Howitt: If the EU wants to prosper, it must stand up for sustainable business

‍"When we talk about business sustainability, we're not talking about animals or green in the abstract, we're talking about whether a particular company with its particular business model will exist in five, ten or fifteen years. Show me any owner or manager who doesn't want their company to be around for the long term. That's what corporate responsibility is all about," says Richard Howitt, a pioneer of European standards for responsible business and non-financial reporting.

As a former MEP for Great Britain, he has more than two decades of service in the European Parliament. For many years he was rapporteur on issues relating to how corporations report on the impact of their activities, including social responsibility.

On the occasion of the Bold Future 2024 conference on the sustainable future of the Czech Republic, where he was one of the keynote speakers, we discussed the historical roots, practical aspects and impacts of a sustainable approach to business and responsibility for the environment and society.

Howitt shared his insights on how the attitude of entrepreneurs towards monitoring the social impact of business has changed in less than a quarter of a century. And there was an assessment of why the activities of the Frank Bold Expert Group on Responsible Business resonate positively in Brussels.

For many people in the Czech Republic, it is difficult to translate concepts like ESG and responsible business from abstract entities into the material world and fill them with real meaning. How would you approach this?

Until about 50 years ago, businesses were seen as responsible co-creators of the world. Only since the 1960s has the economy in the United States suddenly become truly profit-driven, with no regard for social and environmental aspects.

So it is only relatively recently that the idea that companies are only profit-making entities and that all their responsibilities are somehow elsewhere. Such a notion is not based on European tradition, nor is it part of our European history. We must realise that corporate responsibility is a very, very old concept that a few people have forgotten, but which has always been part of the idea of business and what it does.

Anyway, when we talk about ESG and corporate responsibility, we have to start with climate change. And let us be clear that this is not a theoretical concept either. The recent extreme weather events around the world: droughts, floods, hurricanes, are simply no coincidence. Anyone suggesting today that man-made climate change does not exist is simply wrong. The evidence is completely irrefutable. Climate change is happening. The question at the moment is whether we can limit it to the Paris target of no more than a 1.5 degree temperature rise from pre-industrial times.

But even then, there are many changes ahead in terms of sea levels, rising temperatures, where people live and will be able to continue to live, weather conditions and even extreme heat in workplaces. All this will be a daily reality of our future lives and certainly of the lives of our children and grandchildren.

Our actions have consequences and we are able to avoid the worst. It is up to us to adapt and cope with what we can no longer prevent. But we must not stick our heads in the sand and ignore the changes around us because it will simply get worse and it is irresponsible.

Perhaps it is because the burden of responsibility is so great that people feel powerless and afraid that they cannot change anything?

I hear this argument a lot, and I completely understand the sentiment. Likewise, in every country I visit, I hear that they have missed their opportunity, that they are falling behind or that they have missed the train. The good news is that we are not alone in this. That is why it is so important to act together - at community level, at business level, at national level and, for that matter, at European level. But it all starts with individual and corporate responsibility.

Businesses are inseparably linked to the local communities where their employees live. And good relationships with employees and the wider community are entirely compatible with good business, making decent profits, controlling costs and good financial management. These are not two sides that are opposed to each other.

And I think the basis of responsible business is actually improving long-term relationships, employee morale and productivity, expressing trust in them, avoiding conflict with local communities, understanding that energy savings don't just help the climate, but actually mean lower bills for the business. And equally important, understanding that these things are intricately interconnected. It's not easy, it's not straightforward, and that's why we have to work hard at it.

When we talk about business sustainability, we are not talking about animals or green in the abstract, we are talking about whether a particular company with its particular business model will exist in five, ten or fifteen years. Show me any owner or manager who doesn't want their company to be around for the long term. That's what business responsibility is all about.

If I were to be the devil's advocate, I would ask why do we need a strong European bureaucracy and legislation to do this?

I don't want businesses to see reporting on their social and environmental impacts as a necessary evil and an automatic box-ticking exercise to please the regulator. I want them to see impact monitoring as something that actually raises standards for business. Maybe slowly, incrementally and imperfectly, but in a way that actually creates a better world for life and business. That is the real spirit of European legislation on responsible business.

I understand that businesses will always resist new obligations to some extent. This happens everywhere, not just in the Czech Republic, but in every country.

