The Non-financial Reporting Directive: key element for a successful due diligence on human rights

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Friday, January 8, 2021
The EU Non-financial Reporting Directive –NFRD (Directive 2014/95/EU) set up the regulation about non-financial and diversity information that big EU companies must disclose in their annual report. This EU regulation obliged European companies since 2018 to develop responsible approach on how they operate and manage environmental, social, human rights and anti-corruption challenges. (...)

THE NON-FINANCIAL REPORTING DIRECTIVE:
KEY ELEMENT FOR A SUCCESSFUL DUE DILIGENCE ON HUMAN RIGHTS

The EU Non-financial Reporting Directive –NFRD (Directive 2014/95/EU)[1] set up the regulation about non-financial and diversity information that big EU companies must disclose in their annual report. This EU regulation obliged European companies since 2018 to develop responsible approach on how they operate and manage environmental, social, human rights and anti-corruption challenges. However, the scope of the NFRD is limited and affect only to companies with more than 500 employees including listed companies, banks, insurance companies and other companies of public-interest.[2]

This directive is only a legal element within a set of legal measures that the EU has established to promote transparency of large EU companies in a specific field such as respect for human rights and the environment. After four years of voluntary application of the NFRD, different studies[3] showed that its implementation on a voluntary basis were insufficient and that only few companies had implemented the NFRD respecting its content and aim. The voluntary basis of the Directive (NFRD) was proved as useless to improve the lives of people affected by human rights violations or environmental crimes due to the Directive’s soft provisions, flexible transposition by EU member states, lack of specific requirements on respect for human rights and laxity of companies in its implementation.[4]

The aim of the NFRD is to improve the protection of human rights, to guarantee the social rights of workers and to preserve the environment through the publication of measures carried out by large companies. These companies are obliged to disclose not only economic information but non-financial information following both national and international legislation. The violation of Human Rights by big companies as well as the damage that they provoke to health or the environment are not always reported to local or national authorities and companies find the way to avoid any kind the responsibility. The NFRD cannot be seen as an end in itself but as a juridical provision to help European authorities and member states to monitor the actions of large companies along the entire supply chain to protect human rights and the environment. Unfortunately, still many European companies operating in third world countries – especially in Africa – consider themselves not responsible for the human rights violations committed by their subsidiaries or supplier companies.[5]

Limits of the current NFRD

Regarding the scope of the NFRD, companies limit their responsibility to the commercial activity carried out within the EU and exclude the responsibility of those companies supplying goods and services that operate along their supply chain. Companies have disengaged from their corporate responsibility due to the lack of enforcement or punitive measures of the Reporting Directive. Moreover, the laws of the EU member states have made the due diligence of companies insufficient to change their behaviour and commitment to human rights and the environment.

The Directive gives flexibility to member states to choose the model and criteria by which companies should disclose the non-financial information measures used to protect human rights and the environment. This laxity of the NFRD has led to companies to use the easiest and least demanding methodology of disclosing information. In most cases, they have abandoned the methodology proposed by the United Nations’ Guiding Principles reporting framework.[6]  The information disclosed by the companies has been of a general nature and it has not shown the risks inherent in their economic activity. In any case, companies have used this information as an excuse to disclaim any responsibility by stating that they have done everything the law requires them to do. The directive has lacked ambition in its demands and has left to the will of companies the information they wanted to disclose under the excuse of business secrecy.

The review undertaken by the European Commission regarding the NFRD should include more stringent provisions that are mandatory for all companies. Moreover, the mandatory measures should be accompanied by sanctions both for those that do not show accuracy in their information as well as those that have not carried out the necessary measures to prevent the risks of human rights violations and environmental damage.

Last but not less important, the current NFRD do not include any provision regarding the remedy of the damage caused by big companies and their subsidiaries. The reporting of activities to prevent human rights abuse or environmental disasters does not exclude companies of their obligation to repair the damage caused by their economic activity. Moreover, companies should be obliged to provide access to justice to those who have suffered the violation of their social and human rights; and local communities should be protected and receive compensation for the damages caused by the economic activity of the companies.

Conclusion

Once again; voluntary measures are a failure of the EU juridical system. European big companies keep developing their economic activities in Africa with impunity and there is no legal system that protect the population from their abuses. Sometimes for the shameless behavior of the big corporations, sometimes with the complicity of local authorities that accept ridiculous briberies for their silence.

The announced mandatory EU Due Diligence on human rights and environment is an opportunity to close those gaps created for softs EU legislation and should be included automatically in all sectorial legislation to protect all kind of Human rights abuses and environmental crimes. The UNGP is the proportional measure and criteria that must be included in the NFRD to assure a policy coherence among the different legislation that regulate the activity of the big corporations both in Europe and Africa.

The non-financial reporting Directive is not an instrument to discharge the legal responsibility of EU corporations in their economic activities but an instrument that must cover the whole economic activity of all corporations with potential impact on human rights and the environment, especially in those geographical areas where human life and environment are more vulnerable.  The NFRD should embed not only the risks of vulnerability of the population and environment but mitigate and redress the damages caused by companies.

José Luis Gutiérrez Aranda
AEFJN Policy Officer

[1] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0095&from=EN

[2] This directive amends the accounting directive 2013/34/EU https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/non-financial-reporting_en

[3] A Human Rights Review of the EU Non-Financial Reporting Directive https://corporatejustice.org/eccj_ccc_nfrd_report_2019_final_1.pdf

[4] REPORT on sustainable corporate governance https://www.europarl.europa.eu/doceo/document/A-9-2020-0240_EN.html

[5] Towards a mandatory EU system of due diligence for supply chains https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI%282020%29659299

[6] The UNGP reporting Framework is available at: https://www.ungpreporting.org/about-us/