The Politics of Corporate Accountability and Upward Regulatory Harmonization: The Case of the EU Non-Financial Disclosure Directive
The paper is motivated by the following puzzle: despite very favorable circumstances, the Directive was weakened significantly. In the heated negotiations, some countries (particularly France) and interest groups supported the Directive while others (particularly Germany) fought hard against it. While the final text of the Directive has a number of innovative and experimentalist elements, its scope was reduced so that it will only apply to 1/3 as a many companies as the Commissions’ original proposal, which had already fallen far short of demands by trade unions, NGOs and many experts. My analysis suggests that causal complexity was at work. Varieties of Capitalism – the dominant approach in comparative political economy of the past fifteen years – contributes nothing towards an explanation: despite its status as a quintessential LME, the UK supported the Directive, while Germany fiercely opposed it. The positions of the UK and Germany are thus exactly the opposite of what VofC would have us expect.
Firms’ Environmental, Social, and Governance performance is only weakly correlated with support: sustainable companies are somewhat more likely to support binding regulation than less sustainable, but there are many high-performing businesses that have no interest in upward regulatory harmonization. Countries with a large number of Medium-sized enterprises tend to oppose the Directive. Support has come from civil society activists, socially responsible investors, some social-democratic governments, and leading figures in EU institutions. But one of the most important source of support is domestic regulation: countries which already mandate non-financial reporting for companies in the private sector have high reporting rates and supportive business associations. The latter's importance is hard to underestimate, given that this arena is governed by the dynamics of ‘quiet politics.’ Business interests are main reason why it is difficult to regulate CSR-related issues such as non-financial reporting: non-regulation remains the equilibrium and business’s preferred strategy.