The European Union (Disclosure of non-financial and diversity information by certain large undertakings and groups) Regulations 2017 (the Non-Financial Disclosure Regulations, or the Regulations) were signed on 30 July 2017 by the Minister for Jobs, Enterprise and Innovation, and will come into operation on 21 August 2017. They will apply to financial years beginning on or after 1 August 2017.
The Non-Financial Disclosure Regulations transpose into Irish law Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large companies and groups (the Non-Financial Disclosure Directive).
The Non-Financial Disclosure Directive amended the Accounting Directive (Directive 2013/34/EU), which has already been transposed into Irish law by the Companies (Accounting) Act 2017 (click here to see our Guide to the Highlights of the changes made by this Act). However, the additional disclosure obligations imposed by the Non-Financial Disclosure Directive had to be first transposed into Irish law, in order to be effective here. In addition, some of the amendments introduced by Non-Financial Disclosure Directive gave various options to EU Member States, which had to be selected by the Government, when transposing it into Irish domestic law.
This note summarises the main requirements of the Non-Financial Disclosure Regulations.
Who is within scope?
The Non-Financial Disclosure Regulations apply to, and impose different disclosure obligations (discussed below) on:
- Companies that are defined by the Regulations as "Applicable Companies". These are companies which (i) in relation to a financial year, qualify as "large companies" under Section 280H of the Companies Act 2014, including large group holding companies, with more than 500 employees on average, and (ii) are "ineligible entities", within the meaning of the 2014 Act (i.e. companies which (a) have transferable securities admitted to trading on a "regulated market" of any EEA Member State (in Ireland, this is the Main Securities Market (MSM) of the Irish Stock Exchange (ISE)), or (b) are credit institutions, or (c) are insurance undertakings, or (d) are certain other specified undertakings, such as investment companies); and
- Companies that are defined by the Non-Financial Disclosure Regulations as "Large Traded Companies". These are companies that are "large companies" under Section 280H of the 2014 Act, and which are also "traded companies", within the meaning of that Act, i.e. a PLC, Designated Activity Company, company limited by guarantee, public unlimited company, or public unlimited company without a share capital, that in the case of a PLC, has shares or debentures, or in the case of any of the other foregoing company types has debentures, admitted to trading on a "regulated market" in an EEA Member State.
By way of example," Applicable Companies" will include e.g. large Irish PLCs with shares admitted to trading on the MSM of the ISE and which have more than 500 employees on average in the relevant financial year (including where that PLC is the holding company of a group with an aggregate average number of employees in excess of 500), and also large credit institutions, insurance undertakings and investment companies, which meet the foregoing employee requirements.
However, "Large Traded Companies" will include e.g. large Irish PLCs with shares admitted to trading on the MSM of the ISE, and will be subject to the disclosure obligations imposed on "Large Traded Companies", summarised below, even if they do not satisfy the average number of employee requirements that apply to "Applicable Companies".
Disclosures by "Applicable Companies"
Directors of "Applicable Companies" will be obliged, in respect of financial years commencing on or after 1 August 2017, to include, in their directors' report, what is described as a non-financial statement, containing (subject to certain exceptions) information on their policies, main risks and outcomes relating to:-
- environmental matters;
- social and employee matters;
- respect for human rights; and
- corruption and bribery issues.
In addition, the Applicable Companies must include a brief description of their business model.
Where the company does not pursue policies in relation to any of the above matters, it must give a "clear and reasoned" explanation in the non-financial statement for not so doing.
Importantly, it should be noted that, having regard to the definition of "Applicable Company", referred to above, a company that does not meet the threshold of an average of greater than 500 employees in a given financial year will not be subject to the requirement in the Regulations to provide the non-financial statement, in that financial year.
Disclosures by "Large Traded Companies"
The Non-Financial Disclosure Regulations separately require the directors of Large Traded Companies to include in their Corporate Governance Statement with respect to financial years commencing on or after 1 August 2017, details of the diversity policy applied in relation to the company's board of directors with regard to aspects such as age, gender or educational and professional backgrounds; the objective of its diversity policy; how it has been implemented; and the results of that policy, in the financial year.
Where the Large Traded Company does not apply any diversity policy, it must include, in its Corporate Governance Statement, an explanation as to why there is no policy.
There is an exception from the diversity requirements for Large Traded Companies which have only issued securities, other than shares, which are admitted to trading on a "regulated market", unless the company has also issued shares traded in a "multilateral trading facility" (e.g. the Enterprise Securities Market of the ISE).
Obligations on Statutory Auditors
The statutory auditors of both "Applicable Companies" and "Large Traded Companies" have certain obligations under the Regulations, when preparing their report on the company's statutory financial statements.
In the case of the non-financial statement requirements, where applicable, the auditors will be required to establish that the company has prepared that statement either in its directors' report or in a separate statement.
In the case of the diversity policy requirements, where applicable, the auditors will be required to state whether in their opinion, based on the work undertaken in the course of the audit, the diversity policy is contained in the Corporate Governance Statement or, where no diversity policy is applied, the explanation as to why this is so is contained in the Corporate Governance Statement.
Penalties for non-compliance
Failure to comply with the core obligations imposed by the Non-Financial Disclosure Regulations is an offence punishable by a Class A fine or imprisonment for up to 6 months, or both.
Guidelines on non-financial reporting
The European Commission has recently published non-binding guidelines on non-financial reporting, which can be accessed here. These guidelines reflect the Commission's views on the methodology for reporting non-financial information in order to facilitate "relevant, useful and comparable" disclosure of the required information.
Companies within scope of the Non-Financial Disclosure Regulations should review the legal requirements, and take the measures necessary to ensure that they will be able to include the relevant disclosures in their directors' reports and/or (if applicable) Corporate Governance Statements, for financial years beginning on or after 1 August 2017.