I am, of course, referring to the so-called mixed approach, which I have already written about twice: in June and in July. Let me quote the proposed provision of ESRS-40a 1 in full. The odd name, ESRS-40a, comes from Article 40a of the Accounting Directive, which sets out the reporting obligation for large non-European groups that do business in the EU on a sufficiently large scale.
“28. (…) for impacts other than those that are climate-related, the undertaking may limit the reported information to:
(a) impacts that arise from products and services that were or can be reasonably assumed to be sold or provided in the EU market, including by third parties (downstream value chain actors such as distributors and traders); and
(b) impacts of the undertaking’s European Union activities, if not already included in 28 (a),
collectively defined as the undertaking’s EU-related impacts.”
What does this mean in practice? Imagine a non-European group that owns a factory in a country outside the EU. The products made there are later sold both in the Union and in other countries. Let us assume it is a country with relatively low standards of labour rights and environmental protection. The company could claim in its report that the products destined for the EU are made on weekdays between 9 a.m. and 5 p.m., on production lines operated by legally employed workers who are paid adequate wages and whose labour rights are fully respected. At night, meanwhile, the lines are run by workers of uncertain legal status whose labour rights are not respected, and they make only products sold to third countries. The pollution emitted by the factory would, of course, also relate only to products destined for non-European markets. Information on the negative impacts would not appear in the company’s report at all!
A mixed approach is a solution that completely undermines the balance between the reporting requirements for European and non-European companies. Yet the introduction of Article 40a was intended precisely to maintain that balance. If European companies are to report transparently on their impacts on people and the environment, then their non-European competitors should be required to maintain the same level of transparency. That was the purpose of the provision introduced by the Parliament and the Council during the negotiations on the CSRD.
The mixed approach was not EFRAG’s idea; it was proposed by the European Commission. Many members of the SR TEG and the SR Board opposed it. Unfortunately, the mixed approach has made it into the document now under consultation until 31 October. This is the last moment to object to this attempt to favour companies from outside the EU.
To sum up:
- Who is harmed by the mixed approach? All European companies, whether they report on a mandatory or a voluntary basis.
- Who benefits from the mixed approach? The non-European competitors of our businesses, and most of all those that really do have something to hide.
So what can you do? First of all, take part in the consultation on the draft ESRS-40a standard, which is available on the EFRAG website. At MATERIALITY we have already prepared and submitted our response, which you can find here. Then write to or call the organisation your company belongs to, whether SEG, BCC, KIG or any other chamber or association, draw its attention to the problem and urge it to speak up.
The title of today’s newsletter sounds alarming, but I chose it deliberately. I do not believe the idea of the mixed approach could have originated in Europe. I do believe, however, that a strong voice from Polish and European business can restore equal and fair conditions of competition in the market 😊
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