Comments from ACCA to the European Commission, January 2011.
1. How would you consider the current regime of disclosure of non-financial information applicable in your country?
In the context of creating a wider understanding of a company's position and performance, ACCA is committed to promoting the disclosure of non-financial information where this is relevant and proportionate. We believe, as a matter of principle, that to require entities to report publicly on specified matters acts as an incentive for the entities concerned to take those matters seriously and to improve their practices on a continuing basis. With this aim in mind we have campaigned over a number of years for the obligatory disclosure by relevant entities of information on social and environmental matters, and welcomed the decision to incorporate disclosure requirements on these matters in the Companies Act 2006 (through the Business Review) and the Climate Change Act 2008. We have participated in and supported the development by the Climate Change Disclosure Board of its new reporting framework, and are actively involved also in the work of the Global Reporting Initiative (GRI), Accounting for Sustainability and the International Integrated Reporting Committee (IIRC). While there is much development work to do, the latter project offers the opportunity, in the medium to long term, to achieve a radical step forward in the scope of corporate reporting, of which the disclosure of non-financial information is an integral part. We are, accordingly, strongly supportive of the aim of developing reporting frameworks which acknowledge the wider range of factors which have a material bearing on a company's position and performance. In the recent past we supported the development in the UK of the statutory Operating and Financial Review (OFR) and were disappointed when it was withdrawn as a statutory obligation, though encouraged that much worthwhile material was subsequently incorporated into the Business Review. We have also continued to encourage the IASB in the development of guidance on management commentary. In September 2010, the results of an internationally-based study - Hitting the Notes But What's the Tune? - were published by ACCA and Deloitte, which looked at the value and relevance of narrative reporting from the perspective of preparers. One of the main conclusions reached in Hitting the Notes is that many preparers of narrative reports would like to see less prescription and more freedom of manoeuvre for them to frame their reports in the way they think most apt. Therefore, on balance we believe that a strong framework for disclosing non-financial information is important, especially in laying out key areas where all companies should disclose information. We believe that the regime in the UK does help to provide such a framework, although it should always be recognised that the overriding purpose of the business review is to help investors to assess how directors have complied with their stewardship obligations, it would seem illogical to insist on standardised disclosures in every case.
2. Have you evaluated the effects, and costs and benefits, of any current corporate disclosure of environmental and social information?
While we have not performed such assessments, we strongly believe that additional costs of administering such disclosure are met by the benefits of risk reduction and opportunities for social, environmental and economic saving including a potential reduction in the cost of capital of an organisation.
3. If you think that the current regime of disclosure of non-financial information should be improved, how do you suggest that this should be done?
As noted in our response to Question 1, we certainly believe that a degree of standardisation, through the establishment of clear principles will help to define and produce relevant disclosure of non-financial information. It is important that any such information is integrated with financial information to provide decision-useful information for all stakeholders. We also believe that narrowing the primary user group to investors (existing and potential), would ensure that reporting (including non-financial information) would crucially remain streamlined and focused, avoiding much of the complexity that exists in the current reporting framework. In terms of detailed disclosure requirements, we believe that the Business Review in the UK does offer a reasonable level of guidance, effectively incorporating the great majority of the provisions which were initially included in the statutory OFR, as well as reflecting the disclosure items which are mandatory under the Fourth Directive. The differences between the review and what would have been the statutory OFR are thus not great: listed companies are already required to disclose future-orientated information and information on their policies and practices on environmental, social and community issues. There is though one aspect of the OFR that would be very valuable to re-adopt. This concerns the statement of the objectives and strategies of the company. While the review requires companies to discuss the principal risks and uncertainties facing the company, and factors likely to affect the development, performance and position of the company's business [in the future] and the company's policies in relation to those factors, there is no requirement for companies to set out their objectives and forward-looking strategies on a pro-active basis. Without a discussion of the goals of the company, and its plans for achieving them, it can be argued that the narrative report as currently framed lacks an overall context, within which users can assess the policies and practices of then company and the performance of the company and its directors. Finally, we believe it would beneficial for explicit reference to be made for the need to ensure that non-financial disclosure should be closely linked to the financial report itself.
4. In your opinion, should companies be required to disclose whether or not they have a CSR policy, and if they do, how they implement that policy and what the results have been?
While we see merit in all three being disclosed, principally, the key disclosure must be whether or not the company has a CSR policy, and if they do, how they implement this policy. However, similar to other disclosure requirements in the UK pertaining to corporate governance, we believe a ’comply or explain’ approach would be appropriate. It is also crucial to distinguish between the requirements for publicly accountable, large and SME companies. Any approach should initially focus on the publicly accountable entities, with more careful consideration being then given to the needs of other entity types. Again, an emphasis on the integration with financial information would be helpful, including the extent to which policies on varying non-financial and financial measures are interlinked.
5b. Please indicate which indicators you would consider to be the most relevant for all economic sectors.
In order to ensure any entity related information that is disclosed in annual reports in particular, is relevant, we strongly believe it should be material to understanding the business. We also believe that reporting of any non-financial information should be both principles and indicator based, perhaps with those indicators initially being generic, but incorporating sector-specific indicators, allowing users to assess how the company has/is being managed and providing a holistic view of the company’s performance. However, we also strongly urge any EU measures to take into account existing international initiatives, such as those offered by GRI and those being considered by the IIRC. On balance we would therefore prefer a two tier system based on general requirements for all economic sectors and the more applied requirements for specific sectors. Given the quite diverse needs of all stakeholders who would use such information, we believe it would more appropriate to set a high level of underlying principles, supported by best practice guidance on a sector specific basis.
