Thursday, April 17, 2014

6,000 European Sustainability Reports... coming soon

Get ready, folks. The sustainability reporting revolution has just heated up. Congratulations to the European Parliament for taking this major step towards the transparency and accountability of European business. On 15th April, 599 members of the European Parliament passed a vote to amend Directive 2013/34/EU and require mandatory disclosure of non-financial and diversity information by certain large companies and groups  on a "report or explain" basis for all European-based "Public Interest Entities" (PIEs) of 500 employees or more (or by parent companies of European-based 500+ PIEs). This Directive will come into force when ratified by the EU Member States in the European Council which is expected to formally adopt the proposal in the coming weeks.

(PIEs include 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.)

RCV= Roll Call Vote: In favor, against, abstentions on 15th April 2014

For those of you who want to see all the detailed published by the EU Commission, you can find them here. For those of you who want the headlines that I picked out from the EU communication docs, including the Q&A, read on (red highlights are mine).

Companies covered by the Directive, aka PIEs, will be required to disclose in their management report relevant and material information on policies, outcomes and risks, including due diligence that they implement, and relevant non-financial key performance indicators concerning environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

This information should include:
  • a brief description of the group's business model
  • a description of the policy pursued by the group in relation to those matters, including due diligence processes implemented;
  • the outcome of those policies
  • the principal risks related to those matters linked to the group's operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the group manages those risks
  • non-financial key performance indicators relevant to the particular business. 
Where the group does not pursue policies in relation to one or more of those matters, the consolidated non-financial statement shall provide a clear and reasoned explanation for not doing so.

Companies will retain flexibility to disclose relevant information in the way that they consider most useful, whether this is as part of their annual report or in a separate report. References to acceptable international frameworks include the UN Global Compact, the German Sustainability code, ISO26000, OECD Guidelines for Multinational Enterprises  and of course, GRI.

Currently, around 2,500 large EU companies disclose environmental and social information regularly. This Directive, applying to PIEs with more than 500 employees, will affect around 6,000 large companies and groups across the EU.  Millions of SMEs are excluded from this legislation, which makes sense.... for now.

The Directive does not require comprehensive reporting on environmental and social aspects (although the Commission certainly encourages it). The Directive requires only the disclosure of certain information on policies, outcomes and risks. This is estimated to result in an additional direct cost for large companies of less than €5,000 per year. (Though who knows how this was calculated!)

Several measures have been taken to limit the administrative burden for larger companies. For instance, the disclosure requirements may be fulfilled once at group level, rather than by each affiliate in the group, and auditing aspects are limited to an annual check. However...

The Directive requests that the Commission examines and reports back by July 2018 on the possibility of introducing an obligation requiring large undertakings to produce, on an annual basis, a country-by-country report, containing information on, as a minimum, profits made, taxes paid on profits and public subsidies received.

The Directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting.

The Commission shall prepare non-binding guidelines on methodology for reporting non-financial information, including non-financial key performance indicators, general and sectoral, with a view to facilitating relevant, useful and comparable disclosure of non-financial information by Union undertakings. In doing so, the Commission shall consult relevant stakeholders. The Commission shall publish the guidelines no later than 24 months after the entry into force of this Directive.


This is a great leap forward for business transparency. The EU statement boldly makes the point:

"Transparency leads to better performance. This is true not only about disclosure of financial information, but also as regards information on environmental and social matters. Transparent companies perform better over time, have lower financing costs, attract and retain talented employees, and are ultimately more successful."

I am sure many many people have been instrumental in working towards this achievement, but I would like to highlight a few that I personally know have been behind this great news. 

At the GRI: Ernst Ligteringen, Teresa Fogelberg and Pietro Bertazzi,  and the rest of the GRI team. This legislation is a fabulous validation of the tireless work of GRI over many years. Teresa Fogelberg, the dynamo behind GRIs government relations  and advocacy team, said in the GRI Press Release:

“This directive is the vital catalyst needed to usher in a new era of transparency in the largest economic region in the world. 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.”

This is also a fabulous conclusion to an era at GRI which has been led by the formidable Ernst Ligteringen. Ernst announced his intention to step down from 11 years of GRI leadership earlier this month, and he continues as Chief Executive while the organization seeks its next leader. It is very fitting that this culmination of so many years of effort should be just in time to constitute a tribute to his leadership and contribution to sustainable and transparent business. 

At the EU: European Parliament Rapporteur on Corporate Social Responsibility Richard Howitt MEP proposed this change way back in 1999, and has been working consistently since then to get the Euro folks moving. I heard Richard talk passionately about the need for this legislation a couple of years back, hearing his confidence that such legislation would become reality in the not too distant future. This is a validation of his efforts, as well as all the other EU parliamentarian pioneers that drive positive change in our society. See Richard's notes on Facebook here.

For further light reading, some articles already published:

eRevalue blog: Tuesday April 15th 2014: a good day for the corporate world
The Sustainability Report: European Parliament adopts standards for ESG disclosure
Compliance Week: European Parliament approves new rules for non-financial disclosure

This Directive is, I believe, very wise.

It is non-prescriptive enough to allow flexibility about the nature of disclosure and frameworks and data points so as to enable companies to get on board whatever stage of the journey they are at, without having to start again from a blank page. At the same time, it clearly sets a new standard of expectation for disclosure.

It focuses on relevance, materiality, process and outcomes. Coincidentally, or perhaps not so coincidentally, this is the heart of G4. Disclosure is not for disclosure's sake. It is part of an entire connection of business impacts on society and the environment. This approach will hopefully ensure we don't see just a list of numbers clumped together in an Annual Report, but a serious and sensible, meaningful and valuable account of a company's impacts. 

It exempts smaller and non-listed companies. For the time being. Completely logical. With a target of a total of 6,000 companies, of which only 2,500 currently report, this is going to be tough enough to implement and enforce. Maybe later.... the scope could be expanded. 

All that is needed now is a further Directive which requires all adults in the EU to actually take an interest in the non-financial disclosures of PIEs and provide feedback to such companies as to how they are or are not meeting their expectations. However, I guess that's a Directive which might take a little longer to approve. In the meantime, we are making progress.  Well done to all those involved. Good luck to all those affected.  

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Understanding G4: the Concise guide to Next Generation Sustainability Reporting  AND  Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices . Contact me at   or via my business website   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

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