Company reporting
95. In our report last year on PBR 2005, we commented
on the Government's sudden decision to abolish its own proposals,
which had been many years in the making, to require listed companies
to publish annual Operation and Financial Reviews (OFRs); these
would have included requirements to publish audited information
on environmental factors affecting companies' businesses. In our
report we noted that the Government had at the time issued renewed
consultation on the form in which reporting on environmental factors
should take in the Business Reviews which were still going
to be introduced in the Companies Bill; and concluded that: "We
may return to these Business Reviews, and the form they finally
take, in our inquiry into next year's Pre-Budget Report".[111]
96. The outcome of that consultation was seen in
the Companies Act 2006, receiving Royal Assent on 8 November 2006.
We took evidence from Friends of the Earth, one of the leading
voices in a campaign to strengthen these reporting requirements
during that consultation, and asked them to summarise their views
of the eventual legislation. They characterised it as "two
steps backwards and one step forward":
[T]the one step forward was putting back some
of the reporting requirements from the Operating and Financial
Review into the Business Review, so we ended up with something
nearly as good as the OFR but not quite as good. We welcomed the
fact that the Government widened out the number of factors on
which listed companies will have to report. Initially the Operating
and Financial Review required reporting on environmental issues,
but also the impact of the company's business on the environment
which was wider, and social and community issues which would include
human rights, employee issues and then policies affecting policies
in all of those areas. During the passage of the Bill through
Parliament, again those factors were all put back in. We very
much welcome that. At the final stages of the Bill, the Report
stage in the House of Commons, the Government added supply chains
to that list of factors. Again, that was something that we welcomed.
However, Friends of the Earth were clear that there
were still ways in which the Business Reviews were unsatisfactory,
and not as valuable as the former proposals for the OFR:
[T]he report requirements are weaker than they
were a year ago. Most importantly, there is no reporting standard,
so although Government is pointing companies to a statement produced
by the Accounting Standards Board it is not mandatory. That means,
not only will it actually make compliance with the regulations
harder for companies, but it will mean that the reports themselves
are less comparable between companies in the same sector, and
also year on year. Again, that will undermine the role we see
for reporting performance. Also the auditing standards are weaker
than there were for the OFR. We are still also concerned, and
Friends of the Earth did not think the OFR went far enough to
start with. We would like to see mandatory social and environmental
reporting rolled out to a much wider number of companies, not
just 1,300 publicly quoted companies.[112]
97. We also received a number of interesting memos
on the subject. The Association of British Insurers (ABI) stressed
the value to investors of companies offering narrative and forward-looking
reporting on environmental and other factors, and further argued
for the "greater use of key performance indicators and more
information on how boards of directors oversee the management
of material social, environmental and ethical (SEE) risks."[113]
98. The Environment Agency, meanwhile, highlighted
the "urgent need for Government guidance on the publication
of non-financial information to address the current confusion
and ensure consistency". Indeed, they argued that: "The
abolition of the OFR has caused confusion as it has provided the
impression that large companies no longer need to report on their
environmental performance". They further argued that the
lack of mandatory standardised reporting is reflected in the fact
that of the FTSE 100 companies last year, 37 included in their
annual reports what they called a "Business Review",
with 43 including what they called an "OFR", and with
five including two sections, both a "Business Review"
and an "OFR". Finally, 25 did not a produce separate
section clearly labelled either "OFR" or "Business
Review".[114]
99. The Aviation Environment Federation (AEF), for
its part, highlighted the shortcomings of current Corporate Social
Responsibility (CSR) reporting by focusing on recent CSR reports
published by Virgin Atlantic and EasyJet. According to AEF, while
Virgin and EasyJet published a variety of information in their
recent CSR reports, such as their annual CO2 emissions
per passenger-kilometre, neither published their total annual
fuel consumption or CO2 emissions. This could easily
be misleading, given that kgs of CO2 / passenger-km
is only a relative, not absolute, measure of how much carbon dioxide
is being emitted, and could quite easily be going down even while
overall emissions are going up. In other words, airlines could
well be responsible for growing emissions even while becoming
more efficient, simply by expanding their number of flights faster
than their rise in efficiency. This indeed appears to be the situation
in EasyJet's case, according to the calculations AEF have performed
on the figures in EasyJet's report. AEF comment:
Easyjet's CSR report is big on efficiency claims—no-one
doubts that new aircraft use less fuel per passenger, just like
swapping an old car for a newer more efficient model. But nowhere
are they honest enough to tell us what their total emissions are
and that they have risen significantly. […] CSR reporting
is supposedly all about transparency. The atmosphere cannot tell
the difference between an "efficient" molecule of CO2
and an ordinary one—unless of course EasyJet's carbon
dioxide is orange![115]
100. Summing up, then, we welcome the Government's
amendments to the environmental reporting requirements of listed
companies, following consultation during the passage of the Companies
Bill last year. However, these requirements still fail in certain
important respects. Most of all there is no mandatory guidance
on the form they must take, nor are there any requirements to
have the information that is published independently audited.
The former is particularly bad: not only does this undermine transparency
and comparability (and thus the main purpose of the requirement),
but it also poses a problem to companies themselves, in that
without mandatory guidance they are not all on a level playing
field, and thus those which genuinely do more to improve their
environmental impacts may not reap the recognition this deserves.
The Government must implement mandatory reporting standards
when it reaches its two-year point at which it is to review the
workings of the Act.
111 Environmental Audit Committee, Pre-Budget 2005:
Tax, economic analysis, and climate change, para 64 Back
112
Q 53 Back
113
Ev 63 Back
114
Ev 79 Back
115
Ev 105 Back
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