European Parliament Adopts Broad New Compliance and Sustainability Reporting Requirements

April 29, 2014

On April 15, 2014, the European Parliament adopted the Directive on Disclosure of Non-Financial and Diversity Information by Certain Large Companies and Groups (the “Directive”).[1] Pursuant to the Directive, covered companies will need to disclose information on their policies, risks, and results regarding sustainability issues, including environmental matters, social and employee-related concerns, respect for human rights, anti-corruption and bribery issues, and diversity on their boards of directors. The Directive is not self-executing, but will need to be implemented into national laws by the member states in order to become effective. It also requires prior approval by the European Union’s member states in the European Council.

       I.            Which Companies Are Covered?

The new rules will apply (i) to companies with more than 500 employees and exceeding either a balance sheet total of EUR 20 million or a net turnover of EUR 40 million, (ii) to parent companies required to consolidate (pursuant to European Union rules) companies that together have more than 500 employees and exceed either a balance sheet total of EUR 20 million or a net turnover of EUR 40 million, and (iii) to companies whose securities are admitted to trading on a regulated market. In doing so, it will affect approx. 6,000 companies and groups across the European Union. Because the Directive requires the disclosure to be as provided by the local legislations of European Union member states, the rules do not require the information to be included in the annual report that a US company would file in the US (for instance, with the SEC).

    II.            What Information Needs to Be Disclosed and How?

The Directive does not mandate detailed reports but requires companies to disclose in concise fashion information regarding the development, performance, position, and impact of relevant activity in specific areas. In particular, affected companies will be:

• required to report on environmental, social- and employee-related, human rights, and anti-corruption and bribery matters;
• required to describe their business model, outcomes and risks of the policies on the above topics, and the diversity policy with regard to management and supervisory bodies; and
• encouraged to rely on recognized frameworks such as the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines, the United Nations Global Compact (UNGC), the United Nations Guiding Principles on Business and Human Rights (UNGP), the Organisation for Economic Co-operation and Development’s (OECD) Guidelines for Multinational Enterprises, the International Organization for Standardization’s ISO 26000 Standard for Social Responsibility and the International Labour Organization’s (ILO) Tripartite Declaration.

Disclosures may be provided at group level, rather than by each individual affiliate within a group. Companies may disclose the required information in the way that they consider most useful, for instance in their annual reports or in a separate report.

 III.            What Are the Goals and Background of the Directive?

In general, the stated objective of the Directive is to require reporting that aims to enhance corporate governance and corporate social responsibility. It seeks to improve European companies’ transparency and performance on sustainability matters — e.g., environmental and social matters. According to the European Commission, companies that publish information on their financial and non-financial performances take a longer-term perspective in their decision-making, often have lower financing costs, attract and retain talented employees, and ultimately are more successful.

Current legislation, in particular directive 2013/34/EU of June 26, 2013, on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain Types of Undertakings[2], already addresses the disclosure of non-financial information. However, the requirements are applied in different ways in different member states, and thus the Directive seeks to foster enhanced disclosure with greater uniformity in application of the requirements.

 IV.            When Will the Directive Become Effective, and What Additional Rules Are Expected to Follow?

To become effective, the Directive must be adopted jointly by the European Parliament and by the member states in the European Council. Following the adoption by the European Parliament on April 15, 2014, the European Council is expected to adopt the Directive formally within the coming weeks. The member states will then need to implement the Directive into their national laws.

The Directive provides for the European Commission to develop guidelines, after it becomes effective, to facilitate the disclosure of non-financial information by companies, taking into account current best practice, international developments, and related initiatives by the European Union.

    V.            Current Legal Situation in Selected European Countries Regarding Corporate Social Responsibility Reporting

          1)      France

In France, currently boards of publicly traded French limited liability companies (sociétés anonymes and sociétés en commandite par actions) already must disclose information at the shareholders’ annual meeting, regarding the following social and environmental activities:

• employee-related matters, such as information procedures regarding the social dialogue with employees, including consultations and negotiations, training programs, diversity, safety, and health; and
• environmental matters, such as the sustainable use of natural resources and effectiveness in preventing pollution and climate change.[3]

These disclosure requirements also apply to non-publicly traded companies with, cumulatively, annual revenues exceeding EUR 100 million and with more than 500 employees.[4]

An independent committee of the board must review the report before its issuance and note whether it contains all required information.

The French government must report on the implementation of the disclosure requirements to the French Parliament every three years. The report must indicate the actions necessary to develop and encourage French companies’ social and environmental responsibility in France and internationally.

          2)      Germany

In Germany, currently there are few corporate reporting requirements with respect to non-financial information. For instance, certain private and employee pension schemes must disclose whether they incorporate ethical, ecological, and social consideration in their investment policies.[5] Furthermore, large German companies[6] are required to report on non-financial areas, such as employee and environmental matters that materially affect the company.[7]

Additionally, the German Sustainability Code serves as a vehicle to facilitate voluntary reporting on corporate social responsibility activities by collecting in a database the efforts of German companies to achieve sustainability.[8] Companies of any size and legal form are encouraged to disclose information on their environmental, social, and corporate governance performance and to furnish a respective declaration of conformity. The German Sustainability Code is based on international principles such as UNGC, the OECD Guidelines for Multinational Enterprises, the ISO 26000 Standard for Social Responsibility and the reporting standards of the Global Reporting Initiative and the European Federation of Financial Analysts Societies (EFFAS).

In practice, many large German companies voluntarily comply with the reporting standard of the German Sustainability Code and publish corporate social responsibility reports together with their annual reports.

Furthermore, the German Corporate Governance Code presents essential statutory regulations for the management and supervision of German listed companies and contains internationally and nationally recognized standards for good and responsible governance. Although the code does not refer directly to corporate social responsibility, it aims to make the German corporate governance system transparent and understandable and to promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed German stock corporations.[9]

          3)      UK

The UK Government views corporate social responsibility as the voluntary actions that businesses can take, over and above compliance with minimum legal requirements, to address both their own competitive interests and the interests of wider society.

The relevant body of law and regulation in the UK sets out certain reporting obligations which apply to quoted companies and premium listed companies.

Although no part of the UK Corporate Governance Code specifically addresses corporate social responsibility, the Corporate Governance Code touches on the need for the board to “set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met”.[10] Furthermore, the Turnbull Guidance annexed to the Corporate Governance Code makes clear that enterprise risk assessment should extend to “health, safety and environmental, reputation, and business probity issues”.

UK corporate legislation touches on corporate social responsibility in other ways as well. The Companies Act 2006 requires all directors to consider the impact of the company’s operations on the community and the environment when fulfilling their duty to promote the success of the company.[11]  The Companies Act 2006 also requires that quoted companies produce a business review as part of their directors’ report that includes information about environmental matters, employees and social and community issues, including information about any policies of the company regarding those matters and the effectiveness of those policies.[12]

Furthermore the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came into force on October 1, 2013, introduces an obligation for the directors of a company to prepare a standalone strategic report for each financial year. This report must include a fair review of the company’s business and to the extent necessary for an understanding of the development, performance or position of the company’s business, an analysis using key performance indicators including information relating to environmental and employee matters. Quoted companies also must make certain disclosures regarding greenhouse gas emissions in the directors’ report—but only to the extent that it is practical for the company to obtain the requisite information.

Additionally, a significant number of investor representative groups have updated their guidelines to make specific and detailed reference to corporate social responsibility matters.