CSRD: The need to engage with workers...

Introduction:

The Corporate Sustainability Reporting Directive (CSRD) is an innovative piece of European Union legislation that introduces the concept of “double materiality” reporting for companies in scope. It is estimated when by the time it is fully rolled-out, around 50,000 undertakings based in Europe will be covered.

“Double materiality” refers to the potential risks and impacts to an undertaking from its approach to “sustainability”, which cover environmental policies, human rights policies, and employment rights policies. The first “material” impact is the effect on the undertakings business performance. The second “material” impact is how they effect the external environment, the communities in which the undertaking operates, and the undertakings workforce, both in its own operations and in its supply chain. Hence the phrase “double materiality”.

The CSRD amends several existing EU Directives: Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance)

The CSRD builds on the 2014 Non Financial Reporting Directive, but the 2014 Directive did not have the impact that EU assumed it would, hence the decision to bring forward the more exacting CSRD.

From what I understand, undertakings are expected to report on something like 2,000 data points. 

The Directive must be transposed into national laws and, like all Directives, how it is transposed will vary from country to country. Some countries will stick to the letter of the Directive. Others may add to it. When it comes to the issue of involving employees and/or their representatives in the due diligence process, individual national laws will be determinative. As of the time of writing, 17 Member States still have not transposed the Directive. The due date was July 6, 2024.

The penalties for breach of the Directive will be set out in national law and may not be that onerous. However, the way undertakings set themselves up to deal with this Directive will set a precedent for the Corporate Sustainability Due Diligence Directive, which will take effect over the coming years, and which carry penalties op up to 5% of global turnover. As an indication of how complex this matter is see the following from the European Securities and Markets Authority (ESMA) here:

ESMA notes that, as a general rule, the ESRS do not envisage cases in which the lack of data justifies the omission of disclosure of material information. With regards to the disclosures on value chain, issuers should carefully assess the transitional provisions set out in paragraphs 132-134 of ESRS 1 for the first three years for reporting, most notably: (i) issuers can explain why not all the information regarding upstream and downstream value chain is available and how it plans to fill the gaps; (ii) issuers can limit the information on policies, actions and targets relating to value chains to information available in-house or from publicly available sources; and (iii) issuers are not required to consider value-chain information in metrics disclosures (including entity-specific ones, see par. 91 of IG 2), except for metrics derived from EU law (e.g., Scope 3 GHG emissions).

Workers’ Representatives

Undertakings will need to take advice as to whether they are in scope or not. If they are in scope, when do they come into scope? Do undertakings with operations in multiple jurisdictions have to report in each jurisdiction or can they do so centrally? How does this law apply to undertakings headquartered in “third countries”, countries that are not members of the EU? When do such third-country undertakings come into scope.

As this is very much “new law” there are, as yet, no court judgement or precedents that can act as guidance. For now, at best, all the lawyers will be able to do is to offer an informed opinion. Of course, we will need to see what the legislation in all EU Member States has to say about the involvement of workers’ representatives before we can get a full picture of the extent of management obligations in this regard. 

One interpretation is that if an undertaking is in scope, then there will be an obligation to engage with workers’ representatives at some level or other. The precedent here would be the Collective Redundancies Directive which requires consultations with workers’ representatives when collective redundancies are being contemplated. National law must make provision for the selection/election of such representatives if there are none already in place. However, as we comment below, we think the CSRD can be read as going further than Collective Redundancies and makes it mandatory for there to be workers’ representatives in place. 

However, an alternative interpretation, based on ESRS Disclosure Requirement S1-2, is that management may engage with its workforce through non-representative methods, such as opinion surveys or town halls.

A third possibility is that management simply reports that it has no processes for engaging with its workforce, but it seems to us unlikely that any company would want to go down this road. It also needs to be kept in mind that management is obliged to engage with workers’ representatives on the totality of what needs to be reported under CSRD, and not just on workplace issues. Though it does seem to us that it is workplace issues that will primarily be of interest to representatives. 

To repeat, we are in unexplored territory here. No maps. For a comprehensive trade union view, see here. 

Involvement of workers’ representatives in due diligence process

What the Directive has to say about engagement with workers’ representatives, both in the Recitals to the Directive and in the main text of the Directive can be read in full in Appendix 1 to this paper.

What also need to be considered are the “Delegated Regulations” which requires engagement with workers’ representatives in an undertaking’s value chain. These can be read in full in Appendix 2 to this paper.

