Two decades ago, “triple bottom line reporting” was an idealistic concept bandied about the lecture halls of more progressive business schools. Today sustainability reporting has become the norm among some of the world’s largest companies, albeit on a largely voluntary basis.
In 2016, social and environmental reporting will reach another milestone: If all goes according to schedule, major European Union companies will be required to file an annual assessment of their social and environmental impact.
The EU Council’s 2014 directive imposes an obligation on the roughly 6,000 companies in Europe that have 500+ employees to “report or explain” their performance on a variety of sustainability matters. At the moment, EU Commission analysts estimate that about 2,500 large companies submit social and environmental information, but on a purely voluntary basis.
The disclosures will be extensive. Each company must provide detail on its overall sustainability police, employee diversity, and environmental and social effects, plus data on employee working conditions, the company’s respect for human rights, and any corruption or bribery transgressions. Companies will have to describe their policies in these areas and the outcomes of those policies, or offer a persuasive explanation of why they don’t have any policies.
“There will be a stronger relation between the EU’s directive and the transparency benchmark. They will probably change the benchmark a bit to make it compliant with the EU directive.”
Jos Reinhoudt, Senior Knowledge Manager, MVO Nederland/CSR Netherlands
“Previously, they would disclose the risks and if they had any policies, but on a voluntary basis, while under the new rules they will actually have to disclose what they are doing, what’s their policy, and what kind of measures they take to prevent, mitigate, and remedy any adverse impact,” says Anil Yilmaz Vastardis, a lecturer in law at the University of Brighton.
One area of significant uncertainty is how far down its supply chain a company will need to document its environmental and social impact. Vastardis says that the language of the directive is vague on this score; the rule only specifies that the company must disclose enough to present a clear picture of the situation. “We don’t know yet how far down they need to go,” she says.
If deep dives are required, that could be a mixed blessing, according to Wim Bartels, global head of sustainability reporting & assurance for KPMG in Amsterdam. “It’s one of the most difficult areas, I think, in the sense of access to information as well as control over improvements,” he says. “At the same time, for a number of companies, it’s also the part [of the requirements] that can have the highest impact.”
Some clarification may arrive when the European Union offers additional guidance in early 2016, when the new standards are supposed to take effect, but companies in each member state will face their own particular concerns.
For example, the directive is neutral about whether countries require auditors to review the reports. The EU Council agreed that the auditor must verify that the report exists, but did not insist that the auditor assess its contents. The EU directive does permit member states to require an auditor’s assessment, at their own discretion. The law is also vague about the fines or other penalties in the event of non-compliance.
Some countries will take a more activist line than others, experts predict.
British companies may have an easier time adapting to the new regulations than some other EU members, because the United Kingdom may not go beyond the minimum mandate of the European Union. “I know that the United Kingdom was not very happy about these requirements. They’re not opposed, but they weren’t very supportive,” Vastardis says. The position of the U.K.’s Financial Reporting Council so far has been “just disclose what is absolutely necessary and nothing more,” she adds.
REVISED EIA DIRECTIVE
Below are some details on what the amended Environmental Impact Assessment Directive hopes to achieve.
The newly amended Environmental Impact Assessment (EIA) Directive (2014/52/EU) entered into force on 15 May 2014 to simplify the rules for assessing the potential effects of projects on the environment. It is in line with the drive for smarter regulation, so it reduces the administrative burden. It also improves the level of environmental protection, with a view to making business decisions on public and private investments more sound, more predictable and sustainable in the longer term.
The new approach pays greater attention to threats and challenges that have emerged since the original rules came into force some 25 years ago. This means more attention to areas like resource efficiency, climate change and disaster prevention, which are now better reflected in the assessment process. The main amendments are as follows:
Member States now have a mandate to simplify their different environmental assessment procedures.
Timeframes are introduced for the different stages of environmental assessments: screening decisions should be taken within 90 days (although extensions are possible) and public consultations should last at least 30 days. Members States also need to ensure that final decisions are taken within a "reasonable period of time".
