Source: The Conversation – France – By Mira Manini Tiwari, Research Associate at the Robert Schuman Centre for Advanced Studies, European University Institute
If you choose to buy a sustainable product at the supermarket, or invest in a sustainable portfolio at your bank, how far does that sustainability reach? Does the product’s “sustainable” label account for the environmental and labour costs where the raw materials were extracted? Does the portfolio include renewable energy in countries where the investment is needed most?
In the EU, whether you are an individual or represent a company or financial institution, these questions are governed by the bloc’s non-financial reporting (NFR) regulations. The latest ones include the European Sustainable Reporting Standards (ESRS), which are gradually coming into force through 2029. The ESRS set out reporting standards and requirements, while the Corporate Sustainability Reporting Directive (CSRD) determines which companies these standards apply to, to what extent, and when.
These EU regulations also have strong implications for the Majority World, the countries and territories outside Europe and North America where most people live, at a time when global, systemic policy effects are more important than ever. As supply chains become longer and more interconnected, and as communities involved in them confront the fragilities of economic, political and climate shifts, the regulations that govern the sustainability of these chains and that enable or prohibit participation in them must be crafted and implemented to minimise harm to the most vulnerable.
In an article in Environment and Development Economics, my co-authors and I developed a set of proposals to improve the global sustainability of the NFR regulations. These call for collaborative development of regulations across the value chain, better data accessibility, measuring of and accounting for cross-border environmental damage, and greater integrity and engagement from financial actors.
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Cooperation, not compliance
As the ESRS come into force, reporting requirements are being applied to companies’ full value chains. This means that Majority World actors, such as those that extract raw materials for European products, may be indirectly subjected to the NFR regulations. This is important, as it holds companies and consumers, EU and non, accountable for the ethics of the goods and services they rely on. However, when regulations are built without directly involving those they will affect, they risk causing collateral, longer-term damage. For example, reporting requirements that feel inaccessible to smaller organisations can foster distrust and backlash, or cause companies to withdraw from contexts where data are less accessible, taking away key sources of income for communities.
While global climate negotiations have come under public scrutiny for their Minority World dominance, there has been relatively less scrutiny of global organisations governing financial and corporate sustainability standards. On their boards, the Majority World is conspicuous by its absence, demonstrating the dearth of attention to its agency in enabling greater sustainability, both locally and globally. European investors and policymakers are already shifting capital from the Majority World back to the EU in response to the NFR regulations, citing the difficulty of accounting for activities along the length of value chains. The damage falls on livelihoods, industries and essential investments, such as in renewable energy, which can suddenly disappear.
Developing NFR regulations in collaboration with all stakeholders, rather than only at the top, can provide a regulatory landscape that is, from the outset, more implementable, accessible and effective in the long run.
Democratic data and digitalisation
Efficacy in global NFR regulations relies on global data cooperation, which could lower the administrative burden on those reporting and enable greater accountability. The increasing number of EU NFR regulations do not exist in a vacuum: they have been accompanied by shifts in global regulations and a proliferation of national regulations. With regulations expanding to cover the full value chain, actors are increasingly likely to be subjected to multiple regulatory bodies, or have to provide data to reporting entities upstream. The time, financial resources and practical challenges involved in identifying, collecting, processing and sharing data are considerable, both for those submitting data and those receiving and verifying them. This makes divestment or significant losses more likely. Furthermore, the expansion of regulations can result in isolated streams of data and closed-circuit processes, which, in turn, cut out civil society organisations and individuals who use data to help hold firms to account for their social and environmental responsibilities.
Aside from EU calls for a European Single Access Point for corporate data, Majority World contexts offer particularly fertile ground for reimagining and building data infrastructures. Digitalisation in low- and middle-income countries is growing rapidly, and demonstrates the ability to make digital financial and business instruments democratic and accessible to those with the fewest resources. Such efforts should involve statisticians and local data experts from the outset to determine and harmonise appropriate data, along with transnational entities with the mandate of establishing links across data systems.
Support for international emissions accounting
Corporate reporting on environmental impacts must be accompanied by their reduction. Indeed, the work and transparency required to identify impacts in the first place, let alone mitigate them, underpins decisions to simply detach from the system, moving economic activity to local contexts where impacts are more traceable.
Firms that cannot afford to bring their activities onshore must account for emissions that occur from assets not directly under their ownership or control, which are known as Scope 3 emissions. In some cases, these emissions constitute well over half of a firm’s total value chain emissions. However, the implementation of the ESRS has designated the reporting of Scope 3 emissions, and climate impacts in general, to be largely discretionary, under the condition that firms provide evaluations of the economic and material implications of a given activity in their value chains.
The glaring gaps between some firms’ targets, actions and declarations are in part enabled by reporting systems that allow the omission of more distant climate risks and impacts, maintaining the misalignment between climate pledges and actions aimed at achieving them. While the number of firms showing readiness to comply with Scope 3 accounting is increasing, data on global investor preferences suggests that investors do not necessarily prioritise companies’ performance on these emissions when making investment decisions. For ethics to exist on the ground, they must be prioritised in financial flows.
Investment with integrity
In light of the above, financial institutions have a core responsibility to engage with NFR. These institutions’ economic leverage and centrality in the value chains and activities of several sectors give them incentivising power to catalyse a shift from the submission of reports to the building of living data systems and the achievement of fuller value chain accountability. Currently, many investors are not willing to accept reductions in their returns in exchange for the pursuit of social or environmental goals. Surveys suggest this is in part due to perceptions of low quality of environmental information, limited ability to assess the data received, and the difficulty of making investment decisions accordingly. In the current landscape of Minority World-led reporting, such mistrust is likely to be greater with respect to Majority World data, reiterating the need for data systems and reporting mechanisms built on equal footing.
Financial institutions can operate proactively, using their privileged access to data to bridge Minority and Majority World actors engaging in sustainable practices, such as microfinance bodies, local communities and relevant investors. Doing so could plug, at least in part, an information and trust gap that can hinder Minority World firms’ investment in unfamiliar contexts.
Regulating for whom?
The research underpinning our article initially involved a recommendation on streamlining and supporting reporting by small and medium enterprises (SMEs), which account for more than 60% of the EU’s corporate emissions. For these firms, especially, regulators face a critical balance between lowering the entry barrier of the reporting ecosystem and setting robust environmental targets. The nature, data points and timelines of reporting under the CSRD are currently under review following calls for simplification and greater support, and decision-makers are wrestling with the tension between accessibility and integrity.
Our work also included a recommendation that turns from the supply side, the focus of the preceding proposals, to the demand side: the data and sustainability literacy of the individual who walks into the supermarket to buy that sustainable product, or wants family investments to do more good than harm. Across sectors – public policy, investment and citizen engagement – resources must be dedicated to these literacies, so that actors are better placed to hold each other to account. Regulation becomes easily abstracted, reduced to figures and PDFs, databases and scores. Beneath each regulation is a world of citizens whose homes, livelihoods and health depend on them.
The author was affiliated with the University of Siena during the period in which she and her colleagues did the original work for the scholarly article that is mentioned in this piece. The author’s affiliation came via a project that, overall, was financed by the Italian National Recovery and Resilience Plan (PNRR). The scholarly article and the present article were not outputs for the project.
– ref. EU efforts to measure companies’ environmental impacts have global effects. Here’s how to make them more just – https://theconversation.com/eu-efforts-to-measure-companies-environmental-impacts-have-global-effects-heres-how-to-make-them-more-just-261226
