The European Commission (EC) yesterday (16 April), proposed changing accounting legislation to improve the transparency of larger companies in regards to social and environmental matters.

The proposed changes would require companies with over 500 employees to publish information on ‘environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors’ in their annual reports.

Background

The EC states that although legislation covering the disclosure of non-financial information does exist (such as the Fourth Company Law Directive), it has ‘proved to be unclear and ineffective and applied in different ways in different member states’. It further argues that currently less than 10 per cent of the largest European Union (EU) companies disclose information on environmental, social and other aspects of their activities regularly.

The consultation period, which involved member states, companies, investors and other stakeholders, began in November 2010.

Proposed amendments

The proposed amendments to the accounting legislation would only affect larger companies, as “the costs for requiring small and medium-sized enterprises (SMEs) to apply the new rules could outweigh the benefits”, says the EC’s Internal Market and Services Commissioner, Michel Barnier.

He continued: “Today we are proposing important legislation on business transparency across all sectors. This is about providing useful information for companies, investors and society at large – much demanded by the investor community.”

As well as making company policies on areas such as the environment publically accessible, the changes could also make businesses “more successful” as they will have to take a “longer-term perspective in their decision making”, said Barnier.

“Companies that already publish information on their financial and non-financial performances take a longer term perspective in their decision-making. They have lower financing costs, attract and retain talented employees, and ultimately are more successful.

“This is important for Europe’s competitiveness and the creation of more jobs. Best practices should become the norm.”

‘Important and welcome strides’

The EC claims that the proposal has been designed to minimise ‘administrative burdens’ and ‘leaves significant flexibility for companies to disclose relevant information in the way that they consider most useful’. Firms can use or the German Sustainability Code.international or national guidelines, such as the UN Global Compact, ISO 26000,

Rather than having to publish a ‘sustainability’ report, companies can publish concise information which is necessary for ‘understanding a company’s development, performance or position’. Issues that are not relevant to a company do not have to be reported on, but the company must explain why.

In addition to this, large companies will have to disclose information on their diversity policy, which would cover factors such as age, gender, geographical diversity, and educational and professional background. The disclosures would have to set out the objectives of the diversity policy, how it is being implemented and its results. Companies that do not have a diversity policy would have to explain why.

Reacting to the report, the Aviva Investors group said it felt that the EC “has made important and welcome strides towards creating more transparency in the publication of non-financial information”.

Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, said: “Investors need to be able to differentiate between companies that conduct business in a sustainable and responsible manner, and those that don’t…

"Pressuring companies to provide investors with more transparent information on sustainability is an important step in putting sustainable development at the heart of capital markets.

"The baton has now passed to the European Parliament and Council to ensure that the best and most effective rules on transparency are set so that non-financial information can be considered by investors in the same breath as financial information."

Proposals ‘leave companies too much flexibility’

However, the European Coalition for Corporate Justice (ECCJ) – representing 250 organisations in 15 countries – has said that the changes will not ‘guarantee’ ethical corporate behaviour as the current wording ‘leaves companies too much flexibility’.

Jerome Chaplier, ECCJ Coordinator, said: "There is a strong need for legislation with teeth – according to recent opinion polls 62 per cent of European citizens do not feel well enough informed about the impacts of companies on the environment and their lives, and more than 4 out of 10 think companies have a negative impact on society overall.

“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.

"Without clear guidance and sanctions attached to the proposal, the accuracy and reliability of the information companies provide cannot be guaranteed and citizens' trust in companies cannot be restored", he added.

UK business transparency

The EC’s reporting amendments follow the UK's lead, after the UK became the first nation to make it compulsory for businesses to report on their emissions data.

The changes, which came into effect in April 2013, affect approximately 1,800 businesses listed on the London Stock Exchange and form part of the UK’s commitment to cut carbon emissions to 50 per cent of 1990 levels by 2025.

The regulation aims to encourage businesses to reduce their carbon footprint and show investors companies are effectively managing the hidden long-term costs of greenhouse gas emissions. It is estimated the regulations could save four million tonnes of CO2 emissions by 2021.

Integrated Reporting Framework

Aside from the EC’s proposed changes to improve businesses sustainability and social reporting, yesterday (16 April) also saw a global coalition of regulators, investors, companies, and accounting organisations – the International Integrated Reporting Council (IIRC) – launch a consultation on a draft framework for ‘integrated reporting’.

According to the IIRC, the framework would see businesses provide a concise document that would include information on finance, management, sustainability and governance so that stakeholders could get a ‘more complete’ idea of a company’s health.

According to a survey of 43 companies piloting the framework, 98 per cent said that they believed integrated reporting would improve understanding of how their company creates value over time, while 93 per cent agreed that it improved working processes across teams and functions.