At a time of rising conservatism and regressive thinking, the EU’s progressive approach to ESG reporting is raising the bar on climate change action and it will have an impact far beyond the boardroom, writes Dr Brian Keegan
Bad law, like the British legislation overturning the Northern Ireland Protocol, and bad judgments, like the US dismissal of
Roe v Wade, don’t just change the rules. They disrupt attitudes within a society. A disruptive change in attitude can be more damaging than any one piece of repressive law or legal interpretation.
Some people speculate that we are seeing a return to the protectionist thinking of the 1980s, given the resumption of the Cold War and soaring inflation. The evidence suggests that the reset is more dramatic than that, however.
Disregard for the rule of law in international treaties and women’s welfare points, not to a 1980s outlook, but to a medieval way of thinking about the world.
Against this backdrop of toxic conservatism and protectionism leading to international conflict and rising inflation, the management of climate change is slipping down the list of international priorities.
Shepherded through the EU institutions last month by Mairead McGuinness, Ireland’s EU Commissioner, the new Corporate Sustainability Reporting Directive is looking to address this slippage.
Reporting standards traditionally address shareholder concerns and what is material to them. Now the EU has taken this idea a step further by insisting on what it is calling “double materiality” — reporting not just on what is directly material to shareholders, but also on what is material to the wider community and society.
Double materiality is a concept that remains highly subjective, and expert groups within the Institute are working through how it can best be interpreted.
Critical also for this profession is the recognition within the directive of the role of auditing firms in assuring both the “traditional” financial report and the environmental, social and governance aspects.
Chartered Accountants Ireland lobbied hard to ensure that this recognition was included in the text of the directive, because it was by no means guaranteed at the outset.
International accounting standards currently under development by the International Sustainability Standards Board (with the blessing of the G7) are committed to the notion of single materiality, albeit recognising that it is usually in the interests of shareholders that the environment be preserved too.
About 50,000 larger companies within EU member countries will be directly caught by the new directive. They will have no choice but to adopt these new reporting requirements as the directive will have the force of national law.
The profession will, therefore, have to adopt additional standards for reporting and assurance, and draft standards are already in the public domain. This adoption will come at a cost, for the companies themselves and the firms that audit them.
Are these costs worthwhile? I hope so. The Corporate Sustainability Reporting Directive will have a greater practical impact on climate change than any number of impassioned Thunburg-esque speeches from quangos, or government white papers as high on aspiration as they are thin on funding.
Voluntary codes and practices won’t deliver climate change management, but a legal requirement on corporates to declare progress or failure can.
However, the real benefit of the Corporate Sustainability Reporting Directive is the way it will change attitudes on sustainability and the public attitude towards the accountancy profession as assurers of sustainable change over time.
A new legal framework doesn’t merely reflect existing attitudes in society – it changes future attitudes. This directive is a piece of modern thinking at a time when thinking has been turning distinctly medieval.
Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland