By Paul Davies
Unprecedented globalisation, coupled with significant concerns around climate change, has taken environmental and social responsibility from a voluntary concept to something more obligatory and enforceable. Consequently, corporate governance has increasingly become a binding legal obligation in a number of jurisdictions. Demonstrable of such progression, the EU Directive 2014/95 will be enforced from 2017 – a Directive which increases reporting obligations of non-financial information. Member States will need to assess domestic legislation to ensure compliance with the new obligations under the Directive. For example, France notably revised its Commerce Code in August this year to accommodate the latest EU environmental and social governance (ESG) requirements.
Regional and international policy has have led the way. Since the Organisation for Economic Co-operation and Development (OECD) adopted its Guidelines for Multinational Enterprises in 1976, ESG has progressively featured in the legislation guiding businesses. Global Compact, undertaken by the UN in 2000, introduced voluntary participation to comply with its Ten Principles – principles which enhanced ESG. This move prompted the EU Commission to debate how Europe could better promote corporate social responsibility (CSR) to achieve greater transparency and accountability among its member states.
To date, the definition of CSR and ESG are rather ambiguous. Yet, from a responsibility perspective, legislation has increasingly urged companies to go beyond mere compliance and to invest “more” into human capital, the environment and relationships with relevant stakeholders. Progress in this respect has nevertheless been uneven. Exposed to greater transparency and scrutiny, some business sectors have adapted fast, whilst others, such as heavy industries, have tended to find reform more difficult.
From authorities and lawmakers alike, goodwill and voluntarism no longer seem sufficient to adjust corporate behaviour to meet today’s environmental and social needs. The EU Commission has therefore issued legislation aimed at achieving improved ESG transparency – providing amendments to existing provisions in relation to accounting obligations and practices, and setting out certain minimum legal requirements. The amended Directive 2014/95/EU raised disclosure requirements of non-financial and diversity information by large undertakings and groups. Interestingly, the provisions do not impose direct substantive obligations as to how environmental and social governance should be conducted, but rather as to how ESG efforts should be reported.
The provisions insist on such information yielding a “fair” and “comprehensive” view of the undertaking’s “policies, outcomes and risks” – therefore companies are obligated to include a non-financial statement in management reports and a corporate governance statement to supplement an organisation’s diversity policy. The new provisions also stipulate the need for consistent reporting of non-financial information to allow comparability throughout the European Union Member States and to capture information from the due diligence process implemented by the undertaking. With a view to facilitating relevant, useful and comparable disclosure of non-financial information, the EU Commission is to prepare non-binding guidelines on reporting methodology following the circulation of a consultation document. The guidelines are to be published by 6 December 2016.
In recognising the administrative burden of these new disclosure obligations on small and medium-sized enterprises, the Directive is limited to certain large undertakings and groups, determined by number of employees, balance sheet total and net turnover. While the employee threshold is set as 500, Member States remain free to impose the same disclosure obligations upon smaller entities.
By 6 December this year, Member States are required to bring into force the mechanisms necessary to comply with the Directive for the financial year starting on 1 January 2017. It is therefore imperative that domestic legislation be closely scrutinised as the deadline fast approaches.
This post was prepared with David Desforges from Desforges Law.
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