A draft directive introducing new non-financial reporting rules for large companies employing more than 500 people was approved by the European Parliament on 15 April 2014. Companies affected will have to provide information on policies, risks and results in relation to environmental, social and employee related aspects, human rights, anti-corruption and bribery issues and diversity on the board of directors. Although all of these aspects play an important part in the success of a company, we have focused this article on the impact of the new rules in relation to environmental matters.
Which companies will be affected?
The draft directive covers all large public interest entities, which includes listed companies as well as some unlisted companies such as banks, insurance companies and other large entities designated by member states because of their activities, size or number of employees. It is estimated that this will affect approximately 6,000 large companies and groups across the European Union. The scope of the draft directive is therefore slightly wider than under the Companies Act 2006 (Strategic and Directors' Reports) Regulations 2013 (Mandatory Carbon Reporting Regulations) which only apply to quoted companies.
The draft directive extends the reporting requirement to cover the activities of supply chains. Companies will be able to choose whether they report at group level or individually. This will mean that although smaller companies are not specifically covered by the draft directive, they may have to monitor and report on their performance to enable their customers to disclose all relevant information.
Format for reporting
Companies concerned will be required to disclose the information in their management report, although they can choose to present this in the way they consider most useful. Further guidance is expected to be published by the European Commission on what information should be disclosed. Companies may use international, European or national guidelines for reporting.
Impact on investors
The new law should be good news for investors as it will provide a more detailed and complete picture of how a company operates and its environmental performance. It will also allow for more accurate comparison of the performance of European companies which are currently subject to different levels of reporting.
However, the lack of a single reporting method could make it difficult to draw direct comparisons between reporting companies.
Impact on companies affected by the new rules
The rules are not as extensive as initially proposed as it was felt by some that the requirements would be too burdensome on smaller companies. Therefore the rules will only affect approximately 6,000 companies, rather than the 18,000 that would have been captured by the initial proposal.
The new law will hopefully encourage more companies to carefully consider putting in place measures to improve their environmental performance. This will not only help protect the environment, but should also make a business more attractive to potential investors and in the long term increase profitability by, for example, reducing energy costs.
The European Commission estimates that the new requirements will result in an additional direct cost for each company of less than €5,000 per year. However, the costs are likely to depend on what existing measures companies have in place to monitor and report on such non-financial aspects.
When will the law be in force?
The draft directive now needs formal approval from the European Council to become law. A decision is expected within the next few weeks before the forthcoming European elections so companies affected should start to consider what measures they will need to put in place to enable them to meet the requirements of the directive.
Member States will then be required to transpose the directive into national laws. The exact deadline for transposition has yet to be determined but is likely to be in 2015, with the new rules applying form either 2016 or 2017.
