EU Commission moves to enhance business transparency on social and environmental matters

Source: European Commission, 16 April 2013

The European Commission has today proposed an amendment to existing accounting legislation in order to improve the transparency of certain large companies on social and environmental matters. Companies concerned will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.
Internal Market and Services Commissioner, Michel Barnier said: “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. 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. The new rules will only apply to large companies with more than 500 employees as the costs for requiring small and medium-sized enterprises (SMEs) to apply the new rules could outweigh the benefits.”

Under the proposal, large companies with more than 500 employees would be required to disclose relevant and material environmental and social information in their annual reports. The approach taken ensures administrative burdens are kept to a minimum. Concise information which is necessary for understanding a company’s development, performance or position would be made available rather than a fully-fledged and detailed "sustainability" report. If reporting in a specific area is not relevant for a company, it would not be obliged to report but only to explain why this is the case. Furthermore, disclosures may be provided at group level, rather than by each individual company within a group.

The proposed measure has been designed with a non-prescriptive mind-set, and leaves significant flexibility for companies to disclose relevant information in the way that they consider most useful. Companies may use international or national guidelines which they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code).

As regards transparency on boardroom diversity, large listed companies would be required to provide information on their diversity policy, covering age, gender, geographical diversity, and educational and professional background. Disclosures would set out the objectives of the policy, how it has been implemented, and results. Companies which do not have a diversity policy would have to explain why not. This approach is in line with the general EU corporate governance framework.

This measure was announced by the Commission in the Single Market Act communication in April 2011 (see IP/11/469), in the Communication "A renewed strategy 2011–2014 for Corporate Social Responsibility" issued in October 2011 (see IP/11/1238), and in the Action Plan for Company Law and Corporate Governance adopted in December 2012 (see IP/12/1340).

The Commission engaged in a very extensive consultation with Member States, companies, investors and other stakeholders, which started with a broad public consultation in November 2010. An Impact Assessment was concluded in 2012 where different policy options were considered with the intention of adopting a balanced proposal allowing for significant progress on useful, transparent reporting by companies, but avoiding an undue administrative burden.

Current EU legislation, in particular, 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. However, the requirements of the existing legislation have proved to be unclear and ineffective and applied in different ways in different Member States. Currently, fewer than 10% of the largest EU companies disclose such information regularly. Over time, some Member States have introduced disclosure requirements that go beyond the Fourth Company Law Directive. For instance: the UK introduced legislation in 2006 which is now being updated; Sweden adopted legislation in 2007; Spain in 2011; Denmark amended its legislation in the same year; the latest update in France dates from May 2012.

Costs associated with the required disclosures for large companies are commensurate with the value and usefulness of the information, and with the size and complexity of the companies.

On 6 February 2013, the European Parliament adopted two resolutions (“Corporate Social Responsibility: accountable, transparent and responsible business behaviour and sustainable growth” and “Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery”), acknowledging the importance of company transparency on environmental and social matters.