My appeal to Czech entrepreneurs is that they should not think that it stops at simply following the rules and filling in the right forms. I would prefer it if they did not fill in everything correctly, but at the same time made a good faith effort to do so.

They should look at their objectives for the transition to a low carbon economy and at social justice and fairness in the company's relationships with its employees and wider communities. They should identify their biggest positive and negative impacts, and then advocate for improvements.

However, it is essential that they understand that all of this is still intrinsically linked to the value creation and profitability of the business itself. So we are about a bit more good business, not business doing good. And that is actually in the long-term interest of all of us.

So in other words, they shouldn't worry about what they're going to change on a global scale, but focus on the home field and their realistic options?   

Yes, but with the knowledge that we live in a world where no single country can cope with climate change. Global warming would defeat every single country. The only way to influence it is through global cooperation between countries and between all of us.

And I think this is increasingly true of the social crisis, not just the environmental one. The growing discontent and alienation of the population is not confined to one country. It is leading to the rise of extremism that many of us fear. A lost generation of young people is growing up, losing out on the prosperity and benefits that previous generations considered to be their right. Business and commerce are then losing public support, and that is very worrying from a business and social point of view.

Whether it is climate or social breakdown, they cannot be solved in one country alone. I therefore see Europe as a unique stepping stone on a common path.

But it is Europe without the United Kingdom. How does that make you feel?

I despair that my own country has decided to leave the EU and is now suffering the consequences. It is a great lesson for my Czech friends and colleagues: use Europe because it is your common ground. In this sense, Europe, in pursuing the green agenda and ensuring a European social model of justice, serves the interests of everyone, business interests as much as anyone else's.

I believe that if people understand that European legislation on responsible business aims for a fairer society, a solution to environmental problems and a vision of a long-term future as well as short-term profitability, they can work together to achieve it. I think these are reasonable goals for anyone who wants to make money not only for tomorrow, but also for the day after tomorrow and the day after that.

So let's have a sensible and mature discussion together in Europe about what sustainability means for business: it's about respecting people outside the business, but it's also about respecting people inside the business. But it is also about recognising that people in business are moral beings.

How did you find yourself as a speaker at the Czech sustainability conference Bold Future 2024?

I have been working with Frank Bold for a very long time, in fact I have known Filip Gregor, Head of Corporate Responsibility and Chief ESG Expert at Frank Bold, for over fifteen years. In the past decade I have been part of the Frank Bold Purpose of the Corporation project focused on corporate social responsibility. I have also drawn on what I have learned through Frank Bold about responsible corporate governance in the context of ESG and sustainability challenges as a European legislator. That's why today I'm happy to continue working with Frank Bold not only on our international sustainability podcast Frankly Speaking.

Do you see the impact of this activity on the shape of the ESG reporting rules?

In fact, I cannot begin to describe the extraordinary influence Frank Bold has on decision-making in the European Union. This is also due to the fact that it is a law firm. As such, it is perceived differently in Brussels. It is not an NGO or an activist, but a law firm that seeks to provide research and support and to promote what is effective and meaningful in the area of sustainability. Its knowledge and contacts from business and the wider stakeholder community have enabled Frank Bold to become a key player in European decision-making.

I would argue that it was Frank Bold's regular research on the Non-Financial Sustainability Reporting Directive that laid the basis for the revision of the CSRD.

The fact that Frank Bold is not an external lobbyist in the European Union, but is a member of the European Financial Reporting Advisory Group (EFRAG), the EU organisation that recommends European standards for sustainability reporting, and Filip Gregor is a member of the steering committee that sets these standards, is a huge honour and testament to the reputation that Frank Bold has in Brussels.

Let's be a bit more specific in relation to non-financial reporting, what can a company learn about itself from a well-done ESG report?

Take forced labour, for example. Nobody thinks that forcing people to work is a good thing. It used to be called slavery and we thought we had abolished it. However, we are now faced with so-called modern slavery, and not just somewhere far away in the world. Even in our own countries, among the criminal communities, we have people who are forced to work without pay and are in danger of their life or health if they do not comply.

No company wants to have someone like that in its supply chain and benefit from forced labour. Yet it is only in the last five or six years that international regulations on modern slavery have really opened the eyes of people in companies and made them systematically prevent forced labour in supply chains.

