The European parliament and council have agreed the amendments text of the EU’s Corporate Social Responsibility (CSR) Directive. This Directive which aims to enhance the transparency of large companies on social and environmental matters and therefore, to contribute effectively to long-term economic growth and employment, amends the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts, 78/660/EEC and 83/349/EEC, respectively).
The new rules, which are expected to be formally adopted in April 2014, apply only to “public interest entities” employing more than 500 people.
The agreed text represents a significant compromise on the proposals set out by the European commission last April, which would have required all large companies in the EU to report such non-financial data.
The European Commission’s original proposal, looked to increase the scope of existing non-financial reporting requirements to capture firms with 250 employees and with a balance sheet total of more than €20m. This could have potentially required as many as 30,000 UK firms to report on CSR issues.
However, under the agreement reached last month, only approximately 5,000 EU companies that have more than 500 employees and are listed on stock markets will now have to report on environmental and social performance. These companies will also have to disclose information on policies, risks and results as regards respect for human rights, employment, anti-corruption and bribery issues as well diversity on the boards of directors.
While this is a welcome amendment, the UK already has reporting requirements that go beyond the EU Directive. Since Oct 1st 2013, under the Companies Act 2006 companies listed on the main market of the London Stock Exchange are required to report their Scope 1 and 2 emissions alongside their financial reports. The directors’ strategic report must also cover environmental risks and opportunities. Approximately 1,000 UK companies must comply under this act.
While the CSR Directive does bring some important improvements at EU level, critics believe that too many compromises have been written into the amendment. The Directive does not establish, for instance, a common set of indicators, the non-financial performance can be produced in a separate report and there are no clear monitoring and sanction mechanisms.
Yet the reform is a positive step in the right direction. Companies should realise that the introduction of mandatory GHG reporting is an opportunity for all businesses to focus on their carbon footprints in order manage and reduce emissions, environmental impacts and costs. KPMG, the global accountancy firm reported that over 70% of large companies now consider CSR reporting a ‘mainstream business activity”. The next step however is to act on this reported information and consider the financial impacts of identified environmental risks.
Although many SME’s or non-listed companies may be outside the scope of the above regulations, initially at least, they should be moving into a position where they can start to report accurately on emissions relevant to their business performance. As well as encouraging competitive differentiation, CSR and emissions reporting will help companies to focus on reduction and efficiency opportunities from both an environmental and financial viewpoint.
While the amendment still has to be finalised by the full European Parliament and Council of Ministers before it can enter into force, guidelines for firms on how to report under the new rules are expected from the commission within the next two years.
A review of the legislation will also happen after four years, which could result in a broadening of the scope to include smaller firms.