European Commission proposes ESG disclosure for large companies
The European Commission has published proposed amendments to European accounting legislation in order to require certain large companies to provide additional information on social and environmental matters. These companies would need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.
An Executive Summary of the Impact Assessment prepared by Commission staff notes that "the majority of large EU companies fail to adequately meet growing demand from stakeholders (including investors, shareholders, employees and civil society organisations) for non-financial transparency", both in terms of quantity (only around 2,500 out of a possible 42,000 EU companies formally disclose non-financial information each year) and quality (lacking in materiality, balance, accuracy and timeliness). The Impact Assessment outlines the various options considered to address these concerns, including no policy change, requiring disclosure in an annual report, detailed reporting or setting up of a mandatory EU standard.
On the basis of the constituent feedback and analysis performed, it was determined the best policy option was to propose a combined approach, setting minimum disclosure requirements in annual reports, but permitting companies to provide more comprehensive reports if they wish. The requirements would only apply to larger EU companies (around 18,000 in total) to avoid an administrative burden on small and medium-sized companies (SMEs).
To implement the requirements, the legislative proposals would amend the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts, 78/660/EEC and 83/349/EEC) to require the annual report to include a non-financial statement with the prescribed minimum information.
The draft wording of the key requirements is reproduced below:
For companies whose average number of employees during the financial year exceeds 500 and, on their balance sheet dates, exceed either a balance sheet total of EUR 20 million or a net turnover of EUR 40 million, the review shall also include a non-financial statement containing information relating to at least environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters, including:
- a description of the policy pursued by the company in relation to these matters;
- the results of these policies;
- the risks related to these matters and how the company manages those risks.
Where a company does not pursue policies in relation to one or more of these matters, it shall provide an explanation for not doing so.
In providing such information the company may rely on national, EU-based or international frameworks and, if so, shall specify which frameworks it has relied upon.
However, the statement is not required where the company includes in its annual report a comprehensive report relying on prescribed frameworks (such as the UN Global Compact, ISO 26000, the German Sustainability Code, or GRI guidelines) covering the information required.
Frequently asked questions accompanying the proposals clarify they do not require European companies to adopt integrated reporting:
The proposed 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 is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.
Click for EC press release (link to EC website).