligation dovetails with existing legislation on non‑financial disclosures in annual reports.
The prosecution of directors has also raised some concern. But duty of care violations are not punishable under this bill. The Dutch bill has designated the Authority for Consumers and Markets (ACM) to monitor compliance with the reporting obligation. ACM can impose administrative fines. The bill includes only one obligation where non‑compliance has criminal‑law consequences, and that is the reporting obligation. Anyone who persistently refuses to report stands to spend six months in prison. The reporting obligation does not rest on the management board but on the company. Accordingly, directors are only liable to prosecution if they can be personally blamed for the company's offence. The bar is therefore higher than under other legislation such as the Money Laundering and Terrorist Financing (Prevention) Act (Wet ter voorkoming van witwassen en financieren van terrorisme, Wwft), which expressly holds bank directors personally responsible for Wwft compliance.
'Companies are shedding crocodile tears about the duty of care', say Dieperink and Bleeker in the FD financial newspaper.
I would put it differently. While it is true that the risks are not found primarily in the general duty of care, that does not mean there are no risks at all. It can be very tempting to present a good programme. But misrepresenting the facts can lead to greenwashing or deception in extreme cases. And this may prompt measures under civil law, administrative law and criminal law, creating all kinds of legal, commercial and publicity risks.
Companies must have good governance that fundamentally prioritises quality of information. They must report the facts as they are, not as they would like them to be. And they must act on those facts. But mere reporting is not enough: reporting entails responsibilities, as science presents new challenges and risks.
Here is a mental exercise for you. Imagine that a company operates in the timber trade, and news reports claim that, despite the paperwork being in order, the timber might be felled illegally. While not yielding any conclusive answers, the company's own investigation does not yield any guarantees either, and clearly the news items and environmental organisation reports are not looking good.
So what does the fact that the company has reported on sustainability factors mean? How should the company deal with the uncertainty; how far does its investigation obligation extend? Does the company risk being perceived as being involved in criminal offences abroad, even if its own investigation has not positively established this?
On 1 December 2020, the amended Extraterritorial Jurisdiction (International Obligations) Decree (Besluit internationale verplichtingen extraterritoriale rechtsmacht) came into force in the Netherlands. This has ensured that some environmental crimes perpetrated abroad may be liable to prosecution in the Netherlands, and that Dutch criminal law applies to Dutch citizens committing deliberate money laundering outside the Netherlands. Prosecution in the Netherlands for money laundering is no longer conditional on the offence also being punishable abroad or on the money laundering also having taken place in the Netherlands.
Consequently, companies run major commercial, publicity and possibly even criminal‑law risks as NGOs and interest groups are pressing charges ever more frequently.
Those risks increase if sustainability policies prove less than effective. Sustainability is high on the political policy agenda, but agreement on implementation and actual measures is slow in coming. As policy goals remain out of reach and deadlines draw closer, pressure is mounting, both from political circles and from numerous non‑governmental and activist groups pushing for more sustainability action. Under that pressure, the financial sector's and companies' obligations and own initiatives will come under closer scrutiny and every now and then a scandal will be used to pin the blame on banks and businesses.
Sustainability is a noble cause, and the goals set in the various guidelines and treaties are well worth attaining. Plans to work jointly towards those goals also deserve support. But in a juridified society used to thinking in terms of blame and liability, where communicating about conflicts of interest in terms of scandals and divisions is guaranteed to draw a crowd, it is also important to carefully consider the risks.
Evidently, a shared commitment to the climate goals and a sense of joint responsibility and mutual reinforcement instead of shifting the burden onto others is the most effective way to attain those goals and keep the risks in check.
To give an obvious, topical example: if construction companies are required to identify sustainability factors and to identify, prevent, mitigate or bring an end to potential or actual adverse impacts, is the government not actually shifting sustainability onto businesses if it continues to trade with countries where those adverse impacts occur? Are we not allowed to build stadiums in Qatar, yet still allowed to play football and sit in the VIP lounges there? Or will businesses and the government take a common stand?
Many companies have sustainability aspirations. While this may perhaps not sound particularly catchy, ambitions for the quality of reporting should match those aspirations if we are to achieve those sustainability goals and control the risks for companies.
Marianne Bloos wrote this article for the Dutch Association of Company Lawyers (in Dutch) about the bill.