Doubling Down on Impact Reporting

U.S. companies that conduct significant business in Europe are in for the strategic and compliance challenge of a lifetime. Accustomed to doing their best to provide sustainability information to investors via voluntary reporting frameworks, they must now prepare to adopt a rigorous sustainability reporting regime and wrap their collective minds around a new concept: double materiality.

The aim of the European Green Deal is to accelerate the transition to a low-carbon, sustainable economy. By taking into account the current and future needs of a broader constituency of stakeholders, governments are expanding the concept of corporate accountability. Their goal is to compel companies to think beyond conventional calculations of profitability to factor in the impact they have on the world. Companies will find it harder to ignore previously unpriced externalities and must reckon with how much value they are creating or destroying, not only for themselves but for those affected by their activities.

Understanding and measuring the impact that a company’s economic activity is having on the world is a more expansive and novel task than weighing the effects of events, both real and anticipated, on a company’s financial performance and likely prospects. It requires identifying and understanding effects that the company’s activities, value chain, and products have on the workers, communities, geographies, and ecosystems with which it interacts.

Assessing the impact of a conceptually unlimited set of potential harms or benefits that can arise from corporate activity represents a huge challenge for corporate management, especially when the disclosure of such impacts is regulated.

The Green Tip of the Spear: The EU and the Green Deal

The European Green Deal sets ambitious economywide sustainability targets, such as reducing greenhouse gas emissions by 55% by 2030 and achieving net-zero emissions by 2050. The EU’s policy toolkit is extensive: It covers emissions trading schemes, a carbon border adjustment mechanism, a taxonomy of sustainable economic activities, corporate sustainability due-diligence requirements, and expanded fiduciary duties, alongside other initiatives. These efforts are intended to have extraterritorial effects; in developing the Green Deal, the European Commission assessed that around 80% of the negative impacts of EU economic activity may sit outside its borders.

The Corporate Sustainability Reporting Directive (CSRD) is part of the Green Deal package of reforms. Any U.S.-based company with more than a minimal footprint in the EU is likely to find itself subject to its disclosure requirements.