The European Union has disavowed its role as a talking shop on corporate responsibility, and is moving forward with a number of initiatives that will mean obligations for companies
It wasn’t quite an earthquake but it did at least register as a minor tremor. In October 2011, the European commission, the European Union’s executive arm, changed its definition of corporate social responsibility.
Out went the old, which stated that “CSR” was “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” In came a much more punchy definition of corporate responsibility as “the responsibility of enterprises for their impacts on society”.
Jérôme Chaplier, coordinator of the Brussels-based European Coalition for Corporate Justice (ECCJ), which campaigns for more corporate responsibility and accountability, says the change of wording is no small matter. It marks “a real shift” in the commission’s corporate responsibility strategy.
The new definition strikes out the assumption that corporate responsibility is a voluntary activity. “The focus on impact is what really matters. There has been a major shift in the way CSR is defined and addressed,” Chaplier says.
André Martinuzzi, head of the institute for managing sustainability at Vienna University of Economics and Business, goes further. The impact of the new definition, he says, is to “end more than a decade of impactless discussion” on corporate responsibility at European level. “The old definition hampered so many things.”
He adds that the new definition “will lead to a shift of perception of managers – that they are responsible for the impacts of their companies”.
Commission calls the shots
The new definition also marks a move away from a situation in which national governments took the lead on corporate responsibility-related policy. The commission’s concern was that national policymaking would lead to different approaches and standards across the European Union, making life difficult for companies that operate in several countries.
Different countries have different corporate reporting requirements, for example. In its 2011 policy paper announcing the corporate responsibility definition change, the commission warned that this opened up a potential red tape nightmare, or as the commission put it, a “possibility that different national requirements could create additional costs for enterprises”.
Consequently, since 2011, the commission has been increasingly willing to take a lead. It has unleashed a wave of business responsibility initiatives covering issues such as non-financial disclosure, social business and anti-corruption. The effects of these new laws and standards will be seen in the next few years as they start to come into force.
Most recently, in October, members of the European parliament supported an initiative, proposed by the commission in November 2012, for women to take up at least 40% of non-executive director positions on the boards of publicly listed companies by 2020.
The proposal does not force companies to meet the 40% level, but it requires those that do not to put in place more transparent selection criteria, and to choose a woman over a man if equally qualified candidates are being considered for a post. The final form of the legislation is due to be negotiated between the European parliament and representatives from EU member states.
The commission says about 5,000 companies will be affected by the law, but says EU harmonisation is better than a “piecemeal approach”. It points out that in Austria, Belgium, Denmark, Finland, France, Greece, Italy, the Netherlands, Norway, Portugal, Slovenia and Spain there has already been some kind of regulation on women on boards, but in other countries, “no significant progress has been made in recent years”.
Behind the scenes
The commission, in its 2011 paper on corporate responsibility, said more direct EU-level intervention in corporate responsibility is justified because “the economic crisis and its social consequences have to some extent damaged consumer confidence and levels of trust in business. They have focused public attention on the social and ethical performance of enterprises.” In particular, the paper notes, “helping to mitigate the social effects of the current economic crisis, including job losses, is part of the social responsibility of enterprises.”
As the EU has become more bullish about regulating on these issues, national governments have tended to step back. For many national politicians, the best strategy is to wait and see what Brussels does. If it works, the politician can try to take the credit; if it fails, Brussels can be blamed.
This can be seen, says the ECCJ’s Jérôme Chaplier, in current negotiations about non-financial disclosure. The commission proposed in April 2013 to apply a disclose-or-explain rule to companies with 500 or more employees. These companies should include relevant social and environmental information in their annual reports, or explain why they are leaving it out.
The proposal is controversial: if it becomes law, it could affect 18,000 companies. Chaplier says EU countries are divided, with governments such as Belgium, Denmark, France and the Netherlands in favour, and Austria, Germany, Poland and the UK keen to water it down.
