How the EU wants to moralize sustainable corporate auditing

And ifthere is no doubt that companies have an important role to play in the energy transition, the European Union expects even more of them: they must also behave in accordance with EU values ​​for “sustainable” governance. This is what is at stake in the current negotiations over companies’ non-financial reporting. Trilogues are ongoing between Parliament and the Council. The next one is scheduled for early June. Both institutions are trying to adjust their positions. The French EU presidency would like to place this text under its mandate. “We think it’s possible,” says one on the Elysee.

On the side of the Parliament, it is the French deputy Pascal Durand (Renew), rapporteur, who leads the negotiations. Naturally, lobbying from the audit and business world has been intense, as it is about imposing new standards on economic actors. This is not the first time the EU has looked into the matter, but the previous directive, known as the NFRD, adopted in 2014, failed. The Commission therefore proposed to revise this text in April 2021, henceforth under the acronym CSRD (Corporate Sustainability Reporting Directive). Parliament adopted its position in March 2022, within the JURI Committee, unanimously (minus one abstention), that is, if the matter is consensus between the left, the right, the center and even the extremes… PPE, the gateway to Germany’s big business, took a little longer to recover, but it did.

Investors need reliable commitments

“We had to go back to the text, because we find ourselves in the situation where everyone says what they want”, explains Pascal Durand. For example, Michelin will declare that its rubber comes from sustainable rubber forests. Total will declare that it has renovated three schools in Burma. So everyone declares what they do well. I was discussing, for example, with a large Swiss agri-food group. They tell me that when it comes to palm oil deforestation, they are 90% of what they can do. And the 10% they lose? It’s competition with bandits. In other words, until the EU standardizes extra-financial reporting, virtuous companies will be subject to unfair competition from unscrupulous rivals…

READ TOOEnergy prices: fear of yellow vests conquers Europe

Another reason to set standards: investors and financiers want to know if the company they invest money in is trustworthy in the context of green finance. This text is therefore linked to the green taxonomy, as well as the directive on the duty of due diligence of companies in terms of sustainability proposed by the Commission on 23 February 2022. However, it will be necessary to ensure that these texts, which will be adopted in a disparate chronology, maintain consistency…

Listed SMEs, only on a voluntary basis

Anyway, when it comes to companies’ extra-financial reports, today there is nothing credible, nothing easily comparable, nothing easily accessible. Non-financial reports must be clear, with a standard. We have 1,500 to date, because none are set in a legal framework. “Of course, there will always be fake accounts. But it’s one in 100,000 and it ends up in prison,” counters Pascal Durand. The Orpea case – about mistreatment in nursing homes – typically fits into this drift: the group obtained a good rating in extra-financial terms with a Qualicert seal that did not correspond to reality. “In the current situation, companies are evaluated by whoever they want, whenever they want. There is enough! infuriates Pascal Durand. Therefore, it is necessary that the structure be the same for everyone, as well as the financial statements. »

READ TOOThe EU’s plan to reduce its dependence on Russia

The directive will apply to European companies with 250 employees and a turnover of 40 million. Non-European companies – Google, Coca-Cola, Nike, etc. – operating in the European market will they also be affected? The point is still under discussion in the trilogues… The Commission had proposed to extend the directive to listed SMEs (between 1,000 and 2,000 companies). Parliament removed them from the scope in order not to create undue administrative burdens. However, with one downside: investors will not have certified information about listed SMEs. As a result, listed SMEs will be able to carry out this report on a voluntary basis. In total, approximately 50,000 companies will be affected in the EU. It was decided to consolidate the reports at the parent company level. In Europe, it will aggregate data from its subsidiaries, which will not be subject to this penalty.

An obligation of transparency and not an obligation of

If we take the case of a clothing manufacturer in Europe, he will be forced to say how he avoids resorting to child labor in Asia: an agreement with a local NGO, with a recognized and certified union, or controls on… “BMW, for example, does not managed to control its battery production line. The group decided to bring all manufacturing back home to regain control,” explains Pascal Durand.

In reality, everyone needs reliable, standardized and comparable information about companies. NGOs blame polluting companies and know nothing about manufacturing processes; employee unions complain about fragmented information about pay discrimination between women and men; consumers want to know where and how their products are made and if they can be fixed; Finally, investors want to be sure to commit money to a company that is really concerned about sustainability and that won’t go under because of a terrible health scandal…

Battle over sharing audit windfall economic gains

As part of this “sustainable governance”, the European Union has chosen to ask companies to be transparent about extra-financial risks, measuring, for example, the impact of their production on nature, biodiversity, deforestation, general pollution, human rights… that conform to a behavior. It is always the bosses who decide the choices. A company may well decide to do nothing for the climate. She will be forced to declare it. “For example, a company that imports its soy from the Amazon, we are not going to ask it to stop exploiting soy”, specifies Pascal Durand. But let’s ask her where her soy comes from and if she has implemented means to try to exploit soy without deforestation or if she has negotiated with indigenous populations. This is the extra-financial. The Americans proceeded differently. They are focused on the single climate issue and only focused on the existence of a risk to the company. [et sa valeur actionnariale, NDLR]. They will never declare a risk to nature. »

The auditing problem remains. Pascal Durand demanded that the financial and extra-financial audits not be carried out by the same company. The “Big 4” audit – Deloitte, Ernst & Young, KPMG and PwC – took it very badly and lobbied hard on the Board and Commission to combat this idea. “If you have a groundwater pollution risk analysis, it can’t be the financial controller who does it. There must be an independent expert, argues Pascal Durand. The risk must be recognized. And then the financial controller draws the conclusion in terms of provisions. I want real independence so that the extra-financial is not an accessory to the financial audit. So far, in the trilogues, the Council seems quite hostile to her. In France, auditors are also eyeing non-financial audits to increase the size of the pie…

Leave a Comment