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Laws Can Drive Responsible Corporate Reporting But Only People Can Drive Responsible Corporate Behaviour

24/04/2014 11:11 BST | Updated 23/06/2014 10:59 BST

European companies will now have to report to shareholders on their environmental, social and ethical behaviour, following a ruling from the European Parliament last week. The new law will force the 6,000-plus companies listed on European exchanges to produce non-financial reports, although it does not prescribe exactly what information needs to be disclosed or in what format.

It's the result of tireless work over more than a decade from politicians, campaigners and ethical investors, who hope the legislation will drive company and investor behaviour towards better corporate citizenship. But will it?

In companies where Corporate Social Responsibility, or CSR, isn't already high on the agenda, it will certainly draw the attention of the CEO and board to these issues. It will give ethical investors better access to the information they want to base investment decisions on. And although there are no strict rules about the content and format of the reports, it is likely to fuel a move towards greater consistency in reporting practices, which will reduce investor and public reliance on unaudited surveys and subjective rankings.

All this is great, and those who have worked determinedly on this deserve congratulation. It's an important step. But it won't be enough, for two reasons.

First, although the practice of non-financial reporting will become mandatory, the content will still be largely voluntary. Companies will highlight areas where they're doing well and remain silent where they're not. Unless we're asking the direct questions - Do your employees get a living wage? How many are on zero hours contracts? How safe are the factories your products are made in? - we can't expect to get truly revelatory information.

Second, and most crucially, we already know that reporting doesn't stop unethical practices. Every single one of the supermarkets that sold us horsemeat as beef already has a CSR report or webpages, almost all referring to sourcing policies. The implementation of those policies and the compilation of those reports did nothing to highlight to the supermarkets, let alone anyone else, what was going on.

The truth is that while profit is king, the incentive to push the boundaries of acceptable corporate behaviour will remain. No new reporting law is going to change the priorities of investors who don't already care about a company's ethical practices. The disappointingly large majority of investors who are currently driven by short term gains will remain so. As a result, the disappointingly large number of businesses that see CSR only as a nice-to-have will maintain business-as-usual.

My conclusion is that it's up to us. We need to support and encourage NGOs and investigative journalists to continue to provide the information that corporate reporting won't: to examine the working conditions of the people who make our clothes and discover the true content of our supermarket lasagnes. And then, crucially, we need to claim our agency through our own investments in pensions and personal investments like ISAs, to use this information - perhaps as well as that provided by the new mandatory reports - to make change happen. To drive true corporate moral agency, we need to divest from companies whose practices we don't agree with, or use charities like ShareAction to lobby our pension fund managers to force changes in those practices for the better.

This new law is good news. But only if it serves as an incitement to us all to do more to change the culture of business; not if we choose to believe it means the problem is solved.