FSN: What now? Environmental reporting post OFR

What now? Environmental reporting post OFR

29th May 2006
The scrapping of the requirement for listed companies to produce an Operating and Financial Review (OFR) by Gordon Brown in November 2005, subsequent legal challenge by Friends of the Earth and the Government's decision to launch a consultation in response, has led to considerable confusion in the area of forward looking reporting for businesses and, what, if anything, should be reported. Dr Richard Mattison, Head of Strategy for Trucost Plc, explains why and how companies should be reporting and that mandatory disclosure of environmental impacts is still very much on the agenda.

The OFR meant that for the first time in UK Company Law non-financial issues, such as environmental, social and employee factors, would have to be considered in addition to more traditional financial issues. So its abolition had led to some finance directors breathing a sigh of relief at reduced reporting requirements on issues many consider intangible and difficult to measure.

However, very few companies are aware that despite the government abolition of the OFR, they will still need to meet broadly similar environmental reporting requirements for the Business Review under the EU Accounts Modernisation Directive (EU AMD) , the underlying legislation which the OFR sought to implement in the UK . In addition, the recent announcement, in light of the Department for Trade and Industry's (DTI) ‘Consultation on Narrative Reporting', that the Company Law Reform Bill will include, “the requirement that all companies, other than small companies, will need to produce a Business Review, as required by the EU Accounts Modernisation Directive,” has further added to the confusion.

The EU AMD, which is effective for financial years beginning on or after 1 April 2005, requires a mandatory addition of a Business Review to the Annual Report and Accounts. Large and medium-sized companies must produce a Business Review with a ‘fair review' of the business of the company, and while both groups are encouraged to include non-financial matters (explicitly environment and employee matters) using Key Performance Indicators (KPIs) , large companies must do so “to the extent necessary for an understanding of the development, performance or position of the business of the company.”

So despite the government U-turn on the OFR, many companies in the UK still need to meet broadly similar environmental reporting requirements for the Business Review under the AMD - but how many of these companies actually realise this?

Not many, it would appear. In November, the week that the OFR was abolished, Trucost spoke to 161 listed UK companies and found that only 9% of those had heard of the AMD. It is evident, therefore, that while comprehensive publicity and consultation surrounding the abandoned OFR had peaked the interest of companies, a situation has arisen in the UK where few companies are aware of the underlying EU Directive that the OFR sought to implement. The EU Directive still applies, however, and companies will need to produce reports on matters that are material to their business. “All quoted and large private companies preparing the new Business Review will need to report significant environmental issues,” Elliot Morley, Environment Minister, stated at the beginning of the year.

In order to facilitate analysis and reporting in a style familiar to that of the financial community, Trucost and Defra (the Department for Environment Food and Rural Affairs) published a set of guidelines to make it easier for companies to report. The guidelines, Environmental KPIs – Reporting Guidelines for UK Business, were produced to help businesses address their most significant environmental impacts and report on these in a way that meets the needs of their shareholders and other stakeholders.

They outline how environmental impacts can be measured using KPIs – in many cases making use of information already collected by companies – and how to report them easily, highlighting boundary issues and common units of measurements. The benefits of the Defra KPIs are that they are quantitative - they help companies to measure, manage and communicate environmental performance. Targets can be set to improve performance against each indicator and, because reporting against each KPI is standardised, disclosures should become much more comparable. As Elliot Morley, Environment Minister, said at the launch of the KPIs, “ They have been designed to help make reporting much sharper and more focussed on key impacts – this is about cutting out the fluff.”

The guidelines are consistent, practical and flexible and designed for people who are new to environmental reporting. They outline how environmental impacts can be measured through KPIs – in many cases making use of standard business data that may already be collected – and how to report them easily. The guidelines do not specify onerous requirements – for most companies, 5 or fewer KPIs are recommended.

So while the abolition of the OFR can be viewed as a bit of a blow to the advocates of mandatory environmental reporting and a victory for those who complain of regulatory burdens, the EU AMD does represent something of a middle way. In addition the new clauses put forward to the Company Law Reform Bill clarify this area further. One proposed clause states that companies that do not consider environmental, employee or social and community matters significant or relevant to their business should make a statement to that effect in the Business Review. However some ambiguity does still surround the directors' duties clause which states that the, “Government amendments seek to put beyond doubt that the need to have regard to certain factors (including the interest of the employees and impact on the environment) is subject to the overriding duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”

While the changes to the Company Law Reform Bill is currently being debated in Parliament, the additional clauses represent some success for more standardised reporting of non financial impacts and provide much needed clarification in the wake of the confusion after the OFR and how reporting requirements in the UK relate to the EU AMD.

For more information on Environmental KPIs – Reporting Guidelines for UK Business, and to find out which KPIs apply to your business, please go to http://www.trucost.com/newguidelines.html

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