European Union Moves Closer to Mandatory Social and Environmental Reporting

Flag_of_Europe.svgThe European Union took another step toward requiring large companies to publish social and environmental performance reports when the European Parliament approved amendments to a draft directive by a 599-55 majority last week. All that now remains for the measure to come into force is for the leaders of the 28 EU member states to approve the directive by a qualified majority at their next meeting, currently scheduled for late June.

Now that the European Parliament has essentially finalized the text of the non-financial reporting directive, the scope of its requirements are clearer than they were in February, when the European Commission and the European Council reached an initial compromise regarding its terms. (The first draft of the directive is available here, while the European Parliament’s amendments to the first draft begin at page 316 of the Word document available here.)

The text of the final directive will require all European companies with over 500 employees to publish an annual report regarding their environmental, social, employee, human rights, anti-corruption, and anti-bribery policies. Companies must explain their due diligence procedures pertaining to these matters and state the material risks that the company’s products, services, and business relationships pose in each of these areas.

The mandatory disclosure requirements apply only to companies based in a EU member-state whose shares are publicly traded on a European stock exchange. According to media reports, some 6000 companies across Europe meet these criteria. European companies can additionally apply to their national securities regulator for an exemption from some or all of these reporting requirements if it would disadvantage their competitive position to disclose certain non-financial performance information.

The European Parliament’s amended version of the non-financial disclosure directive requires the European Commission to prepare non-binding guidelines for how companies should report on their social and environmental performance. This includes the development of general and sectoral key performance indicators in consultation with stakeholders. It has not been confirmed when the new directive will come into force, although most observers believe that the EU member states will have two years to implement the measure.

In the meantime, companies that are looking for a head start on complying with the new European directive should consider benchmarking their non-financial performance against internationally-recognized CSR frameworks. The preamble to the new directive specifically recognizes that non-financial performance reports that reflect frameworks such as the U.N. Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the Global Reporting Initiative will satisfy the directive’s reporting requirements — thereby reducing the compliance costs for companies that are already engaging in such reporting.

Although some members of the NGO community would have preferred even more expansive mandatory reporting requirements, socially responsible investors (SRIs) have reacted very positively to the European Parliament’s action last week.  In recent press reports, one institutional investor based in the United Kingdom observed that the directive “will make a big difference” in providing investors with improved information on which to base their investment decisions. Similarly, the European Sustainable Investment Forum (Eurosif) stated in a press release that the new directive “sends a clear signal to companies that non-financial information can be material to their performance and competitiveness at a time when a growing number of investors are taking environmental, social and governance (ESG) information into account in their investment decisions.”

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