r3.0 Feedback on Revision of the EU Non-Financial Reporting Directive
By Bill Baue & Ralph Thurm
The European Commission started a two-step feedback process on the revision of the Non-Financial Reporting Directive (NFRD) in February 2020. In a first step they offered a general consultation on three policy options, best described as 1) leave the NFRD as it is, 2) let the Directive be more based on (a) standard(s), and 3) strengthen the directive where necessary. This will be followed by a survey process that will run until May 2020. Please read our feedback to the step 1 consultation here:
r3.0[1], a networked NGO focused on redesign for resilience & regeneration (founded by experts with experience leading the Global Reporting Initiative (GRI) and producing sustainability reports for GE, Siemens, Walmart, and others), supports Policy Option 3: Revise and strengthen the provisions of the NFRD. Specifically, we see the need to require implementation of the Sustainability Context Principle, first established in 2002, which calls for reporting on the “performance of the organisation in the context of the limits and demands placed on economic, environmental, or social resources at a macro-level.”[2]
Sustainability requires contextualization within thresholds. That’s what sustainability is all about,” says GRI Co-Founder Allen White. “Yet to this day, contextualization rarely appears in sustainability reports.[3]
Empirical research supports this assertion. A 2017 study of 40,000 corporate responsibility reports issued since 2000 found that only “5% of companies referred to ecological limits in any year. Of these 5%, only 31 companies planned to align performance or products to limits.”[4] This translates to 0.258% of reporting companies addressing these limits in the performance measurement or product development. (See Figure 1 below[5])
A 2015 United Nations report on “raising the bar” on sustainability reporting included an entire section advocating for context-based reporting, which ended with the following Recommendation:
All companies should apply a context-based approach to sustainability reporting, allocating their fair share impacts on common capital resources within the thresholds of their carrying capacities.[6]
A 2019 United Nations report formalized context-based sustainability performance assessment into a Three-Tiered Typology. The first two tiers are predicated on the Sustainability Quotient, a generalized specification for implementing Sustainability Context, which holds that Sustainability (S) = Actual Impacts (A) / Normative Impacts (N). (See Figure 2 below[7])
The Three-Tiered Typology appears below:
- Tier One: Incrementalist Numeration
Numeration indicators focus on actual impacts, which include absolute indicators as well as “intensity” indicators that describe performance relative to a non-normative counterpart (such as unit of production), and are therefore incrementalist by definition.
- Tier Two: Contextualized Denomination
Denomination indicators contextualize actual impacts against normative impacts. Also known as “Context-Based” indicators, denominator indicators take into account sustainability thresholds in ecological, social, and economic systems, as well as allocations of those thresholds to organizations and other sub-system entities such as sectors, portfolios, or bioregional habitats.
- Tier Three: Activating Transformation
Transformation indicators add trans-contextual elements of implementation practices and policies (as well as more ephemeral emergence) to normative indicators in order to instantiate sufficient change within complex adaptive systems.[8]
In sum, we return to the words of GRI Co-Founder Allen White to strongly recommend integration of Sustainability Context into the NRDC:
We don’t have decades to get serious about Context in light of the ecological and social perils that lie ahead. I think the time for procrastination has passed; the time for aggressive movement is upon us.[9]
References:
[1] See https://www.r3-0.org/
[4] https://www.sciencedirect.com/science/article/pii/S0959652615019204
[5] Figure Source: https://www.sciencedirect.com/science/article/pii/S0959652615019204 (Data); http://www.unrisd.org/baue (Graphic)
[7] https://www.rug.nl/research/portal/files/13147569/DISSERTATION-2.pdf p113 (content); http://www.unrisd.org/baue (Graphic)
[8] http://www.unrisd.org/baue p11
