This article was first published in the June 2013 International edition of Accounting and Business magazine.
Just as the International Integrated Reporting Council (IIRC) was launching its consultation on the draft international integrated reporting framework in London, the European Commission in Brussels was pushing for large companies to disclose information on social and environmental matters.
The European Union’s internal market commissioner Michel Barnier tabled on 16 April an amendment to the EU’s fourth (78/660/EEC) and seventh (83/349/EEC) directives on annual and consolidated accounts. The reforms will oblige firms with over 500 employees to disclose information on policies, risks and results regarding environmental, social and employee aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.
The proposals have been made because existing legislation only asks companies to provide non-financial information in their annual reports ‘where appropriate and to the extent necessary for an understanding of the company’s development, performance or position’. Meaning it is optional and Brussels thinks not enough companies have been playing ball.
‘The requirements of the existing legislation have proved to be unclear and ineffective and applied in different ways in different member states,’ an EC statement acknowledges, noting that fewer than 10% of the largest European companies disclose non-financial information regularly.
Barnier, a Frenchman, thinks this is a bad thing: ‘This is about providing useful information for companies, investors and society at large – much demanded by the investor community,’ he says, noting that companies which report on both financial and non-financial performance ‘have lower financing costs, attract and retain talented employees and, ultimately, are more successful.’
Carmel Dunne, a spokesperson at the EC, says the proposal was not directly inspired by the work of the IIRC. But Brussels was following it closely, she adds. And the IIRC seems to be keeping an eye on the EU: ‘We believe the Commission’s proposals are an intelligent and logical milestone on the continuing journey towards integrated reporting as part of the evolution in corporate reporting globally,’ says Paul Druckman, IIRC CEO.
‘The production by businesses of non-financial information is the essential first step in equipping providers of financial capital with the data they need to make efficient and effective capital allocation decisions.’ he continues, adding: ‘For investors to have confidence in the resilience of the business model, companies need the right reporting framework to enable them to integrate processes and decision-making, reduce silos and trigger board discussions that reduce risks and improve the long-term prospects of the business.’
All this aside, Brussels is still avoiding a rigid accounting law on non-financial reporting. It wants flexibility and ‘non-intrusiveness’ about how companies can report their non-financial information. ‘Companies may use existing national or international reporting frameworks and will retain their margin of manoeuvre to define the content of their policies, and flexibility to disclose information in a useful and relevant way,’ says an EU memorandum. The proposals say reporting guidelines that can be followed include those of the UN Global Compact, the International Organisation for Standardisation’s sustainability standard ISO 26000, or the German Sustainability Code, among others.
Companies will also only have to report information relevant to their business. ‘When companies consider that some policy areas are not relevant for them, they will be allowed to explain why this is the case, rather than being forced to produce a policy,’ the Commission’s memorandum explains.
‘All efforts have been made to avoid an undue administrative burden,’ says the EC. This explains why small and medium-sized enterprises (SMEs) have been spared by this proposal. ‘The costs for requiring…SMEs to apply the new rules could outweigh the benefits,’ explains Barnier.
Investors have welcomed Barnier’s announcement as a step in the right direction. ‘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,’ says Steve Waygood, chief responsible investment officer at Aviva Investors and member of the EC’s expert group on narrative reporting.
‘We believe that it’s really a positive push and good management practice,’ Ilse Moens, director at PwC Belgium, tells Accounting and Business. She believes such reporting prepares companies for the future, forcing them to assess how different social and environmental elements can affect their business. This prompts companies to develop strategies beyond reacting to markets, she adds. ‘Companies are thus looking at risks that are not materialised today, but can be in the next five to 10 years and be prepared.’
‘We have a lot of companies that have gone through this type of reporting,’ adds Marc Daelman, PwC Belgium partner. And once they do, they start seeing the added value, he says. ‘In the past they had more silo thinking, with departments focusing on the environmental or social side.’ Holistic reporting requires corporate maturity, he believes. ‘Some companies are afraid of being more transparent, putting quantitative measures on social and environmental issues – are we not shooting ourselves in the foot because we don’t meet those objectives, although for good reasons?’
According to Moens and Daelman, the costs of reporting will be minimal for most companies, although it will take investment, say the two executives.
Executives will also need to work to convince doubters: ‘Some company leaders can prove that it has a positive effect, and others equally say that it doesn’t have any impact,’ Moens says.
Burden not benefit
And indeed, some companies only see added administrative burdens, not added value. ‘The proposed regulatory approach to corporate social responsibility [CSR] is running the risk of demotivating all companies that have embarked on genuine CSR activities on their own, says Jürgen R Thumann, president of BusinessEurope, which represents both small and large European companies. ‘Instead of applying a ticking-the-box approach, the business-driven purpose of CSR – to contribute to business goals by addressing social and environmental challenges over and above what is required by law – must be safeguarded,’ he adds.
Wim Bartels, KPMG sustainability partner at KPMG Advisory in the Netherlands, adds: ‘The proposed legislation by the EC will imply an additional burden for those big companies who haven’t paid much attention yet to the topics referred
to in the legislation.’ And he predicts the legislation will not convince sceptical companies of non-financial reporting benefits. ‘They will treat [it] largely as a compliance requirement and will not see any additional benefit.’ However, he welcomes the opt-out for companies not having to provide information for areas where they have no policy.
And it will help already supportive companies, says Bartels, as they ‘will be able to demonstrate their efforts and focus now, supported by formal legislation, and can showcase their leading position’.
The cost-benefit ratio depends on each company’s profile and strategy, he adds, predicting some companies will use the new reporting requirement to promote organisational change. ‘All other companies who follow their peers in reporting only, or believe reporting is ‘just needed to keep up the image’, already suffer from current reporting practice,’ Bartels notes.
The legislation will now be debated by the European Parliament and the EU Council of Ministers. If passed, the proposal should force 18,000 companies to undertake non-financial disclosure, with their 2017 annual reports being the deadline.
Carmen Paun, journalist based in Brussels