European Union Introduces Mandatory Reporting

In April 2014 the European Parliament adopted the long-awaited directive on the disclosure of nonfinancial and diversity information by certain large companies, amending the 2013 Accounting Directive. The directive, which adopts a report-or-explain approach, introduces measures that will strengthen the transparency and accountability of an estimated 6,000 companies in the EU.

A last-minute compromise deal between EU Member States and European Parliament negotiators means that listed companies will, for the first time, be required to report on key human rights and environmental issues, including within the supply chain, if the law is adopted later by the Parliament’s plenary and the Council.

“This vote is a victory for transparency and this is a great day for the future of sustainability reporting,” says Teresa Fogelberg, Deputy Director of the Global Reporting Initiative (GRI). “This agreement demonstrates the EU’s strong commitment to corporate transparency and sustainability – supporting smart, sustainable, and inclusive growth, and paving the way for a sustainable global economy.”

The new rules will only apply to certain large companies with more than 500 employees. In particular, large public-interest entities with more than 500 employees will be required to disclose certain nonfinancial information in their management reports. This includes listed companies as well as some unlisted companies, such as banks, insurance companies, and other companies that are so designated by Member States because of their activities, size, or number of employees.

“It is estimated that some 6,000 companies will fall under the scope of the directive. To put this in perspective, there are currently approximately 2,500 global organization sustainability reports in the GRI Global Database, which represents one of the most comprehensive databases of sustainability reporting,” explains Louis D Coppola from the G&A Institute.

Scope and range were weakened during the preparation

The compromise has been welcomed as a timid step forward by the European Coalition for Corporate Justice (ECCJ) – a broad coalition representing NGOs, consumer groups, trade unions, and academics who have been urging legislative reform. But a spokesperson for ECCJ said they were disappointed that some Member States had weakened the proposal. The European Parliament’s legal affairs committee had asked for clearer and more demanding reporting by all large companies.

ECCJ coordinator Jerome Chaplier says: “This is an important step forward, as it means citizens and investors will have access to meaningful information from companies – rather than the selective and often misleading data currently provided. They will have to release details of important risks to people and to the environment. This means a listed large oil company will have to report on its oil spills and the health risks from gas flaring, for example, or a listed clothing retailer will have to consider risks in its supply chain.”

Original proposals to extend the law to all large companies were blocked by some national governments, who also inserted a number of loopholes, which could mean some companies will be able to avoid reporting.

Jerome Chaplier added: “Some Member States have sought to water down this
legislation, weakening its scope and power. Some of the clauses introduced could be used by companies to limit what they report, effectively undermining the intentions of this reform. The European Commission must be ambitious in the way this reform is implemented and ensure that misleading information provided by companies can be challenged.”

Flexibility by choosing the adequate standard

The directive leaves significant flexibility for companies to disclose relevant information in the way that they consider most useful, or in a separate report. Companies may use international, European, or national guidelines that they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code). Fogelberg from GRI added: “This is a truly historic moment, and I am confident that this is just the beginning of a new era for transparency and sustainable and inclusive growth in the EU.”

Guidelines for companies on how to report under the new reform, including on water use, land use, greenhouse gas emissions, and use of materials, are expected from the European Commission within the next two years. The legislation is expected to be reviewed after four years.

“The demand by investors and civil society for greater transparency and accountability of undertakings is growing,” says MEP Raffaele Baldassarre. “The new rules will enable forward-looking business leaders to address this demand and to fully make use of the huge potential of CSR in order to increase their competitiveness while contributing to smart and sustainable growth in Europe.”

Sources: European Union, European Coalition for Corporate Justice, Global Reporting Initiative, G&A Institute