Child labour is a similarly thorny issue. Has anything changed recently?

Actually, a lot has changed. It is very easy to say that you are against child labour. At the same time, we know that child labour is the norm in many countries around the world and that it is children who support their families, not the other way around.

In the last decade or so, we have begun to understand that not all child labour is bad, but that there are categories of exploitative child labour, where children are exposed to long hours that prevent them from going to school, or exposed to dangerous chemicals or other workplace hazards, which is fundamentally wrong.

To illustrate what child labour looks like in a positive light: even in the Czech Republic or in the UK there are young people delivering newspapers or working in shops. And we consider this to be good for our children and their upbringing. That is a different and positive story. But what about the worrying cases described above?

Although I am fundamentally opposed to the abuse of child labour and have long fought against it, I have learned that we have to accept its existence to some extent. We have to understand that in many countries, if you take children out of employment, they can be forced into prostitution, drug trafficking and other illegal activities, because without their work, families have no income. By taking away children's jobs, you simply take away their income. It sounds morally dubious, but it is true.

Conscious businesses today are therefore committed to ensuring that the children in their supply chain are not just thrown out of work without a second thought, but that their families are provided with livelihoods and assistance so that their children can be educated. Yes, it may mean that it will take longer for children to be able to stop working, but it is actually in their own interests.

Ten years ago, we would not have had this debate at all. We would have just said that child labour is bad and pretended it wasn't happening. Today, we are trying to influence and manage the situation, in the best interests of children and in the best interests of businesses.

Do companies see both sides - environmental and social - as equally important?

I have been involved in ESG for 25 years, I was at the origin of the first European sustainability reporting rules, so I have a long memory. I remember businesses saying, ' We can't handle environmental impact reporting because it's too new, too uncertain, too ambiguous, so it's generally unfair to ask us to do it'.

Yes, it's difficult. Reporting indirect emissions in Scope 3 is really not easy. But ask businesses today. This year's Frank Bold analysis, which summarises findings from ESG reports of 100 major European companies in sectors with high environmental and social impact, shows that 80% of companies reported Scope 3 indirect emissions from suppliers and the supply chain. It is as if they are saying, "yes, greenhouse gas emissions, we can calculate that, no problem." It only took a couple of years and in many cases businesses completely changed their attitude towards tracking their environmental impact.   

And what are we hearing now? That "social conditions and impacts are uncertain, ambiguous and vague. We can monitor the environmental impacts, but we cannot manage the social impacts". Add five years and I guarantee you that companies will find tracking social impacts feasible and useful too.

So are we waiting for a time when companies will stop distinguishing between the three dimensions of E(nvironmental) S(ocial) G(overnance), but take monitoring as a whole?

Yes, all ESG dimensions are fundamentally interrelated. We cannot fight climate change without maintaining public support for the fight. We help companies financially in their transition from energy-intensive production to low-carbon production and then they do not have to make redundancies. Social and environmental issues go hand in hand.

Similarly, look at the victims of climate change. People living in lower-lying, island states are by far the most likely to be victims of rising sea levels. Billions of people will be forced to migrate on the current trajectory of climate change because they will not be able to live in the places where they now have their homes.

And if people are worried about immigration today, and they are worried not only in the Czech Republic but all over Europe and the world, they should understand that climate will be the biggest source of mass migration in the years to come if we don't deal with its impacts today. So whether it is the impact on our local population or on the world population, climate and social impacts are quite inextricably linked.

At the same time, I feel the need to make a case for the G(overnance) S(ocial) dimension and why it is important in the sustainability reporting rules, CSRD. If sustainability in a company is seen as an unwanted but necessary add-on, something that comes from outside, an obligation to do something because the regulator requires it, then ESG will never work and will never benefit such a company.

Only when companies really take the monitoring of environmental and social impacts at face value and understand that it is essential not only for people outside the company but also for the future of the company itself that the transition to a low-carbon and socially inclusive business model will mean a change in the nature of the company, only then do companies have a chance of being successful in those 5, 10 or 15 years.

G(overnance), management at the top level ensures that everyone in a particular company truly understands the importance of ongoing and upcoming changes and participates in them not because they fear repercussions, but because they know it is good for business.