The Horse before the Cart: A Sustainable Governance Model for Meaningful Sustainability Reporting
26 April 2019, SSRN
The EU Non-Financial Directive of 2014 has a great potential for stimulating change towards the much needed corporate sustainability, with its unprecedented inclusion of broader sustainability issues, which are not limited to the legal entity of the company, and of the key mechanism of due diligence. However, for sustainability reporting to be meaningful, it has to be comprehensive, relevant and reliable. One of the reasons that sustainability reporting has tended to be neither is the chasm between the perceived role and duty of the corporate board, on the one hand, and the reporting requirements, on the other. When corporate boards (wrongly) assume that their legal duty is to respond to shareholder requirements and to maximize returns for investors, this leads to a short-term and narrow focus that ignores the financial risk of ‘business as usual’, and creates a basis for seeing reporting requirements on environmental and social issues as irrelevant. This chasm undermines the aim of sustainability reporting.
Changing corporate behaviour through sustainability reporting therefore leads at best to very slow and incremental improvements in a time where urgent action is needed. Moving forward may require putting the horse before the cart: by adopting and implementing an integration of sustainability into the purpose and role of the board, as a basis for meaningful sustainability reporting. Ideally, the integration of sustainability into the purpose of the corporation and the role and duties of the board should be mandated through a reform of corporate law.
The SMART Sustainable Governance Model and its integrated Sustainability Assessment Tool are our proposal for how the integration of sustainability can be implemented into individual business, whether that would be within the context of law reform or independently, based on the individual business’ decision to do so. Section 2 draws on previous research to explain why the current regulatory framework is insufficient. Section 3 presents the tentative proposal, including its relevance for realising the potential of the EU Non-Financial Directive. The proposal is aimed at the board and management of a business entity. It involves amending the corporate governance model to integrate a continuous sustainability assessment process, conducting a sustainable behavioural analysis for the business, where the business positions itself within the life cycle of the products or services integral to its value creation, defines its global value chains, and develops a sustainability strategy. With this starting point, a research-based process towards identifying the business’ sustainability footprint is outlined, which would give a basis for meaningful sustainability reporting. The sustainability reporting would not be an end goal but an integral element of a continuous improvement process towards a more and more sustainable corporation. Section 4 concludes with reflections on the way forward.