Lots of pressure and compromises but the main thing is preserved. The “European sustainability information standards” pass through the stages of the European Union regulatory circuit and maintain, against all odds, a so-called “double materiality” approach. Double, because it will lead the companies concerned to communicate more extra-financial indicators from two points of view: on the one hand, how environmental and social factors are likely to affect profits – we are talking here about financial materiality -, and on the other hand, what are the impacts of companies themselves on the climate, biodiversity, water, communities, etc.
A few days ago, the former boss of Danone, Emmanuel Faber, signed in the columns of World a platform against the model supported by Europe. President of the private organization ISSB, he defends a model of simple financial materiality, less restrictive and therefore more attractive in the eyes of businesses. This week, the European text faced another revolt, that of a rejection motion presented by MEPs. The European Parliament voted by majority against on Wednesday October 18.
Faced with these blows, many voices are calling for resistance, particularly among investors. For L’Express, Frédéric Ducoulombier, director of the EDHEC-Risk Climate Impact Institute research center, dismantles the arguments of the lowest bidders one by one.
L’Express: How do the vision of Emmanuel Faber, president of the ISSB, and that of the Europeans, supporters of dual materiality, oppose each other?
Frédéric Ducoulombier: Emmanuel Faber is part of the perspective of financial materiality, an accounting concept which requires that information must be published if it is likely to influence the financial decisions of current or potential investors and creditors. This does not necessarily imply neglecting environmental or social factors. Dual materiality adds consideration of the needs of a multiplicity of stakeholders who may be affected by the company’s activities, regardless of their financial impact for the company. This is the approach adopted in Europe through ESRS, the European sustainability information standards. These require transparency of financial risks and opportunities, as in the ISSB framework, but also transparency of environmental and social impacts.
In his column published in The world, Emmanuel Faber described the European vision as “simplistic”. What do you think ?
This diatribe came at a time when the text was in the observation phase in the European Parliament. It is part of a global offensive against Europe’s sustainable development ambitions. I found it virulent. It is interesting that Emmanuel Faber presented it as a peace offering. It is difficult to characterize as simplistic an approach which encompasses and develops that of the ISSB. His attacks are of low quality.
His text identifies the three “illusions” of the defenders of double materiality. The first would be that non-economic information can have an impact on financial markets. However, affirms Emmanuel Faber, “there is no common denominator of concerns, and therefore no stable materiality, but only a myriad of fragmentary uses of information, the impact of which is tiny compared to the power of the materiality that directs the flows of financial markets.” It would therefore be useless to communicate on these subjects on the pretext that they are ineffective?
In accounting terms, what is financially “material” is not the reaction of the markets, but the usefulness of the information for a reasonable investor’s decision-making. Moreover, the markets do not necessarily respond immediately and correctly to relevant information. Above all, economic actors have in reality always been interested in non-financial questions. Thus, certain ethical, social or environmental problems can have a financial impact. And what is non-financial can become so. Scandals often play a remarkable role in accelerated transitions. Look at the pharmaceutical group Purdue Pharma pushed into bankruptcy by its methods of selling opiates in the United States, or the setbacks of the Orpea retirement homes in France.
Second illusion, that of believing possible “exhaustive accounting of the impacts of a company”. An “unrealistic” aspiration, as Emmanuel Faber describes it?
There is no question of requiring “millions of biobalance reference points in GPS data” as he would have us believe, but only the disclosure of material impacts relevant to stakeholders. Certainly, a thousand indicators have been standardized. But the final text of the ESRS provides that the company can decide itself on the importance of each theme with regard to its activity, and whether or not to communicate on it.
This flexibility is also a concession compared to the initial project. Have the critics of this European directive scored a point?
There had already been significant concessions since the initial project had double the number of indicators. The version revised by the Commission was aligned with the information essential to market participants and the key political objectives of the Union. The consultation opened by the European Commission this summer attracted more than 600 contributions, including those from the main investor associations, large asset managers, and representatives of civil society, who insisted that the publication of all these indicators are mandatory. But users were not listened to. With one exception, for the climate part: companies that claim that climate change is not material to them will have to publish a justification.
The president of the ISSB adds that these new standards will not make it possible to respect the Paris climate agreement and that they cannot “hide the need for political ambition for the transition”. A third argument that hits the mark?
This is true in theory – it would be naive to rely on publishing information to ensure the transition, whether working with the single materiality of the ISSB or the dual materiality of the ESRS. Except that these ESRS standards are part of the European Green Deal, which includes ambitious reforms in economic, social and human rights matters, etc. This obligation of transparency does not replace public action, it accompanies it. The information is used by investors to modify their asset allocations on financial or other grounds, it facilitates the work of those who advocate regulatory changes and the evolution of mentalities in civil society, including in matters of consumption or labor market.
Despite everything, do you have points of agreement with Emmanuel Faber?
I agree with him in affirming that above all we need ambitious environmental and social policies, and in recognizing that the markets can be the allies of public power in the transition provided they give companies and investors clear signals, including a credible implementation timetable. However, it is not necessary to subscribe to an absolutist and fundamentalist vision of markets or to keep key information under wraps for monitoring policies, protecting people and ecosystems, and democratic debate.
Businesses have been lobbying against this text for months, saying they are worried about the scale of the task. Is this fear justified?
The exercise is demanding but these standards will ultimately only apply to nearly 50,000 companies present in Europe. A figure to be compared to some 25 million European companies! Around 12,000 of them are already subject to extra-financial reporting obligations, and are also calling for harmonization, to reduce the cost of responding to the multiple requests from rating agencies and other organizations. This text therefore affects a tiny minority of companies. Calls to protect SMEs are in patent bad faith. The only SMEs directly affected are those that are listed and their obligations will be proportionate.
Around forty German companies have written publicly to the Minister of Finance to demand the abandonment of dual materiality. Among them, many large companies in polluting industries which will not benefit from this transparency effort. The green champions of tomorrow are less audible, because they are still small and cannot deploy the same influence activity.