The screening procedure, determining whether an EIA is required, is simplified. Decisions must be duly motivated in the light of the updated screening criteria.
EIA reports are to be made more understandable for the public, especially as regards assessments of the current state of the environment and alternatives to the proposal in question.
The quality and the content of the reports will be improved. Competent authorities will also need to prove their objectivity to avoid conflicts of interest.
The grounds for development consent decisions must be clear and more transparent for the public. Member States may also set timeframes for the validity of any reasoned conclusions or opinions issued as part of the EIA procedure.
If projects do entail significant adverse effects on the environment, developers will be obliged to do the necessary to avoid, prevent or reduce such effects. These projects will need to be monitored using procedures determined by the Member States. Existing monitoring arrangements may be used to avoid duplication of monitoring and unnecessary costs.
Source: EU Council.
In the Netherlands, officials say that the new rules are likely to be grafted onto the existing transparency benchmark of the Ministry of Economic Affairs. “There will be a stronger relation between the EU’s directive and the transparency benchmark,” says Jos Reinhoudt, senior knowledge manager at MVO Nederland/CSR Netherlands, an agency founded by the Ministry of Economic Affairs. “They will probably change the benchmark a bit to make it compliant with the EU directive.”
In markets where audits are not required and fines not levied, activist groups may nominate themselves as prosecutor. The new reports “will be a great tool for civil societies who are trying to hold companies accountable for their human rights impact,” Vastardis says. “I think they will scrutinize these reports in great detail. They will tear these reports apart.”
Costs and Logistics
The most difficult part of the new regulations may be the sections on human rights, anti-corruption, and bribery, says Annise Maguire, a lawyer in the environment, health, and safety practice of Willkie Farr & Gallagher in Washington D.C. These sections will require significant work as compliance officers figure out which tools they should use to measure compliance and how much detail they should report. Companies will be free to disclose the information any way they like and to choose the guidelines they consider most pertinent to their situation, such as the UN Global Compact, ISO 26000, or the German Sustainability Code.
Another uncertain variable is the cost of filing new details. CSR reporting is already a big expense. “Preparing a good CSR report is quite a job,” Bartels says. In a larger company, its preparation can keep four employees busy full-time all year around, he says.
However, companies already serious about their voluntary reporting may not have that much more work to do. The Global Reporting Institute suggests (perhaps to little surprise) that companies already issuing G4 integrated reports should have no problem complying with all aspects of the directive, and EU press materials claim it will cost a major company no more than €5000 euros per year.
“For pretty much every single company [the directive] is going to apply to, it’s not going to be applying from scratch,” says Maguire. Most large companies are already familiar with filing details about their environmental and social impact. “If they have robust reports already, the amount of improvement those companies are going to need to do is probably going to be minimal.”
Will It Matter?
Given that CSR reporting in Europe has gone so far in the last decade with persuasion, will the extra effort be worth it? Observers have mixed opinions.
Even without compulsion, the filings of many firms have improved dramatically over the past decade, according to Reinhoudt, who has watched the Dutch transparency ranking from its beginnings 11 years ago.
“Ten years ago, you’d read some snip-snap information about, for example, new printing machines or new energy fuel-efficient car or whatever, but nowadays, the best companies really have a very good report with a good analysis on materiality and about compliance with the law,” he says.
Yet Bartels sees some limits to an approach that relies on volunteerism. The Dutch benchmark, for example, stimulated companies in the beginning, he says, but he believes it’s become less useful as it has matured.
“Now, companies just try to get higher on the benchmark … If I answer this question or add additional information, I get more points … but when that starts to be an objective on its own, it loses its value. It becomes a reporting exercise. It doesn’t change your view, it doesn’t change your strategy, it doesn’t change your behavior,” he adds.
Vastardis also notes that a voluntary report left companies with a lot of discretion about what they do or do not disclose. “Because it’s been voluntary, companies could pick and choose what they report, whereas now they have certain minimum issues that they have to report,” she says. “They will have to think about these issues in a more structured way, not only just, ‘We are doing this social community project’ or ‘We are dealing with this issue,’ but in a more methodical, more structured way.”