“Many member states are trying to undermine this reform without having any public debate,” Chaplier says. “No member state has openly criticised the commission, but behind the scenes they will try to keep it as flexible as possible, so it can be driven by companies.”
The motives of opponents of the law vary. Germany is against binding corporate responsibility requirements, believing that if environmental or social issues need to be regulated, it should be done through general environmental or social law. For the UK, opposition is more about retaining the right to do things the UK way.
For France, meanwhile, adoption of EU-level legislation on issues such as non-financial disclosure and women on boards would mark a victory. France already has a national quota for company boards to be 40% female by 2017, and French companies with 500 or more employees are subject to mandatory disclosure of a wide range of non-financial information, covering their environmental and social behaviour, commitment to sustainable development and respect for human rights.
France, along with Denmark, tends to be in the vanguard on sustainability reporting. Both are members of the “Friends of Paragraph 47” group, which refers to the declaration that came out of the 2012 United Nations Rio+20 Conference on Sustainable Development. Paragraph 47 noted that sustainability should be promoted through more extensive corporate reporting standards. Brazil and South Africa are the other Friends of Paragraph 47.
The commission is also attempting to coordinate the national corporate responsibility plans prepared by EU member countries, with a call for them to update, or to write if they don’t yet exist, their corporate responsibility strategies, and a programme of meetings and peer review sessions for national corporate responsibility policymakers.
All countries were supposed to have a corporate responsibility action plan in place by mid-2012. Speaking to Ethical Corporation, the commission says that most had done so, or were “in the process of developing” a plan, though Latvia has declined to prepare one, and Belgium, Greece and Luxembourg have not responded to commission questions on the issue. “Of course, this doesn’t mean that they won’t do anything, but at the same time we cannot say what they will do,” a commission spokeswoman says.
The institute for managing sustainability at Vienna University of Economics and Business reviewed national corporate responsibility plans in 2011. None of them, Martinuzzi says, was found to include “smart” objectives – meaning goals that are specific, measurable, assignable, realistic and time-related.
The best were the Danish and German plans, according to Martinuzzi, but even these “do not have comparable, clear indicators”.
But the drawing-up of plans and strategies seems to be taking second place to initiatives on specific issues, either at EU or national level. For example, the British government, in September, published the world’s first national guidance for companies on doing business according to the UN Guiding Principles on Business and Human Rights.
The guidance would help companies fall into line with new requirements in the UK Companies Act that came into effect on October 1, the government says. Under the requirements, large listed companies are required to disclose their human rights policies, the gender make-up of the boardroom and information about their greenhouse gas emissions.
The result for British companies, when the Companies Act requirements are combined with the EU obligations that are on the way, will be a corporate responsibility framework that looks considerably more French.
EU corporate responsibility initiatives
The European commission’s 2011 change of direction on corporate responsibility has been followed by a wave of regulatory initiatives:
- The Social Business Initiative: A plan to boost social business in the EU was published at the same time as the commission’s updated “CSR” definition. The initiative is mainly about making social business an “investment priority” when EU funds are handed out.
- Country-by-country reporting: EU rules agreed in April 2013 require European companies involved in natural resource extraction to disclose any payments of €100,000 or more made to governments. Disclosure must be done per project. The legislation is intended to prevent corruption related to resource concessions in developing countries. Rock star and veteran activist Bono said the new law was a “game-changing breakthrough”.
- Women on boards: 40% of non-executive directors should be women by 2020; companies that fall short will be required to take positive discrimination measures. Currently under discussion between the European parliament and EU member states.
- Non-financial disclosure: All companies with 500 or more employees will be required to disclose information on their social policies, environmental impacts, boardroom diversity and respect for human rights. The April 2013 proposal must be agreed by the European parliament and EU member states before coming into force, and is sure to be the focus of a fierce lobbying battle.
- Crowdfunding: Most recently, the commission has said it is “exploring the potential and the risks of this relatively new and growing form of finance”. Crowdfunding is potentially “a sustainable source of financing for new European projects”. A public consultation on the matter is open until December 31 2013.