By Allen Campbell, JD, MBA
This is another blog post in our series on Value Chain Sustainability.
In a Nutshell: The new Corporate Sustainability Reporting Directive (CSRD) of the European Union will mandate in-scope companies to disclose “opportunities related to sustainability matters”. This is questionable public policy for many reasons and should be reconsidered.
It is in the best interests of society that companies proactively find opportunities related to sustainability.
Sustainability is not just about managing risks; it is also about identifying business opportunities. Smart companies go beyond the compliance aspects of ESG to find or create opportunities and build corporate value. That can be done by changing internal business processes and/or by developing and offering new products and services that advance the cause of sustainability. Indeed, many business plans are predicated solely on profiting from such opportunities.
Innovation is central to business. Companies invest enormous amounts of money and attention creating proprietary technology and business methods. Share prices reflect innovation.
Societies encourage innovation and, to that end, provide legal safeguards such as trade secret laws. Leading companies have a culture of innovation and protect their intellectual property. That is the purpose of confidentiality agreements.
However, the CSRD mandates companies to disclose “opportunities related to sustainability matters”. (See Articles 19a and 29a.) This is bad public policy for several reasons:
- It will discourage companies from being sustainability innovators. It is contrary to the normal business imperative to create or maintain a competitive advantage, which drives human progress. It disincentivizes companies from devoting the effort and money needed to “build a better mousetrap”. It is unfair to companies that do so.
- It will be a compliance nightmare for companies. The CSRD requires that a company report on companies in its value chain; those companies may prove to be very resistant to demands on them to disclose their views on sustainability opportunities and their related plans.
- It is extremely open-ended. Does it require companies to disclose opportunities not yet thought of? Not yet vetted? By whom?
Beyond that, the CSRD opportunities-disclosure mandate is at odds with the overall purpose of the European Green Deal to transform the EU into a modern, resource-efficient, competitive economy.
- In their adopting legislation, EU Member States will be allowed to permit information relating to pending developments or matters in negotiation to be omitted if disclosure would seriously prejudice a company’s business. There is however a proviso: that the omission will not prevent a fair and balanced understanding of its company’s development, performance and position and the impact of its activity.
- Companies will not be required to disclose trade secrets (as defined under EU law).
- In making their disclosures under the CSRD, companies will need to consider their future plans and opportunities. This will require making judgment calls. The exceptions stated above are open to interpretation, which is itself problematical. Companies will be wise also to re-examine their trade secret policies and practices and their past action. It may be time for updating.
- We recommend that the legislative and administrative bodies of the EU reconsider this part of the CSRD and act accordingly. We recommend that companies be supportive of such efforts.