The Directive

To deal with the Directive first. The key provisions are as follows:

Recital 52

Member States should ensure that sustainability reporting is carried out in compliance with workers’ rights to information and consultation. The management of the undertaking should therefore inform workers’ representatives at the appropriate level and discuss with them relevant information and the means of obtaining and verifying sustainability information. This implies for the purpose of this amending Directive the establishment of dialogue and exchange of views between workers’ representatives and central management or any other level of management that could be more appropriate, at such times, in such fashion and with such content as would enable workers’ representatives to express their opinion. Their opinion should be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Article 19a 

Sustainability reporting

5.  The management of the undertaking shall inform the workers’ representatives at the appropriate level and discuss with them the relevant information and the means of obtaining and verifying sustainability information. The workers’ representatives’ opinion shall be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Article 29a

Consolidated sustainability reporting

6.  The management of the parent undertaking shall inform the workers’ representatives at the appropriate level and discuss with them the relevant information and the means of obtaining and verifying sustainability information. The workers’ representatives’ opinion shall be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Article 29b

Sustainability reporting standards

2. (b), specify the information that undertakings are to disclose about the following social and human rights factors:

1. equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity.
2. working conditions, including secure employment, working time, adequate wages, social dialogue, freedom of association, existence of works councils, collective bargaining, including the proportion of workers covered by collective agreements, the information, consultation and participation rights of workers, work-life balance, and health and safety.
3. respect for the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on the Rights of Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the fundamental conventions of the International Labour Organization, the European Convention for the protection of Human Rights and Fundamental Freedoms, the European Social Charter, and the Charter of Fundamental Rights of the European Union.

See the details on what needs to be reported on EFRAG (sharefile.com)

The first point to note is that management “shall” inform workers’ representatives. It is our understanding that the word “shall” means “must” in EU legal terms. This implies that there “must” be workers representatives in place to be informed. How such representatives are to be put in place is left to national law and/or practice. 

Interestingly, neither the 2009 EWC Directive nor the 2002 Information and Consultation Framework Directive require the establishments of EWCs nor of information and consultation fora unless either management or employees, or their representatives, trigger the process and ask for the establishment of an EWC of an Information and Consultation Forum. 

Does the use of the word “shall” in CSRD imply a break with this voluntarist approach and make the election/selection of representatives mandatory? If so, it could have far-reaching consequences for employees relations across Europe. The CSRD was written by DG Finance, as CSRD is a development on the 2014 Non Financial Reporting Directive. Were those who drafted it aware of the potential unintended consequences of their wording? 

When it comes to “consolidated sustainability reporting” by parent companies might it make sense to engage with EWCs? The words in the Directive that management shall inform workers’ representatives “at the appropriate level” opens the door to EWC involvement. Reporting to EWCs could avoid having to report to multiple employee representative bodies in multiple countries and would also have the benefit of avoiding having to elect/select representatives in multiple countries where none already exist. 

However, when we consider that the proposed revisions to the EWC Directive could see EWC being able to engage experts and lawyers funded by the undertaking, this could complicate the process. But engagement with CSRD issues is not a core EWC competence mentioned in the Directive. EWCs cannot demand to be informed and consulted over CSRD issues.

This offers the possibility that management could agree to inform and consult the EWC on CSRD issues on a voluntary basis, outside the core framework of the EWC Directive. An addendum to the main agreement could be drafted to cover CSRD information and consultation, making it clear that there would be no expert involvement in the process and that would fall outside the normal EWC disputes procedure. 

If this formula was not acceptable to the EWC, then management could decline to involve it in the process. But, as stated above, until we see all the transposing laws in all 27 Member States, it will be impossible to make a fully informed judgement as to how best to proceed. 

Supply Chain Worker Representatives 

ANNEX I to Commission Delegated Regulation (EU) 2023/2772 supplementing Directive 2013/34/EU detailing European sustainability reporting standards (ESRS) sets out the obligation on the management of undertakings in scope to engage with the representatives of workers in their supply chain. The details can be read in Appendix 2. The key provisions are as follows: 

The undertaking shall disclose its general processes for engaging with value chain workers and their representatives about actual and potential impacts on them.

The objective of this Disclosure Requirement is to enable an understanding of whether and how the undertaking engages, as part of its ongoing due diligence process, with value chain workers and their legitimate representatives, or with credible proxies, about material actual and potential positive and/or negative impacts that do or are likely to affect them, and whether and how perspectives of value chain workers are taken into account in the decision-making processes of the undertaking.

Whoever wrote this does not seem to have given any great deal of thought to the practicalities of how this is to be done. Most large undertaking, and many smaller ones, have thousands, of suppliers, who in turn have their own suppliers. Taken in total, say a large supermarket chain like Carrefour, between direct suppliers and suppliers to suppliers, could have a value chain of several hundred thousand individual undertakings. 

