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Corporate reporting on the environment and human rights: EU recognises that voluntary approaches are not enough

On Tuesday April 15th the European Parliament will vote to adopt new reforms to non-financial reporting by large European Union (EU) companies. European Member States and MEPs agreed this last minute compromise package in February 2014 after weeks of negotiation about the draft law, seen by many as a crucial first step towards preventing human rights abuses and environmental problems in production.

What is the significance of this new regulation for financial companies?

The new Non-Financial Reporting Reform is an amendment to the EU Accountancy Directive.  All large listed EU companies with more than 500 employees will need to report publicly on risks and impacts in relation to environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.  Their statement should include due diligence processes and their results.  If a company does not pursue policies in relation to these issues, it will have to give a clear and reasoned explanation for not doing so.

For financial companies, the reforms will have an impact in terms of both their use of other companies’ annual reports and their own annual reporting. A useful element of the reform is that in relation to reporting of principal risks, a clearer link is made to the adverse impacts of an undertaking’s operations.  The new requirements set out that, “where relevant and proportionate”, reporting on risks to the environment and human rights should also include the company’s “business relationships, products or services which are likely to cause adverse impacts in those areas” as well as setting out how the company manages those risks.  Statutory auditors and audit firms will have to check whether the non-financial statement has been provided.

Pressure from EU Member States (including the UK and Germany) to exclude the largest privately-owned companies resulted in the scope of the reform being much narrower than originally intended. The original draft law would have covered 18,000 large businesses but the new provisions are expected to require only 6,000 of them to report.

However while there are a number of potential loopholes in the draft regulation, it still represents a significant step forward in terms of minimum requirements for corporate transparency.  Currently the European Commission estimates that out of 42,000 large EU businesses only 2,500 formally disclose this kind of non-financial information each year.

This reform sets a new threshold standard across the EU Member States.  In addition, it challenges the view that company reporting is only for shareholders and investors. Consumers and the public are also explicitly acknowledged as part of the audience for statutory disclosure by business.

There are many points of the legislation which will need to be fleshed out – the European Commission will be developing guidance for companies on how to report, including Key Performance Indicators for different sectors.

Member states also have a degree of flexibility when it comes to transposition into national law which will need to be completed by September 2016.  For example, this is the case for how they designate “public interest entities” or whether they require the content of the non-financial statement to be verified.

Clearly a lot still remains to be done.  But these EU non-financial reporting requirements finally recognize the impacts that the largest businesses can have on people and the environment, and that ultimately we all have an interest in corporate reporting that supports accountability.

Anne Lindsay is the Lead analyst on Private Sector at CAFOD.

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