Disclosure of non-financial information: Europe’s largest companies must be more transparent on social and environmental issues

22nd April 2015

Following adoption by the European Parliament of Directive 2014/95/EU on 15 April 2014, large companies (more than 500 employees) and groups will, from their financial year commencing on or after 1 January 2017 be required to disclose material non-financial and diversity information on social and environmental matters, such as, employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.  

 

 

 

It is hoped that such disclosures will give investors and other stakeholders a better understanding of the company’s development, performance, position and prospects for the future.  Better (more fulsome and transparent disclosure), says the EU, will drive the long-term performance of the EU's largest companies and contribute to Europe’s competitiveness and the creation of more jobs.

The new Directive will only apply to approximately 6,000 large companies, and large public-interest entities with more than 500 employees.  Smaller companies are not subject to the new requirements.

The Directive provides companies with significant flexibility to disclose information in the way that they consider most useful, or in a separate report and they may use international, European or national guidelines which they consider appropriate.  To limit the administrative burden for larger companies, the disclosure requirements may be fulfilled once at group level, rather than by each affiliate in the group, and auditing aspects are limited to an annual check.

Why the EU is acting on boardroom diversity

EU Commission evidence shows that EU companies often do not have sufficiently diverse boards resulting in, they say, management decisions not being challenged effectively and the stifling of innovative ideas.  In view of the key role of the board in the governance of companies, the Directive will require large listed companies to reflect better on the composition of their boards and to be transparent about their diversity policy providing information about age, gender, educational and professional background.

Tax matters will come under closer scrutiny

This Directive is also a first step towards the implementation of the European Council conclusions on the need for further transparency on tax matters and for ensuring consistent country-by-country reporting by companies and groups.

On 22 May 2013 the European Council called for some measures to fight tax evasion and fraud, including Country-by-country reporting about taxes paid, by each country where they have operations.  With more transparency, tax evasion and fraud will become more difficult. Transparency is complementary with other measures, such as strengthening international cooperation.

The Directive requests that the Commission examines and reports back by July 2018 on the possibility of introducing an obligation requiring large undertakings to produce, on an annual basis, a country-by-country report, containing information on, as a minimum, profits made, taxes paid on profits and public subsidies received.

This is not the first attempt

Many large companies already disclose a significant amount of information about such topics in their Annual Report, or aligned publications.  So what will change, and how?

Current EU legislation about disclosure of non-financial information has proved to be unclear and ineffective, and is applied in different ways in different Member States.  Furthermore, the current voluntary approach has its limitations. The Commission states that today, only around 2 500 large EU companies disclose environmental and social information regularly, (less than 10% of EU large companies).

The EU hopes that regulating some minimum requirements will improve the situation for the investors who may gain a better understanding of the companies in which they invest.  And according to the EU, the companies stand to benefit as well.  In the opinion of the Commission, transparent companies perform better over time, have lower financing costs, attract and retain talented employees, and are ultimately more successful.

So what will this cost the companies?

Many companies have already realised the strategic value of reporting on social and environmental matters for their internal business-decision process, and for their external communications.  The Commission (somewhat optimistically) estimates that compliance will result in an additional direct cost for large companies of less than €5 000 per year.

What happens next?

The Directive came into force on 6 December 2014. EU Member States have two years to transpose the Directive into national legislation. Therefore, companies concerned have time to adapt to the new requirements, and will start reporting from their financial year commencing on or after 1 January 2017.

Linklaters, the legal services firm, report that the directive requires the Commission to publish non-binding guidelines on the disclosures within two years, taking into account best practice, international developments and related EU initiatives. This will be preceded by a consultation with relevant stakeholders.

So, to a greater or lesser extent, affected companies potentially have another significant compliance project to contend with.  Such information as is required is unlikely to be on any system (apart from some KPI data), so companies are advised to mobilise now, track developments closely, complete a data-gap analysis and prepare in good time. 

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