From opt-in to all-in: Is corporate sustainability going mandatory?

By Judy Kuszewski

As we remain in our lockdown bunkers, I am sure most of us are conscientiously adhering to the rules: maintaining our distance during our allotted physical-activity sessions, calling off the neighbourhood barbecues despite the brilliant spring weather, cleaning our hands and surfaces and resisting the urge to stockpile. Rules are necessary when important consequences are at stake, all the more so when those consequences land disproportionately at the feet of society’s most vulnerable people. When we recognise this, we often comply readily, no matter whether the rules are imposed on us by government, or self-imposed by social customs or market norms.

When the worst of the health crisis is passed and our economies – currently on the equivalent of medically-induced coma – can be safely brought back to life, it will surely be against the backdrop of a major new rash of rules and requirements – and sustainability will be no exception.

Regulation and mandatory requirements have historically been a minor player in the corporate sustainability world, characterised perhaps more by voluntary initiatives, best-practice frameworks and custom-branded sustainability plans. What’s most interesting to me, however, is that even before the Covid situation started to bite, I had already begun to see evidence that the voluntary approach was on the way out. Some examples:

  • BlackRock Chairman and CEO Larry Fink set out in his annual letter to investee company CEOs the firm’s expectations that investee companies produce, by the end of 2020, an ESG report or data disclosures in line with international standards, as well as an assessment of climate-related risks in line with the recommendations of the Taskforce on Climate-related Financial Disclosure. Meanwhile, regulatory bodies including the UK’s Financial Conduct Authority are setting out increasingly ambitious proposals to embed climate disclosure in listing requirements and other instruments in the very near term. Certainly on the topic of climate risk, markets have assessed serious, long-term challenges to business and society, which can only be managed with clear, forthright and comparable disclosure of data. If companies do not voluntarily offer such robust disclosures, their regulators and largest investors will, it seems, insist on it.
  • The European Commission has announced a reopening of the EU Non-financial Reporting Directive, with the intention to produce European non-financial reporting standards by the end of 2020. These are intended to be built on the best-developed and most widely used credible approaches worldwide, whether these are currently mandatory or voluntary initiatives, and their use will be made mandatory for companies operating within the EU.
  • The Responsible Business Conduct Working Group of the European Parliament has called for an EU law requiring companies to undertake human rights due diligence through their supply chains. This action comes in response to the patchy uptake of best-practice recommendations, some of them embedded in legal instruments such as the UK Modern Slavery Act and the French Duty of Vigilance law. It is intended to level the playing field between those companies that already take seriously the risks of human rights abuses, from child labour to modern slavery conditions, and those companies that have been slow or inadequate in their response.

These are to some extent early indications of the direction of travel, but they share a few common themes:

1) They recognise the financial materiality of sustainability issues and risks, and acknowledge the need to manage these proactively.

2) They build very clearly on the work of the existing (generally voluntary) frameworks, standards and best practices larger companies are already very familiar with, holding out the promise that true comparability and an end to the free-rider problem could be at hand.

3) They state very clearly that compliance should be set out as mandatory from the beginning.

While the last few decades of voluntary leadership have given the business world many outstanding examples of vision, innovation and commitment to accountability, they have also, sadly, led to inadequate, selective disclosure and lack of attention to looming sustainability failures. These threaten business, our economy and the most vulnerable in society in equal measure. If these recent trends are any indication, our world is moving away from experimental altruism towards one where the ability to thrive is based on proving that your business proactively resolves the very real risks and problems our world urgently faces.