EUROPE – The European Commission (EC) has proposed an amendment to existing accounting legislation 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 or explain why they have not included such information.
Internal market and services commissioner Michel Barnier said: "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 to apply the new rules could outweigh the benefits."
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 will not be obliged to report, but it will be asked to explain why this is the case.
Furthermore, disclosures may be provided at group level, rather than by each individual company within a group.
Nigel Sleigh-Johnson, head of the Institute of Chartered Accountants in England and Wales' financial reporting faculty, said: "The comply-or-explain aspect of the new regime is welcome, as is the decision to limit the impact of the proposals to the group level and to the largest EU businesses – those with over 500 employees.
"It will, nonetheless, be important to ensure that a reasonable period of transition is provided, not least for the large private companies subject to the more rigorous regime."
But he added: "Disclosures in corporate annual reports should be aimed squarely at the needs of investors, not other parties; additional information, if required solely for public policy reasons, should be kept out of the annual report.
"If the information is not bespoke and of relevance to investors, it will just lead to clutter and boilerplate."
After applying seven tests to measure the likely effectiveness of the proposal, Aviva Investors concluded that the while the EC made important and welcome strides towards creating more transparency in the publication of non-financial information, refinements should be made to ensure and promote truly sustainable capital markets.
The asset manager recommended the EC go further to promote full integration of non-financial information in annual reports, include a reference to a form of oversight by the markets – at the AGM via an investor vote, for example – and reference the guidance from the Carbon Disclosure Project and the Climate Disclosure Standards Board.
Steve Waygood, chief responsible investment officer at Aviva Investors and a member of the EC's expert group on narrative reporting, said: "The proposed update to the existing accounting legislation meets five of our seven tests, which is an excellent start.
"We strongly welcome the focus on business-relevant corporate sustainability issues and believe the proposals would help correct an area where both the market and its regulators have so far failed to provide important information to investors. However, there is scope for further improvements."
The seven tests have been set out by the Corporate Sustainability Reporting Coalition (CSRC).
Among other factors, the tests look at whether company boards are being encouraged to debate sustainability issues and disclose their performance in this area appropriately.
Aviva Investors is encouraging public debate on the topic.
Together with the ACCA and Eurosif – all members of the CSRC – it aims to raise awareness and discuss the new measures at a high level roundtable entitled 'Non-financial information disclosure: towards a more sustainable and comparable corporate reporting regime?' on 4 June held at the European Parliament in Brussels.
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.