The principle of keeping things simple may well turn out to be critical in gaining widespread acceptance of environmental reporting requirements.
Simon Thomas is chief executive at Trucost, a research consultancy which specialises in measuring the impact companies have on the environment. He refers to a recent report compiled by consultants Mercer which identifies that trustees are expected to monitor how effectively their SIP is feeding through to the investment managers.
The report shows that trustees can’t see what is being done because there is no data. Thomas points out: “The reason that investment managers don’t factor in SRI is a lack of data from companies. We need to complete the virtuous circle by improving the dialogue between investors and companies on environmental matters.”
The problem of a lack of data derives from the complex framework for reporting on social and environmental impact. This originates in the EU commission’s 2001 recommendation stating that environmental information is “often disclosed in a variety of non-harmonised ways among companies” and that “there is little guidance directly related to such matters and no specific international accounting standard solely focused on environmental issues”.
The government has implemented an enabling framework – called the operating and financial review (OFR) so that listed companies are required to consider environmental, employee and social issues alongside financial information. OFR became law in April and all annual reports should have an OFR by 2006.
But there have been problems. “Lots of companies have resisted the OFR,” says Thomas. “They saw it simply as more reporting and therefore more overhead. They feel burdened by the volume of reporting – and complain that investors never ask them about these matters anyway.”
He explains that UK companies are feeling overwhelmed by the volume of disclosure that the OFR requires, just as US companies found it difficult and expensive to comply with the new accounting regulations that followed the Enron debacle. Quality has often suffered as a result: “There is far too much corporate hot air,” he says.
Thomas adds: “At present only 10% of FTSE companies are disclosing to the minimum level that the government is asking for. So the government asked us to look at their guidelines.”
In parallel with the OFR, the EU Accounts Modernisation Directive introduces requirements for large private companies to include “an analysis of environmental and social aspects necessary for an understanding of the company’s development, performance or position” in an enhanced directors report.
“With all these new regulatory and other pressures companies would appreciate some guidance,” says Thomas. Following the government’s decision to revisit the matter draft guidelines were published in July for the purposes of consultation and the full set will be published in the second week of November.
As stated in the consultation document, the purpose of the guidelines is to:
o Give clear guidance to companies on how to report on their environmental performance using environmental key performance indicators (KPIs);
o Define which KPIs are most relevant to which sectors;
o Set out the business rationale for managing environmental performance using KPIs.
The guidelines set out three main areas against which businesses should consider their environmental performance: direct KPIs, namely the impact which their operations have on the environment directly; the environmental impact of their supply chains and the environmental impact of their products.
As a result of its research Trucost has identified 25 KPIs; there are specific KPIs for each sector – indeed KPIs have been mapped out for over 50 sectors.
The thrust of the new guidelines is simplicity. The consultation document states: “While some companies already have sophisticated reporting systems in place, these guidelines aim to help many more companies reach a level where they understand their environmental performance and can improve it.”
The simplicity lies in the fact that there are 80% of companies which have to report on no more than five KPIs; the remaining 20% of environmentally intensive companies will have to report on 10 KPIs.
In the UK the system will be principles-based allowing directors to decide what they disclose. The principles represent current best practice. “The guidelines will simply recommend to companies what areas they should be reporting on,” says Thomas. “A rules-based system may threaten disclosure because investors and companies would end up spending a lot of time with lawyers.”
There is a requirement for auditors to check the consistency of the figures with the accounts as a whole. “We will see auditors developing their expertise in this area,” says Thomas. “But it is the first time that accounts have required the inclusion of a forward-looking