Go into a Carrefour hypermarket and you will probably find a Philips television. Is Carrefour supposed to engage with the employees’ representatives in Philips? That is what the Regulation we quote above would appear to say. And is Philips supposed to engage with employees representatives in Carrefour because is Carrefour not part of Philips’s “value chain” as opposed to its “supply chain”? 

As we noted earlier, it is estimated that as many as 50,000 undertakings based in Europe will eventually come into the scope of the CSRD. Are all of these 50,000 undertakings going to be criss-crossing each other as they engage with workers’ representatives in their value chains? How many undertakings are there that sell Philips’s televisions? Are they all going to have to talk to workers’ representatives in Philips?

We have no doubt that what was intended here was the need for undertakings to engage with workers’ representatives in, say, the Bangladesh textile industry or coca workers in West Africa. Whatever was the intention, that is not what the Regulations says. It attempts to cast a very wide net. A net that is so wide it is impossible to cast.

We strongly believe that this Regulation needs to be revisited, and fast before chaos ensues. As we noted earlier, the penalties for breach of the CSRD may not be severe. But how the CSRD is implemented by undertakings will set a precedent for the CSDDD. In the meantime, one pragmatic solution might be for undertakings to ask their suppliers for a statement that they engage with representatives of their workers on CSRD relevant issues. 

For example, an undertaking might say: Where an undertaking in our value chain certifies to us that they engage with their employees and/or their representatives in a manner consistent with CSRD then we take such certification as meeting our value chain obligations in this regard.

But what is there are no workers’ representatives in undertakings outside of Europe? European law cannot oblige third countries to make provisions for the election/selection of workers’ representatives. What about China? How are European undertakings supposed to engage with workers’ representatives in this country, the source of so much material and finished goods?

The idea that any major multinational undertaking could or should engage with the worker’s representatives in the thousands, if not hundred of thousands, of suppliers in its value chain is simply not practical.

Some Final Thoughts

It needs to be remembered that the CSRD is a reporting Directive, requiring undertakings to put a great deal of data into the public domain. On the other hand, the CSDDD will require undertakings to take action to prevent and correct abuses. As we said earlier, there are around 50,000 undertakings within the scope of the CSRD, while the CSDDD will only cover about 5,000. 

Nonetheless, the data that undertakings are required to report under CSRD will be used by global unions, activists, and NGOs to take cases under national laws, such as the German Supply Chain Act, or the French Duty of Vigilance law. The data will also be used to takes cases to National Contact Points under the OECD’s Multinational Guidelines. Not to forget the USMCA. 

If they are not already doing so, member companies need to start thinking now about how to manage the challenges that making public the data that CSRD requires may bring. 

It needs to be kept in mind that undertakings only need to consult on relevant risks and impacts. That can take a restrictive view of relevant risks and impacts in their materiality assessment, thereby limiting the number of issues they need to consult on. 

How you go about undertaking materiality assessments is outside the scope of our expertise, which is about informing and consulting with employees’ representatives. Management will need to take advice on materiality assessments to ensure that they are in compliance with appropriate national laws. 

 Tom Hayes

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Appendix 1: The Directive

The Recitals

(The introductory text which sets out the reasons for the Directive and its individual provisions)

Whereas: 

(9) If undertakings carried out better sustainability reporting, the ultimate beneficiaries would be individual citizens and savers, including trade unions and workers’ representatives who would be adequately informed and therefore able to better engage in social dialogue.

(14) The lack of sustainability information provided by undertakings also limits the ability of stakeholders, including civil society actors, trade unions and workers’ representatives, to enter into dialogue with undertakings on sustainability matters.

(49), Sustainability reporting standards should specify the information that undertakings should disclose on social factors, including working conditions, social partner involvement, collective bargaining, equality, non-discrimination, diversity and inclusion, and human rights. Such information should cover the impacts of the undertaking on people, including workers, and on human health. The information that undertakings disclose about human rights should include information about forced labour and child labour in their value chains where relevant. Sustainability reporting requirements concerning forced labour should not free public authorities of their responsibility to address, through trade policy and diplomatic means, the import of goods produced as a result of human rights abuses, including forced labour. Undertakings should also be able to report on possible risks and trends regarding employment and incomes. 

Sustainability reporting standards that address social factors should specify the information that undertakings should disclose with regard to the principles of the European Pillar of Social Rights that are relevant to businesses, including equal opportunities for all and working conditions. The Action Plan on the European Pillar of Social Rights, adopted by the Commission on 4 March 2021, calls for stronger requirements on undertakings to report on social issues. The sustainability reporting standards should also specify the information that undertakings should disclose with regard to the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on the Rights of Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the UN Convention on the Rights of the Child, the ILO Declaration on Fundamental Principles and Rights at Work, the fundamental conventions of the ILO, the European Convention for the Protection of Human Rights and Fundamental Freedoms, the European Social Charter, and the Charter of Fundamental Rights of the European Union. Reporting carried out on social factors, as well as on environmental and governance factors, should be proportionate to the scope and the goals of this amending Directive. Sustainability reporting standards that address gender equality and equal pay for work of equal value should specify, amongst other things, information to be reported about the gender pay gap, taking account of other relevant Union law. Sustainability reporting standards that address employment and inclusion of people with disabilities should specify, amongst other things, information to be reported about accessibility measures taken by the undertaking.

