This article is part of our special report European Corporate Reporting.
SPECIAL REPORT / A pledge made by heads of state and government this summer to beef up corporate social responsibility reporting for European companies is set to be ditched because too few member states are prepared to support it, EURACTIV has learned.
This spring (16 April), the Commission launched new corporate social responsibility (CSR) rules to require larger companies to report non-financial information, such as their diversity and environmental policies, and to explain why they have not progressed in these areas, if necessary.
According to the Commission, fewer than 10% of the largest EU companies regularly produce sustainability reports.
The proposal would require listed companies to disclose information on environmental matters, social and employee-related affairs, respect for human rights and anti-corruption and bribery issues. They would also have to disclose details about the diversity on their board of directors.
Around 18,000 companies would be affected by the new rules, compared to the 2,500 organisations that now disclose environmental and social information.
Meeting for a summit in Brussels on 22 May, European heads of state and government proposed to take the CSR reporting obligations further, concluding that the proposal be examined “with a view to ensuring country-by-country reporting by large companies and groups.”
Leaders pledged to widen reporting obligations
The pledge would see larger companies reporting non-financial information in respect of each country in which they operate, rather than issuing one report for all their European operations.
Country-by-country reporting makes it easier to compare how member states measure up against one another in terms of their CSR standards.
The European Parliament has been considering the proposal but is likely to drop country-by-country reporting as a condition within its recommendations, EURACTIV understands.
Raffaele Baldassarre, an Italian centre-right MEP and rapporteur on the legal affairs committee for the proposal, has suggested delaying a review of the reporting obligations to 2018, at which point country-by-country reporting could be introduced.
Other MEPs would like to see country-by-country reporting introduced with the first version of new rules, which should come into force in 2015. UK MEP Sharon Bowles (Alliance of Liberals & Democrats for Europe) has prepared a report for the economic and monetary affairs committee calling for country-by-country reporting to be included from the beginning.
Baldassarre is hoping his committee can agree to a final report when it meets on 16 December.
Leaders may have stayed up too late
But sources in the Parliament told EURACTIV that support for country-by-country reporting has dissolved amongst the member states. “Only Spain and France are supporting it, and with some member states – notably Germany – increasingly against introducing any proposal at all, the Parliament will not push the issue for fear that it will destroy the chances of the entire proposal,” said one source familiar with the issue.
"It is strange that they have pulled back on what leaders agreed so recently," said another source on condition of anonymity. "There is some suggestion that it was very late at night [at the summit] when the leaders made their pledge, and not all of them understood what they were agreeing to!" the source continued.
Germany’s opposition reflects strong opinions from the country’s industry. A spokesperson for the Federation of German Industries (BDI), which represents more than 100,000 enterprises, said the group advocates the withdrawal of the Commission’s proposal as is “problematic, because it would impose additional burden and disproportionate requirements on numerous companies, particularly small and medium-sized enterprises.”
The Commission estimates that its proposal would cost companies on average less than €5,000. BDI considers the estimate “far too low”, given that the numbers fail to take into account the cost of collecting the necessary data or the external auditing of the additional information in the management report, amongst others.
Estimates endorsed by BusinessEurope, the European employers' umbrella organisation, put the real costs at between €155,000 and €604,000 per year.
“These additional financial burdens would put European companies at a serious disadvantage with regards to their international competitiveness, and should therefore be avoided on all accounts,” said the BDI spokesperson.
Business fears obligations would be costly, uncompetitive
The argument that European companies would be put at a competitive disadvantage by such reporting obligations was rebutted by Henning Drager, a Ukraine-based partner of auditing and consultancy firm BDO.
He believes that countries such as the Ukraine look to the standards set by Europe as a bellwether. “One reason that the Ukraine finds it difficult to attract foreign investment is the lack of transparency, so the business community would welcome introducing more European standards of rules. Perhaps that would result in higher labour costs, but it would be better for innovation, and help the country to sort some of its environmental problems with dioxin pollution and radioactive waste,” Drager said.
For him, the Commission’s proposal could be stronger. “It would be much more effective if companies were obliged to require disclosures from down their chains of supply. Because requiring only the larger companies to disclose means that three-quarters of industrial interests will remain unseen, that seems to be the elephant in the room,” he added.
Calls for reporting obligations to be extended down chains of supply are indeed popular amongst MEPs, who are expected to endorse the idea, however much it may be resisted by smaller companies.
Rolling reporting obligations down the supply chain
“The Commission states that ‘Transparency is part of the solution, not part of the problem’, but Chambers believe that the associated reporting obligations are firmly part of the problem, especially for smaller businesses,” according to Guendalina Cominotti, a spokesperson for Eurochambres, the association of European Chambers of Commerce and Industry.
“It’s therefore crucial that co-legislators introduce effective mechanisms to avoid that non-financial and diversity reporting obligations are transferred to SMEs all along the supply chain,” she added.
If business appears resistant to the march of non-financial reporting it may find itself swimming against the tide. There are increasing calls in the US and Europe for so-called “integrated reporting”, which would mean applying the CSR standards to each separate part of the company accounts, rather than writing one report and including this as an annex to the accounts, as the Commission’s proposal suggests.
Judging by the apparent U-turn by member states on country-by-country reporting, it seems unlikely that integrated reporting is in the EU regulatory pipeline. Once the concept of obligatory CSR reporting beds down, however, non-financial elements of company reporting are likely to spread further.
With a green paper, two communications and an alliance with industry and other stakeholders, the European Commission has been trying for more than a decade to pave the way towards more responsible corporate behaviour.
If made law, the Commission's 16 April proposal would require Europe's largest companies to 'comply or explain' with new CSR reporting obligations for the first time.
- December 2013: European Parliament's legal affairs committee set to adopt report on Commission's proposals