25 February 2022

ACCA statement on the release of the European Commission’s initiative on Corporate Sustainability Due Diligence

While we view this as a step in the right direction, ACCA believes greater transparency and disclosure are needed on the entire spectrum of ways businesses can impact people and the planet if we are to ensure that sustainability is effectively embedded into corporate governance best practices.

 

·         ACCA (the Association of Chartered Certified Accountants) welcomes the European Commission’s (EC) proposals aimed at fostering the role businesses play in respect of human rights and the environment across their operations and value chains.

·         While we view this as a step in the right direction, ACCA believes greater transparency and disclosure are needed on the entire spectrum of ways businesses can impact people and the planet if we are to ensure that sustainability is effectively embedded into corporate governance best practices.

·         We look forward to contributing to the debate as the interinstitutional legislative process is starting.

 

There is no doubt that the increased expectations of businesses to contribute to sustainable development and do more to protect society at large have been exacerbated by Covid-19. We see, through our engagement with ACCA members, how this has compelled companies to re-think their purpose and strategy for the long-term. ACCA believes that financial professionals can help lead their organisations more in identifying, planning and accounting for social and environmental matters, ensuring that adequate governance measures are both effectively communicated and put into context.

 

Mike Suffield, ACCA’s director of Professional Insights, says: ‘We have always advocated that corporate governance is just as much about creating value as it is mitigating risk, and we agree that it is crucial for organisations to understand their stakeholders’ interests if they are to succeed in doing this.’

 

ACCA encourages companies to go further by reporting on their objectives for shifting to more long-term thinking as well as on their progress or lack of throughout the journey.

 

Suffield adds: ‘This would help companies better align their decision making with stakeholders’ needs, which is clearly the direction we see investors and prudential regulators around the world heading. We also, in this respect, would encourage companies to set credible transition pathways and provide enhanced reporting on concrete environmental and social targets or KPIs. These measures could help organisations meet their objectives better and, indeed, build the trust and robust risk culture needed to support sustainable futures.’

 

Regarding the scope of the proposals, ACCA welcomes the fact that third-country companies with significant operations in the EU should be covered. ACCA also commends the Commission’s proportionality approach, which is excluding small and medium-sized enterprises, but at the same time calls for better guidance for them to identify emerging risks and impacts, build better governance processes, engage with stakeholders more effectively, conduct materiality assessments and align the long-term interests of stakeholders and shareholders with overall business strategy.

 

Rachael Johnson, head of Corporate Governance and Risk Management at ACCA explains: ‘We recommend incorporating more scenario analysis and taking extra consideration of the inputs and outputs of these models to ensure organisations are able to identify and plan for emerging and transition risks more effectively and proactively. Accountancy professionals are in a good position to provide the decision makers with greater foresight, for example, with predictive analysis and unexpected loss data.’

 

She adds: ‘Enhancing due diligence is key to knowing your risk and this means knowing your stakeholders across the organisation and up and down its value and supply chains. Organisations with even the most mature enterprise-wide risk management frameworks realised during the first lockdown how misaligned and disconnected their risk governance was. There needs to be more due diligence, so more questions asked and checked over longer histories and shorter time horizons if they are to build resiliency and not get hit hard again. Indeed, when it comes to the existential risks we face today something that is not material now  could easily be tomorrow, so the monitoring must be continuous.’

 

On directors’ duties, ACCA regrets that the European Commission proposal does not require more transparent disclosures in terms of boards’ compositions, as the pandemic proved that many lack a sufficient understanding of their company’s risks.

 

Johnson notes: ‘Boards need to represent their stakeholders proportionately and be composed of the expertise and backgrounds necessary to navigate the increasing uncertainties if they are to be effective at leading and steering their organisations in the right way. Audit Committees’ duties, especially, have been expanding with the changing risk landscape and are vital to surviving and thriving through the rapid transformations happening in the world.’

 

For ACCA, when developing measures for sustainable corporate governance frameworks and due diligence requirements, it is important to keep initiatives closely in line with international standards, such as the OECD Guidelines for Multinational Enterprises, the OECD Due Diligence Guidances, the UN Guiding Principles on Business and Human Rights, and the ILO Tripartite Declaration of Principles on Business concerning Multinational Enterprises (MNE Declaration). ACCA also calls for consistency and alignment with other EU measures, which directly address some specific sustainability challenges or apply in some specific sectors, such as the Fit for 55 package, the Corporate Sustainability Reporting Directive - currently being discussed by the co-legislators, as well as the recent Taxonomy Regulation and the Sustainable Finance Disclosure Regulation.

 

Mike Suffield concludes: ‘As stewards, boards must drive a responsible culture and approach to business conduct and this can only be achieved by carrying out proper due diligence and building trust. We believe everyone has a role to play in building sustainable futures for all and creating more coherent best practice standards for this is the way forward. ACCA stands by policy makers to contribute its part in building the right EU and global frameworks.’

 

ACCA

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