This article is part of our special report Corporate Governance.
SPECIAL REPORT / Proposals for disclosure of non-financial information by large companies to beef up corporate social responsibility (CSR) launched by the Commission yesterday (16 April) go too far for business interests, but not far enough for NGOs.
Launched in Strasbourg by Michel Barnier, the internal market commissioner, the CSR proposals would amend three accounting directives that require larger companies to report non-financial information, such as their diversity and environmental policies and to explain why they have not done so where necessary.
As a first step, EU member states have been given the possibility to apply the new rules to listed companies only.
Companies failing to do so would be required to explain why they have not included such information, in the first attempt to legally impose such a “comply or explain” regime on larger companies.
The proposals will need the approval of the European Parliament and EU states before becoming law.
Information is not needed for investors, say business leaders
BusinessEurope, a federation that represents Europe’s largest companies, said in a statement that it was “disappointed” by the European Commission’s decision, claiming that the obligations ran the risk of “demotivating all companies that have embarked on genuine CSR activities on their own.”
“This proposal will create red tape and further disadvantage for a large number of European businesses in international markets, running counter to the urgent necessity of re-establishing the conditions for confidence and competitiveness in Europe,” said Jürgen Thumann, BusinessEurope’s president.
He underlined as a key concern business fears that disclosures in corporate annual reports should be aimed squarely at the needs of investors, not other requirements, which are aimed at placating public policy aims, rather than the genuine needs of investors.
“If required solely for public policy reasons, [the information] should be kept out of the annual report,” Thumann said.
Fewer than 10% of companies disclosing proper CSR information
His remarks were echoed by Nigel Sleigh-Johnson, the head of financial reporting at the Institute of Chartered Accountants in England and Wales (ICAEW).
Despite broadly welcoming the proposals, Sleigh-Johnson warned: “If the information is not bespoke and of relevance to investors, it will just lead to clutter and ‘boilerplate’.”
But the Association of Chartered Certified Accountants (ACCA) disagreed.
The global auditing body said in a statement that fewer than 10% of the largest EU companies currently disclose such information either regularly or properly.
“This approach will build trust with stakeholders, attract investors and help with the transition to operating in a green economy,” said Rachel Jackson, head of sustainability at ACCA.
NGOs claim proposals too weak
NGOs welcomed the proposals, but criticised their lack of teeth.
"The private sector has a critical role in the fight against corruption in the EU, and these proposals will help determine if the biggest companies are playing their part,” said Jana Mittermaier, the director of the Transparency International EU office.
She said that few companies currently indicate whether they prohibit “facilitation payments” – bribes paid to officials to speed up routine such as customs procedures – and reporting on the monitoring of anti-corruption programmes tends to be weak.
Meanwhile the European Coalition for Corporate Justice (ECCJ), an NGO, welcomed the proposal but stressed that “the current wording leaves companies too much flexibility.”
“We fear companies will only identify and disclose the risks that affect their economic performance, and won’t take responsibility for the impacts they have on the people and the planet,” said, Jérôme Chaplier, the ECCJ coordinator.
MEP Richard Howitt, who serves as the European Parliament's rapporteur on Corporate Social Responsibility (CSR) and who is an ambassador for the International Integrated Reporting Council, said: "Mandatory sustainability reporting has been introduced in India and China, and through stock exchange requirements in Brazil, South Africa and the United States. In Europe we had reached a glass ceiling on corporate sustainability reporting where the number of companies reporting on their social, environmental and governance impacts had peaked. It had fallen to individual European Member States to move ahead with their own legislation. Today's EU proposal opens the door to growth of over 600% in new reporting."
The Carbon Disclosure Project (CDP) applauded the Commission’s proposal as a significant move to enhance corporate transparency and accountability across Europe. "This legislation must now be progressed without being weakened and should be strengthened to foster consistency of environmental information for investors," the organisation said in a statement.
Paul Simpson, chief executive of CDP, said: “Non-financial reporting is an essential market mechanism to drive more sustainable decision making. Ratification of this proposal could accelerate the integration of environmental considerations into companies’ core strategies, dramatically transforming the market and placing Europe in a leadership position on corporate accountability. Further, businesses that disclose are best positioned to manage their environmental impacts, risks and opportunities, building business resilience across the region.
Nigel Sleigh-Johnson, the head of ICAEW’s financial reporting faculty, said: “Non-financial, narrative information forms an increasingly important part of companies’ communication with investors and other stakeholders, providing insights into the long-term success of the business.”
“In the UK, significant progress has been made by the largest companies in their reporting of relevant environmental and social issues, and new requirements due to take effect in the Autumn will enhance the narrative information communicated to investors. We support the Commission’s aim of ensuring that good reporting practice is embedded across the EU, and note that in seeking to achieve this through enhanced regulatory requirements, the Commission appears to have adopted a generally balanced and proportionate approach,” Sleigh-Johnson said.
“The new EU proposals are consistent with several other current developments which are changing the way that companies report on their activities,” said John Davies, the head of technical issues at the Association of Chartered Certified Accountants.
“These other developments include the new framework being developed by the International Integrated Reporting Council, the revised guidelines being issued by the Global Reporting Initiative, and national initiatives such as the UK’s new Strategy Report. Many companies are already applying sustainability reporting principles in practice and it is important that, to maximise the potential impact of the proposed new EU reporting requirements, they take account of all these developments and practices,” Davies said.
CSR compels companies and financial institutions to not only consider their profitability and growth, but also environmental and social impacts of their supply chain, production and services.
Current EU legislation, such as the Fourth Company Law Directive on annual accounts, addresses the disclosure of non-financial information in a way that companies may choose to make public certain information on environmental, social and other aspects of their activities.
With a green paper, two communications and an alliance with industry and relevant stakeholders, the European Commission has been trying for more than a decade to pave the way towards more responsible corporate behaviour. The Commission's 16 April proposal - if made law - would require Europe's largest companies to 'comply or explain' with new CSR reporting obligations for the first time.
- 2013: Commission proposal to be debated by European Parliament and European Council