Want companies to report climate abuses? Set up a global watchdog

by Bethan Livesey | Policy at ShareAction
Tuesday, 27 April 2021 15:13 GMT

The City of London financial district can be seen as people walk along the south side of the River Thames, amid the coronavirus disease (COVID-19) outbreak in London, Britain, March 19, 2021. REUTERS/Henry Nicholls

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Now is the time for a centralised entity tasked with doing due diligence on companies and raising alerts to investors about human rights or environmental abuses

Bethan Livesey is Director of Policy at ShareAction, a charity that aims to improve corporate behaviour on environmental, social and governance issues 

The 21st century can be overwhelming.  The world we now live in is fast-paced, complex and it can sometimes feel like we are running headfirst towards environmental and social meltdown. 

Complexity is ratcheting up for companies too.  In the last few years, the bar has been raised in respect of companies’ impact on society and the environment.  This seems right, given the role companies can play in causing, or solving, the world’s problems. 

Regulations like the EU’s Corporate Sustainability Reporting Directive, announced on April 21, are setting a higher standard in terms of companies’ sustainability reporting.  And the Commission has confirmed that it will soon implement mandatory human rights and environmental due diligence for companies, too.

Institutional investors like pension funds are also facing more stringent requirements on sustainability.  For example, the UK Government is mandating extensive climate-related disclosures across the investment chain, from pension funds to companies.

This is positive for everyone who recognises that there is a link between the way money is invested, the way companies operate and the world around us.   But it makes things far more complex for companies and investors. And when things are complex, there is a risk of poor execution. 

We don't want a scenario in which companies are disclosing mountains of information about their human and environmental risks and impacts, but investors in these companies are under no obligation to do anything with this information.

The EU’s proposal for a “European Single Access Point” for company disclosures will help by collecting companies’ sustainability and financial information in a central place.  However, this won’t solve the issue of what investors in those companies are expected to do in response to that information.  And it won’t help those investors navigate complex information in a way that catalyses action.

The solution to this problem is to establish a “Council for Investor Due Diligence”: a centralised entity tasked with making sense of companies' disclosures, doing wider due diligence on companies, and then raising alerts to investors when it has concerns about a company’s human rights or environmental activities. 

This could be a global resource, given that much of finance is global, or it could have a national focus.  There are already councils in Norway and Sweden advising their sovereign funds on ethical issues.

The Council would not be another investor coalition that only attracts the most progressive investors.  Nor would it be a regulator with enforcement powers, although no doubt these things are needed.  

Independent of industry and staffed by experts, its role would be to raise the alarm where companies are out of line with environmental and social standards.  But crucially, investors holding  shares in these companies would be legally required to respond to these alerts by setting out what action, if any, they will take.  This would apply whether or not the investor cares one bit about the environment or human rights.

Investor action could include engaging with the company to establish what it will do to address the issue or, in cases where it is clear the company is not on top of the issue, choosing to divest now or within a set timeframe.  Of course, the investor may decide not to act at all.  But the requirement to explain its reasoning would be a powerful motivator for investors to take companies’ environmental and human rights breaches seriously.

After all, why would we, as a global society, be happy for investors to do nothing in the face of evidence of human rights abuses or serious environmental damage for the sake of a bit more profit?

When the data and warnings are easily available, it would be interesting to see what our expectations of investors would be. And whether they can live up to them.