Sustainability reporting standards that address training and skills development should specify, amongst other things, information to be reported about the proportion and breakdown of workers participating in training. Sustainability reporting standards that address collective bargaining should specify, amongst other things, information to be disclosed about the existence of works councils as well as the existence of collective agreements and the proportion of workers covered by such agreements. Sustainability reporting standards that address participation of workers should specify, amongst other things, information to be disclosed about the participation of workers in administrative and supervisory boards. Sustainability reporting standards that address diversity should specify, amongst other things, information to be reported on gender diversity at top management and the number of members of the under-represented sex on their boards.

(52), Member States should ensure that sustainability reporting is carried out in compliance with workers’ rights to information and consultation. The management of the undertaking should therefore inform workers’ representatives at the appropriate level and discuss with them relevant information and the means of obtaining and verifying sustainability information. This implies for the purpose of this amending Directive the establishment of dialogue and exchange of views between workers’ representatives and central management or any other level of management that could be more appropriate, at such times, in such fashion and with such content as would enable workers’ representatives to express their opinion. Their opinion should be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Legally Binding Provisions

Article 19a

Sustainability reporting

5.   The management of the undertaking shall inform the workers’ representatives at the appropriate level and discuss with them the relevant information and the means of obtaining and verifying sustainability information. The workers’ representatives’ opinion shall be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Article 29a

Consolidated sustainability reporting

6.   The management of the parent undertaking shall inform the workers’ representatives at the appropriate level and discuss with them the relevant information and the means of obtaining and verifying sustainability information. The workers’ representatives’ opinion shall be communicated, where applicable, to the relevant administrative, management or supervisory bodies.

Article 29b

Sustainability reporting standards

2 (b), specify the information that undertakings are to disclose about the following social and human rights factors:

(i), equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity;

(ii), working conditions, including secure employment, working time, adequate wages, social dialogue, freedom of association, existence of works councils, collective bargaining, including the proportion of workers covered by collective agreements, the information, consultation and participation rights of workers, work-life balance, and health and safety;

(iii), respect for the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on the Rights of Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the fundamental conventions of the International Labour Organization, the European Convention for the protection of Human Rights and Fundamental Freedoms, the European Social Charter, and the Charter of Fundamental Rights of the European Union;

Appendix 2: The Regulations

Disclosure Requirement S2-2 – Processes for engaging with value chain workers about impacts20

20. The undertaking shall disclose its general processes for engaging with value chain workers and their representatives about actual and potential impacts on them.

21. The objective of this Disclosure Requirement is to enable an understanding of whether and how the undertaking engages, as part of its ongoing due diligence process, with value chain workers and their legitimate representatives, or with credible proxies, about material actual and potential positive and/or negative impacts that do or are likely to affect them, and whether and how perspectives of value chain workers are taken into account in the decision-making processes of the undertaking.

22. The undertaking shall disclose whether and how the perspectives of value chain workers inform its decisions or activities aimed at managing the actual and potential impacts on value chain workers. This shall include, where relevant, an explanation of:

1. whether engagement occurs with value chain workers or their legitimate representatives directly, or with credible proxies that have insight into their situation;

2. the stage(s) at which engagement occurs, the type of engagement, and the frequency of the engagement;
3. the function and the most senior role within the undertaking that has operational responsibility for ensuring that this engagement happens, and that the results inform the undertaking’s approach;
4. where applicable, Global Framework Agreements or for agreements that the undertaking has with global union federations related to respect of human rights of workers in the value chain, including their right to bargain collectively, and including an explanation of how the agreement enables the undertaking to gain insight into those workers’ perspectives; and
5. where applicable, how the undertaking assesses the effectiveness of its engagement with workers in the value chain, including, where relevant, any agreements or outcomes that result.

23. Where applicable, the undertaking shall disclose the steps it takes to gain insight into the perspectives of workers that may be particularly vulnerable to impacts and/or marginalised (for example, women workers, migrant workers, workers with disabilities).

24. If the undertaking cannot disclose the above required information because it has not adopted a general process to engage with workers in the value chain, it shall disclose this to be the case. It may disclose a timeframe in which it aims to have such a process in place.