The snappily-titled “directive on disclosure of non-financial and diversity information by certain large companies and groups” will enter into force once adopted by the European Council of heads of member states and published in the EU Official Journal.
The rules affect large “public-interest” entities with more than 500 employees – primarily listed companies – but also apply to some banks, insurance companies, and other companies because of their activities, size or number of employees. In total, around 6,000 companies will need to comply. Currently, fewer than 10% of the largest EU companies disclose such information regularly, according to the European Commission.
Companies concerned will need to disclose information on policies, risks and outcomes as regards to environmental, social and employee-related issues, and boardroom diversity, as well as information on how their operations may impact human rights and anti-corruption and bribery issues.
Veronica Poole, Deloitte
The reporting requirements will create a level playing field in corporate disclosure throughout the EU
MEPs say the directive leaves “significant flexibility” for companies to disclose relevant information in the way that they consider most useful in their annual reports, or in a separate report. Companies may use international, European or national guidelines that they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code). However, the Commission is also developing guidelines (though with no set timeframe) taking into account current best practice, international developments and related EU initiatives.
So far, reactions have been positive. “This vote is a victory for transparency and this is a great day for the future of sustainability reporting,” said Teresa Fogelberg, deputy chief executive of the Global Reporting Initiative (GRI), an organisation that champions greater corporate disclosure.
Experts do not believe that the new rules will present any extra administrative or regulatory burden to large UK companies. “The UK has already made great steps towards narrative reporting and the advantages of providing meaningful, transparent disclosure,” says Veronica Poole, UK national head of accounting and corporate reporting at Deloitte.
“Although the new directive will need to be transposed into UK law, there should be little to worry about because the current UK requirements apply to all companies rather than just those that are of public interest,” she adds.
Requirements for narrative reporting in the UK came into effect at the end of last year for companies with financial years ending on or after 30 September 2013. The rules state that companies need to prepare a strategic report that requires board approval, but quoted companies are required to disclose additional information, including a description of the company’s strategy and business model, details of human rights issues, and information relating to the gender split of directors, senior management and employees. As a result, UK companies should be in a better position to comply with the EU directive when it is transposed into national law.
Poole says that “financial figures do not tell the full story of any company. They only highlight the key financial risks to the business. It is now generally accepted that non-financial risks are equally important and these rules will help Europe develop a singular view as to how they should be discussed, and the value such disclosure has to the business and to investors.”
However, Poole says that the new EU rules will have a much bigger impact on other EU member states where narrative reporting and non-financial disclosure are not as developed or even in place. Although Poole declined to single out any countries, other experts have pointed out that several former eastern bloc countries do not have a good track record in making such disclosures.
“The reporting requirements will create a level playing field in corporate disclosure throughout the EU,” says Poole. “There will now be greater visibility about how companies perceive key risks to the business, and how they manage those risks. This is an important step,” she says.
Some are more sceptical about the benefits that the rules will bring. For example, opposition from some member states, particularly Germany, Poland and the UK, mean the requirements will not apply to the majority of large companies. According to Jerome Chaplier, the co-ordinator of the European Coalition for Corporate Justice (ECCJ), a network of more than 250 NGOs, trade unions, consumer groups, and academics promoting greater corporate accountability, just one in seven large companies will be required to report.
Furthermore, companies will also be free to choose which indicators and standards they use for reporting, which some experts fear will make comparisons between companies meaningless. Added to that, reports will be audited, but not verified – and no sanctions are in place for companies that fail to comply.
Swarnodeep Homroy, associate professor in economics at Lancaster University Management School, says that the lack of detail on any penalty for non-compliance is “worrying” because “some companies may interpret it to mean that there is no reason to follow the rules immediately.”
Homroy also says that, while the move towards better and more unified disclosure on non-financial reporting is welcome, he is unsure what the immediate impact might be.
“It is not clear whether investors are actually asking for this information because they are interested in it and they think it makes a difference to corporate governance, or because they are expected to ask if a company can supply such non-financial information purely to satisfy regulatory compliance,” says Homroy.
Vincent Neate, partner and head of UK sustainability services at KPMG, says that the challenge for companies is to seriously consider what they should report and how they should disclose the information to honour the directive’s “spirit”.
“On face value, human rights abuses such as human trafficking are not going to be relevant to the majority of companies reporting – particularly those in financial services, for example – because their operations have no direct link,” says Neate.
“But this is where companies will need to think a bit more laterally. While their own operations might not have any direct impact, they may be facilitating such abuses by using organisations associated with these practices in their supply chain, or holding bank accounts for them and so on. Companies will therefore need to report on the importance of regular monitoring to ensure that they are honouring best corporate practices, and disclose whether they are considering such risks, and the actions they are taking to mitigate them.”
Campaign groups also hope that the directive will force companies to look more seriously and widely at the impact that their operations and supply chains can have on human rights and labour conditions. “In cases such as the collapsed garment factory Rana Plaza in Bangladesh in April last year, proper reporting of risks could have rung the alarm bell in time. European business must take appropriate measures when collaborating with suppliers that display such disrespect for human rights,” says Nicolas Beger, director of Amnesty International’s European institutions office.