Guy Morgan, Director, Advisory Services, BSR
Recently, the European Union adopted PE-CONS 47/14, a new directive related to the mandatory disclosure of nonfinancial information by certain large companies and groups “of significant public relevance.” The 28 EU member states now have two years to incorporate the provisions into domestic law, which will be applicable in 2017.
This directive is important for a number of reasons:
- It raises the bar on disclosure of material nonfinancial information for a large array of companies. This directive applies to all “public interest entities,” which includes publicly listed companies, banks, and insurance companies with more than 500 employees and/or those with revenues greater than 40 million euros. It also applies to other companies that have significant public relevance due to the nature of their business, their size, and/or their corporate status. In practice, this applies to more than 6,000 corporate entities within the EU member states, as well as companies headquartered outside of the EU that have significant operations in the region.
- It emphasizes the need to undertake due diligence. Companies covered by the directive will be required to report on policies, performance, and principal risks related to environmental, social, and employee matters; respect for human rights; and anticorruption and bribery. It won’t be enough for companies simply to report their performance on what they deem key sustainability issues: They will need to include the due diligence processes implemented, they will have to know and show why they are reporting on specific issues, and, if certain issues are omitted, they will need to include the reasons for doing so.
- It requires greater supply chain transparency. The directive is explicit in its requirement for companies to identify, prevent, and mitigate both existing and potential adverse impacts in their supply and subcontracting chains. This means companies will need to undertake supply chain due diligence on everything from human rights to carbon emissions.
The EU’s regulatory push comes at a time when investors are putting more pressure on business to report metrics on their social and environmental performance, investments, and risks. This is particularly evident in the growing momentum around climate action. According to a 2013 Carbon Disclosure Project (CDP) report, 84 percent of the Global 500 companies reported that they have emissions reductions targets, and 75 percent reported that they already have reduced their emissions in some areas of their business.
These companies are not only responding to investor demand, they are seeing the benefits of increased transparency to shareholders, clients, and consumers; using the process to build strategies for climate resilience; enhancing their ability to increase efficiency and reduce unnecessary costs; and uncovering new business opportunities for climate action. This menu of benefits is core to BSR's Business in a Climate-Constrained World initiative and the new We Mean Business coalition, which BSR cofounded.
The directive has taken its lead from well-established voluntary disclosure frameworks, including the Global Reporting Initiative, CDP, and the UN Global Compact. The emphasis on contextualizing risk and impact in relation to the company’s business model also links nicely to the principles enshrined in the International Integrated Reporting Council’s framework on integrated reporting.
This disclosure shows the EU is increasingly serious about corporate transparency and accountability on matters deemed essential for sustainable growth and regional competitiveness. We’ll be watching closely to see if and how other markets and regional blocs respond.