This week, Internal Market and Services Commissioner Michel Barnier presented a proposal regarding the amendment to existing accounting legislation. The transparency of companies with more than 500 employees shall be improved: in future, these would be required to disclose information on policies, risks and results concerning environmental matters and social and employee-related aspects as well as their approach to human rights, diversity and anti-corruption issues. This shall provide consumers and investors with additional information on corporate policies in these areas. In spite of the fact that the draft for the amended Directive is to a large extent non-prescriptive and does provide companies with significant room for manoeuvre, its publication, however, is capable of putting pressure on large companies, whose performance fall short regards the issues mentioned.
The proposal of the European Commission is based on several Communications issued in recent years: the expansion of disclosure requirements to non-financial information was announced in the 12 projects to strengthen the Single Market (“Single Market Act”), which Barnier presented in 2011, in the EU Strategy for corporate social responsibility as well as in the Action Plan on European company law and corporate governance. Since 2010, the Commission has been engaged in consultations with companies, stakeholders and Member States. The objective was a balanced proposal, which shall improve transparency and at the same time keep additional bureaucracy in check.

The proposal is based on the Fourth Company Law Directive on statutory audits of annual accounts and consolidated accounts. In accordance with current EU law, companies may decide themselves, whether they disclose information on environmental, social and other aspects of their activities to the public. According to the Commission, this had been proven to be ineffective and too complicated: whilst fewer than 10% of the largest EU companies disclose such information regularly, some States have even implemented the Directive in such a way, that its legal provisions go beyond the requirements of the Commission. It has now become necessary to provide legislative clarity, whereby recently the EU Parliament too had the issue of corporate transparency on its agenda: on 6 February 2013, it passed resolutions on corporate social responsibility, which are aimed at transparent business practices and sustainable growth.

What precisely is at issue? Who is affected by this Directive?

Whilst companies’ annual financial statements are mainly concerned with figures, non-financial information shall now gain in significance. Companies with more than 500 employees shall disclose their policies, risks and results concerning environmental matters and social and employee-related aspects along with their approach to human rights, anti-corruption and bribery issues as well as diversity on the boards of directors. “Smaller” companies are not affected as one wants to avoid additional administrative expense. This is not about a fixed, predetermined “sustainability plan”, which companies have to follow by the letter. The Commission intends to leave significant flexibility for companies to ensure that administrative burdens are kept to a minimum. If details for a specific area (environment, Human Rights, etc.) are not required to obtain a broad, public overview of a company’s situation, it will not be necessary to include this area in the report. But: the company has to explain why it considers the protection of the environment or social rights for example as not relevant. Scope and layout of these reports will be left to the companies. However, there are international and national guidelines, such as the United Nations “Global Compact”, ISO Standard 26000 or the German Sustainability Code, which companies may use as a guide.

The background of the Commission proposal: in the long-term, transparency leads to an improved performance of a company in the broadest sense. Not only groups of investors, but also consumers are increasingly interested to know how a company addresses Human Rights issues of its employees or how it deals with diversity (age, gender, ethnicity, etc.). In the long term – so the idea – transparency, healthy economic growth, the protection of the environment and sustainable employment will engage with each other. The coming weeks will show how this proposal will be discussed in the European Parliament and by the critical public. In any case, the attempt to persuade large companies to disclose non-financial information is to be welcomed and provides follow-up opportunities to advance the objective of a social and environmentally friendly mode of production – even if the Commission proposal is more concerned with putting public pressure on companies, apart from the fact that it hardly has any sanctions at its disposal. The arbitrarily chosen limit of 500 employees is also much too high, as it means that only a small number of companies will be subject to this Directive.

Further information:

Directive proposal