Businesses increasingly find themselves under the spotlight to demonstrate that they are operating not only in accordance with the law, but also in an ethical and socially responsible manner.

The UK Bribery Act was a high-profile (and highly-politicised) example of commercial enterprises being required to ensure sound business practices. Two more recent (albeit slightly less high-profile) pieces of legislation continue the trend, with a focus on non-financial reporting.

Modern Slavery Act

The Modern Slavery Act (the Act), which received Royal Assent on 26 March 2015, seeks to combat slavery and human trafficking, in part by putting the onus on businesses to ensure that there is no forced labour in their supply chains.

Because of this focus on supply chains, the Act is likely to be of greatest relevance to the construction industry, as well as the food, clothing and technology sectors.

Section 54 of the Act requires that from October 2015, companies which carry on a business, or part of a business in the UK and which have a turnover of £36million or more must prepare a slavery and human trafficking statement for each financial year of the organisation (a s54 statement).

A s54 statement is one of the following:

  • A statement of the steps the organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains and in any part of its business.
  • A statement that the organisation has taken no such steps.

While no particular steps are mandatory, the Act sets out six areas of information that a s54 statement “may” include and it seems clear that the UK Government expects that many business will choose to cover these areas. The areas include a number that will be recognised by those familiar with the adequate procedures under the UK Bribery Act, including a risk assessment, information about due diligence and details of training and monitoring.

The Act does not require the s54 statement to be included in the company accounts, but it must be:

  • Published for each financial year.
  • Published on the corporate website.
  • Approved by the board and signed by a director.

It therefore seems likely that many businesses will choose to publish their s54 statement alongside the annual report.

EU directive on disclosure of non-financial reporting

As part of a drive to increase “the transparency of the social and environmental information” provided by businesses across the EU, whilst also creating a level playing field for those businesses, the EU published Directive 2014/95/EU on 15 November 2014 (the Directive).

The Directive affects “large companies” – defined as those which meet all of the following criteria:

  • They have more than 500 employees.
  • They meet financial thresholds (have a balance sheet of at least €20 million or net turnover of at least €40 million).
  • They are “public interest” organisations (this includes listed companies, plus unlisted companies such as credit institutions, insurance undertakings and other businesses selected by member states).

It requires these companies to publish annual environmental, social and governance reports (also known as ESG reports or non-financial statements), either within the annual corporate report, or in a separate filing.

ESG reports must include a description of the diversity policy applied in relation to the company’s board and address three areas as a minimum:

  • Environmental matters.
  • Social and employee related aspects (e.g. gender equality, trade union rights, health and safety at work).
  • Human rights, anti-corruption and bribery.

Companies must conduct a risk assessment of the particular risks which their business faces in relation to each of these matters. They must include within their ESG report a summary of those risks, a description of the company’s policy in respect of these risks and the outcome of that policy. As well as a description of the company’s business model, they must include information about their due diligence process (including with respect to their supply chain).

The Directive imposes the “comply or explain” principle, with the result that if a company fails to pursue policies relating to the areas covered by the Directive, it must explain why in its annual report.

The Directive must be implemented in each member state by 6 December 2016, with companies to start making reports for the financial year starting on 1 January 2017 or during the calendar year 2017. Penalties for failure to comply with the requirements of the Directive will be set by national legislation.

The Directive is unlikely to have a substantial impact on UK businesses because of the breadth of the UK’s Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which set out the current UK reporting requirements. Under these regulations, a strategic report is required which must include information about:

  • Environmental matters.
  • The company’s employees.
  • Social, community and human rights issues.

There is therefore substantial overlap with the requirements of an ESG report.

Conclusion

These reporting requirements seek to “name and shame” organisations not doing enough to ensure they are acting ethically and in a socially responsible way, with customers, suppliers, trade unions and pressure groups likely to use evidence of corporate failings as a way to apply pressure for change.

The reputational harm associated with being a non-compliant organisation is likely to exceed the financial penalties.

Affected businesses should be aware of their increased reporting obligations and ensure that they collect the information required in order to be able to comply. They should also review corporate policies, both to check that they are fit for purpose and to ensure that employees (and where relevant, customers and suppliers) are aware of their contents.

Companies which are complying with these reporting obligations should publicise that fact, as this is an area where compliance can be a competitive advantage.