What does the Non-Financial Reporting Directive mean for companies?
by James Gibbs at 11:43 in Battery, Circular Economy, Environmental, Packaging, WEEE, Content
Directives, EPR and Environmental Reporting:
What are EU directives?
A European Union Directive is distinct from a regulation. A regulation is a binding legislative act which must be applied in its entirety across the EU. A Directive on the other hand is a legislative act that sets out a goal for all EU countries to meet through implementing their own national legislation.
An example of a Directive is the Packaging and Packaging Waste Directive 2015 which aims to harmonise national regulations through EU recycling targets and goals such as a maximum consumption level of 40 plastic carrier bags per person per annum by 2025. The means through which a country achieves this goal is up to them.
What is CSR and EPR?
Corporate social responsibility (CSR) refers to business practices involving initiatives that benefit society. A business's CSR can encompass a wide variety of tactics, from giving away a portion of a company's proceeds to charity, to implementing 'greener' business operations. The EU approach thus far has been to encourage these practices through guidelines and encouraging market rewards for CSR.
CSR guidance is distinct from extended producer responsibility (EPR) in nature. EPR is introduced through Directives and are enforceable by the EU with sanctions to those who fail to meet goals outlined. In the field of waste management, EPR is a strategy designed to promote the integration of environmental costs associated with goods throughout their life cycles into the market price of the products. Through EU Directives the principle of ‘polluter pays' has been integrated into national laws. Producers must therefore produce reports on their activities to demonstrate compliance under the relevant law.
There is substantial overlap between the objectives of CSR and the legal requirements under EPR. Many countries already have existing laws regarding product waste and environmental impacts and the NFR Directive will extend this overlap and further encourage and enforce the objectives of positive business practices.
What is it?
Starting 2016, over 6000 companies in Europe must report annually on their sustainability performance per the objectives and requirements of the EU Directive on Non-Financial Information Disclosure.
The Directive requires certain large companies to disclose non-financial information which is relevant to provide investors and other stakeholders a more comprehensive picture of the companies' development, performance and position and the impact of their activity.
It aims to enhance the consistency and comparability of the non-financial information disclosed by large EU businesses. For those companies who already comply or outperform Corporate Social Responsibility (CSR) standards the Directive is merely an administrative exercise and the Directive's underlying objectives will be met.
However, for those who do not comply, and those who have poor CSR standards, the reality is that the Directive will be a public and formal recognition of any potential harm, weaknesses and/or failures of their company compared to the strengths and contributions of their competitors.
Per the Directive obligated parties should disclose in their management report relevant and useful information on their policies, main risks and outcomes relating to at least:
1. Environmental matters,
2. Social and employee aspects,
3. Respect for human rights,
4. Anticorruption and bribery issues, and
5. Diversity in their board of directors.
Who is affected?
The Directive affects "large companies". In this context "large companies" are defined as those which meet all the following criteria:
* They have more than 500 employees.
* They meet financial thresholds (by having a balance sheet of at least €20 million or minimum net turnover of at least €40 million).
* They are "public interest" organisations (this encompasses both listed companies, unlisted companies such as credit institutions, insurance undertakings and other businesses selected by individual member states).
For the first time the Directive includes a number of measures relating to current hot topics in the media such as diversity and anti-corruption and bribery. If a company do not have a policy on one of these areas, the non-financial statement should explain why not.
A subsidiary company is not required to produce a statement if the information is included in the report of its parent company.
How will it work?
EU countries have until 6 December 2016 to incorporate the Directive in their national law, Denmark being the first to transpose the Directive in 2015. Countries may do this in any way they see fit as long as it meets the objectives set out by the EU.
European Union reporting:
* All first reports must be published in 2018 on activities of Financial Year 2017.
* Penalties for failure to report and comply with the requirements of the Directive will be set by national legislation.
The Directive provides significant flexibility for companies throughout the EU regarding the disclosure of relevant information which includes reporting in a separate report. This flexibility extends to allowing companies to rely on international, European, or national guidelines (e.g. the UN Global Compact, the OECD Guidelines for Multinational Enterprises, ISO 26000, etc.).
Compliance Example: UK
The UK has implemented the Directive through the Department for Business, Energy & Industrial Strategy (BEIS). Due to the overlaps in objectives the BEIS could use this as an opportunity to de-regulate existing requirements. This could relieve and streamline administrative burdens or accessibility of information for example; by publishing reports exclusively in electronic formats on a company's website.
The Directive is unlikely to have a substantial impact on businesses who operate in countries with an established CSR culture or legislation such as the UK because of the range of the UK's Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, which govern current UK reporting requirements. Under these regulations, a strategic report is required which must contain information about:
* Environmental matters.
* Social, community and human rights issues.
* The company's employees.
There is therefore substantial overlap with the requirements of an Environmental and Social Governance (ESG) report and consequentially the requirements of the Directive.
Conversely, companies who are currently not obligated, or have limited obligations in EU countries will not only have to compile data and report it, but implement CSR policies and practices which they can place in the report.
Points of interest
Consumers and companies alike have taken a proactive approach to Corporate Social Responsibility. Studies show that consistently consumers are willing to spend more on a product they believe to be sourced ethically and fairly regarding the pay workers receive, or if it is sustainable. Therefore, it is not surprising that CSR has rapidly expanded amongst big businesses, alongside the existing regulations which enforce such practices.
One study conducted by ‘Wine Intelligence' found that over two-thirds (68 percent) of regular wine drinkers are choosing to buy from sustainable brands. In conjunction with research released in 2017 by Unilever from 5 countries mapped the choices of consumers relating to sustainable products and the real value of those choices.
Following research released in 2017, Unilever concluded that the impact of consumer preference for CSR represents an untapped opportunity of $1.024 billion out of the total market for sustainable goods.
The Non-Financial Reporting Directive aims to make it easy for consumers to distinguish between CSR and sustainable products and those which are not.
Conclusion
These reporting requirements seek to "name and shame" organisations who are failing to do enough to ensure they are acting ethically and in a socially responsible way. Evidence of corporate failings will provide leverage for customers, suppliers, and other interested parties to push for change.
As consumers across the EU increasingly value CSR policies, the reputational harm associated with being a non-compliant organisation is likely to exceed the financial penalties unless individual national legislation imposes very large and lasting financial sanctions.
The Directive brings transparency. This is good for those who are already doing well but bad for those who aren't. Most large companies recognise there is a direct link between sustainability, responsible business practice and business success. Adopting CSR policy has become necessary for competitive business practices whilst also benefiting society's well-being, the community, and the environment. Positive non-financial and CSR activity reflects the human side of businesses and their leaders' intention to contribute to the society of which they (and their customers) are a part of.
Forbes, the popular American business magazine ranks some of the largest and most successful companies in the world such as Microsoft and Google as those with the very best CSR reputations. The Directive then, given its flexible reporting guidelines, offers companies the opportunity to show and grow positive non-financial activities and shine a spotlight on those who fail to do so.
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