In a bid to improve the transparency of company information across all Member States, the European Commission (Commission) has published its proposals for a directive to amend the Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts (the Accounting Directives) regarding the disclosure of non-financial and diversity information by large companies (the Amending Directive).

Importance of transparency

The objective of the proposals is to increase EU companies' transparency and performance on environmental and social matters. The Commission believes that enhanced transparency will help companies to manage their non-financial risks which should have a positive impact on their financial performance. Transparency should also allow investors to take better account of sustainability considerations and long-term performance of companies.

Several consultations conducted by the Commission, however, reveal that only a limited number of large EU companies regularly disclose non-financial information and the quality of such disclosure varies, making it difficult for investors to understand and compare companies' positions and performance across the EU. Furthermore, certain Member States, including the UK, have introduced disclosure requirements which go beyond the Accounting Directives, causing further difficulties when comparing company data from different Member States. Consequently, the Commission believes that the existing legislation has proved ineffective and an update is required to ensure a level playing field across the EU.

What are the proposals?

Non-financial information

Currently, the Accounting Directives require large companies to disclose non-financial information, including information relating to environmental and employee matters, in their annual reports.

The proposals will require large companies to include a non-financial statement in their annual report, including material information relating to at least environmental, social and employee-related matters, respect of human rights and anti-corruption and bribery aspects. Within these areas, the statement must include:

  • a description of its policies
  • the results of the policies, and
  • the risks relating to those areas and how the company manages those risks.

When providing this information, and without prejudice to more stringent requirements imposed by Member States, the company may rely on national, EU based or international frameworks (for example, the UN Global Compact or the Global Reporting Initiative) and it must disclose which framework it has relied on. A company that does not apply a specific policy in one or more of these areas will be required to explain why this is the case.

The amended provisions would only apply to those companies whose average number of employees exceeds 500 (currently, the threshold is 250) and which have a balance sheet total of 20 million Euros or a net turnover of 40 million Euros. It is estimated that the new requirement would apply to approximately 18,000 companies in the EU.

Companies that provide non-financial reports corresponding to the same financial year will be exempt from the obligation to provide a non-financial statement in the annual report, provided that the report corresponds to the same financial year, covers at least the same content required by the Amending Directive and is annexed to the annual report.

Furthermore, subsidiaries (and their own subsidiary undertakings) are exempt from the new requirement provided that the consolidated annual report for the group is drawn up in accordance with the new requirement.

Diversity policy

Large listed companies are required to provide information on their diversity policy, including aspects concerning age, gender, geographical diversity and educational and professional backgrounds. The information will be included in the corporate governance statement of the annual report which must contain the objectives of such a policy, details of how long it has been implemented and the results obtained in the reporting period. Companies which do not have a diversity policy will be obliged to provide a clear and reasoned explanation as to why this is the case. Small and medium sized companies which are exempt from certain accounting obligations under the Accounting Directives are not subject to this requirement.

What is the position in the UK?

The UK already has a framework in place to ensure disclosure of non-financial information in company annual reports. The Companies Act 2006 requires companies to incorporate a business review in the directors' report which must contain a fair review of the company's business and a description of the principal risks and uncertainties facing the company. Companies may therefore, depending on their nature, be obliged to disclose non-financial information in their business review.

Additionally, a business review of a quoted company, (that is, a company with shares listed on a regulated market in the EEA (including the Main Market but excluding AIM), NYSE or Nasdaq) must include information about environmental matters, the company's employees and social and community issues.

The draft Companies Act (Strategic Report and Directors' Report) Regulations 2013, which will amend the Companies Act 2006 and are expected to come into force this spring, propose further changes to the structure for narrative reporting. Click here for our article on the proposed changes in our November 2012 newsletter. Companies will be required to produce a stand-alone Strategic Report which will replace the existing business review. Whilst the content of the Strategic Report will largely replicate that of the business review, quoted companies will be required to report additionally on their strategy and business model, their diversity record and human rights issues relevant to an understanding of their businesses.

Furthermore, the UK Corporate Governance Code, which is applicable to companies with a premium listing, requires companies to include the board's policy on diversity, including gender and related objectives for implementing its policy, together with a report on its progress in achieving those objectives.

Change to the status quo?

The UK has a framework of existing and proposed legislation to require companies to disclose financial and non-financial information, with particular requirements for listed companies which largely follow or are similar to the requirements proposed by the Commission. The Amending Directive will further require large companies, including those which are not listed, to comply with the new requirements or explain why they do not wish to do so. One might expect such larger companies to follow similar reporting in their business reviews or at the very least, be familiar with the practice of reporting non-financial information in the UK. Consequently, the proposals do not represent a major cultural shift for narrative reporting in the UK, but may be viewed as such in other Member States.

Next steps

The Amending Directive will need to be adopted by the Council and European Parliament before being transposed by Member States. There is no clear indication when the proposals are expected to be effective. In its FAQs, the Commission suggests that transposition may not be until 2016, which means that companies might be required to publish their first reports in 2017. The Commission states that Member States may grant non-listed companies, which currently may be less used to reporting practices, the possibility of an additional transitional year.