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EU Reporting: it’s not all about the money

In the avalanche of regulation passed by the EU Parliament on its election-boosted Turbo Tuesday, it might have been easy to miss their approval of a Directive intended to improve corporate social responsibility. Affected companies will have to disclose information on policies, risks and results with regard to:

  •          environmental matters,
  •          social and employee-related aspects
  •          respect for human rights
  •          anti-corruption and bribery issues
  •          all the above issues through the supply chain
  •         diversity on boards of directors

 The amendment to existing accounting legislation will apply to “large public-interest entities”, primarily listed companies and financial institutions, with over 500 employees; thought to amount to approximate 6,000 firms across the EU. Reporting can be made at the group level, providing concise and useful information of the firm’s activities, rather than a prescribed, detailed report. Environmental, social and governance (ESG) data will be included in the annual report and accounts, though the approved draft leaves it up to individual firms to decide how and when other necessary information will be presented, the Commission has retained the option to issue further binding guidance. The Directive has been controversial, less than 10% of firms currently disclose this data, and has been subject to considerable diminution in both extent and application, an earlier draft would have covered up to 18,000 firms. Despite the protests about ever-encroaching bureaucracy and the costs of mandatory compliance; through much of the EU, the Directive mirrors and unifies existing national legislation. There is an increasing focus on non-financial aspects of a business, publication will force a focus on these areas and the data will be useful for sustainable\ethical investors, other stakeholders and consumers. The Directive has been criticised as a toothless compromise and a wasted opportunity- lack of reporting prescription will make comparison difficult, reports will be audited but not verified, it will only apply to a small fraction of firms and there is no sanctions regime. However, it is the first piece of legislation to make ESG reporting mandatory across the EU; good-citizenship is a virtue that is inimical to compulsion, and given sufficient light to see by- the court of public opinion can wield a big stick.

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