6. In your opinion, what should be the process to identify relevant principles and/or indicators (whether general or sector-specific)?
While it would be useful to have guidance on identifying relevant principles and indicators, a systematic approach is essential, through wider consultation with users and preparers and one that shows a sound understanding of key sustainability issues. Clearly, it is vital that there is also clarity on definitions and on calculation methods, to ensure a level of comparability. Again, the EU should look to concurrent work in this area, such as the findings of the IIRC in due course, ISO 26000, as well as further investigating the possible endorsement of GRI guidelines.
7. In your opinion, should companies be required to disclose the steps they take to fulfil the corporate responsibility to respect human rights?
We believe that, to some extent, corporate responsibility with respect to human rights is an extension of CSR in general. As in our response to earlier questions, it is important to distinguish whether there is a material impact on the business itself. Certainly we would expect companies, in their own interests, to take into account the consequences of their activities on stakeholders in respect to human rights, and if these are material to the business, we would expect them to make relevant disclosures on how those risks are being addressed. However, at this stage we do not believe it should be a legal requirement to disclose such information for all companies, especially as it is unclear what level of disclosures might be required.
8. In your opinion, should companies be required to disclose the risks they face and the policies they have in the field of corruption and bribery?
This is a fundamental aspect of discharging social accountability and where companies face material risks in this regard, they should be required to disclose their policies with regards to the ethical principles they follow, allowing a more transparent understanding of the risks they face and how they are being addressed. From April 2011, the Bribery Act will come into effect in the UK, requiring all companies in the UK to have in place appropriate policies in this respect. Therefore, where companies have such policies in place, we would expect disclosure of the level of risk they face and their policies towards mitigating them.
9. In your opinion, what companies should be required to disclose non-financial information?
Many of the key elements of non-financial information are not dependent on size or status. Some disclosure is necessary by all companies (eg CSR, key business risks etc.) although we do believe it is important that detailed disclosure requirements even in these instances should be proportionate to the size and complexity of the organisation. We would therefore support a phased approach for any mandatory reporting requirements, initially geared towards publicly accountable (all listed companies) and large entities similar to the existing requirements incorporated in the Directives and in the UK Companies Act. However, all entities should have the option to voluntary apply the requirements, which would also act as a guide of best practice to other smaller entities. Furthermore, this would allow time for further assessment of the extent to which they are being applied by SMEs and whether a simpler, but mandatory regime for other companies should be developed.
10. In your opinion, should institutional investors be subject to specific or additional disclosure requirements, for example to disclose whether and how they take into account environmental and social issues in their investment decisions?
We recognise that institutional investors have the power to influence the behaviour of organisations. However, we are concerned that singling out particular types of industry is not conducive to a principles-based reporting framework and therefore would require clearer evidence for the need for such a distinction to be made. In fact we believe that the question of such disclosure being required for institutional investors should not be seen as necessarily distinct with the wider question of requiring such disclosure for all companies in general.
11. In your opinion, should European policy promote the concept of "integrated reporting"?
In principle we agree that a holistic and integrated approach to reporting will have significant benefits for all stakeholders to enable them to assess the ongoing performance of an entity as well as its longer term sustainability. We believe the advantages of an appropriate framework for integrated reporting, linking financial, social, environmental and governance reporting, would include making better links between financial and non-financial information. It would also emphasise that the economic results of an organisation's activities are just one part of its impacts. Integrated reporting also recognises that the non-financial aspects, which have always been relevant to stakeholders other than shareholders, are increasingly relevant to financial performance. However, the understanding of integrated reporting is at a fairly nascent stage and it is therefore essential that the EC take into accounting the forthcoming findings of the IIRC, which in fact includes a principles based definition of what integrated reporting is. We also believe it is important to differentiate integrated reporting and the combined corporate reporting that many entities already deliver. Many organisations are already producing separate CSR reports for wider stakeholders, but which are not necessarily linked, physically or otherwise to the financial reports. We believe that such reporting, where it is indeed for wider stakeholders, other than investors, is of benefit, as it does not ‘clutter’ the annual report. However, where any non-financial information is material and relevant to the performance of the organisation it should be integrated with the financial information.
12. In your opinion, should disclosed nonfinancial information be audited by external auditors?
We certainly believe that non-financial information should have some element of independent attestation or assurance. We note that the questions uses the term ‘audit’, which we consider as inappropriate and quite distinct from the wider term assurance. The level of any assurance itself will equally depend on the nature of the disclosures and whether they were part of the financial statements required to be audited. Again, it is important to draw attention to the distinction between CSR reporting which is separate to the financial statements and that which is an integrated part of them. Currently many parties provide assurance (audit firms, NGOs, quality assurance consultants and individuals – ‘opinion leaders’). Larger accounting firms are able to use multi-disciplinary teams that include the necessary scientific and technical skills and that can assure using standards other than auditing standards (eg ISO 14064, AA1000AS and ISAE 3000). Whether the level of assurance provided by such standards would provide the credibility required of an integrated report is questionable. As integrated reporting emerges and develops, we believe it is likely to cause financial statement auditors to adapt their methodologies to properly address the more forward-looking, qualitative and non-financial information concerned.