Tell the whole story: Selective disclosure of adverse impacts creates liability risks

One of the reasons the EU introduced the EU Corporate Sustainability Reporting Directive (CSRD) was to ensure that companies recognize the principal actual or potential adverse impacts connected with their entire value chain, including their products and services. Once these impacts are pinpointed, companies are required to report how they identify and monitor their adverse impacts; report the actions they take to prevent, mitigate, remediate, or end their adverse impacts;[1] and report the result of their actions.[2]

The EU authorities do not expect companies to resolve the world’s problems; the authorities want companies to think about how their businesses impact society and the environment, address problems that arise, and disclose accurately. This example illustrates why it is important:

The world’s largest paint producer states in its 2023 sustainability report that it prevents pollution; develops, manufactures, and distributes products in an environmentally conscious manner; and minimizes its activities’ impact on the environment. It goes on to highlight the positive effects the company’s products have on the environment. Considering that paint may be the largest source of microplastic pollution (why this matters is explained here) and that paint particles can be highly toxic, it raises this question: why would a sustainability report not address such important issues?[3]

The reason for the omission does not matter. What matters is that this sustainability report could be perceived as concealing potential harm and greenwashing the company’s environmental track record. And thus, reputational, legal, and liability risk is born. The company’s leadership would be well advised to reconsider its approach to disclosure.

History shows that suppressing information about harmful products has rarely been successful. Sooner or later, it leads to controversy, loss of revenue, or payments for damages. In some cases, investors may sue companies that do not disclose risks appropriately. A company that consistently discloses the same adverse impacts year after year is also at risk. Its sustainability report could be seen as its own record of omission — an omission seen as action.

Adverse impacts are the cause of sustainability challenges — this is related to what economists call externalities — and so it is important that corporate reporting has a double-materiality perspective. The EU’s expectation is clear: sustainability reports must be complete, neutral, and accurate. When these three conditions are fulfilled, it shows that boards understand and are addressing adverse impacts in a comprehensive and science-based way.

[1]    Note that the CSRD is closely connected to the EU Corporate Sustainability Due Diligence Directive (CSDDD), which will requires a similar but more systematic approach to adverse impacts.

[2]    These expectations align with international standards, primarily those of the OECD and the UN. The CSRD allows companies to primarily focus on “principal adverse impacts” that are prioritized according to criteria.

[3]    Related keywords such as abrasion, pollution, and weathering only occur once in a different context; wear, tear, toxicity, micro, or nano (plastic) do not appear in the report. Similar omissions are observed in the 2023 impact report of the world’s largest sporting goods manufacturer; it does not mention microplastic pollution from the wear of shoe soles or from consumers washing clothing.