9 Disclosure of non-financial and diversity
information by companies
| (34852)
8638/13
+ ADDs 1-2
COM(13) 207
| Draft Directive amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups
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| Legal base | Article 50(1) TFEU; co-decision; QMV
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| Department | Business, Innovation and Skills
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| Basis of consideration | Minister's letters of 8 February and 17 March 2014
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| Previous Committee Report | HC 83-iii (2013-14), chapter 7 (21 May 2013)
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| Discussion in Council | See para 9.8 below
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
9.1 Although the so-called Accounting Directives
(78/660/EC and 83/349/EC) on the preparation of annual financial
statements provide for non-financial information relating to environmental
and employee matters to be supplied, the need to improve the transparency
of such information was one of the areas identified by the Commission
in its April 2011 Communication[39]
on the Single Market Act, and reiterated in a Communication[40]
in October 2011 on a renewed EU strategy for Corporate Social
Responsibility. However, the Commission points out that only
a limited number of EU companies regularly disclose non-financial
information, and that the quality of this varies considerably,
making it difficult for stakeholders and investors to compare
performance. It also notes that differences in the requirements
as between Member States have led to a fragmentation in the legislative
framework within the EU, thereby adding to the lack of clarity.
The current proposal
9.2 It therefore put forward in April 2013 this proposal
to amend the two Directives by requiring that, where a company
has more than 500 employees, and either a balance sheet in excess
of €20 million or a net turnover of more than €40 million,
it should provide each year a non-financial statement containing
information relating to at least environmental, social and employee
matters, respect for human rights, anti-corruption and bribery.
In addition, it would have to include a description of its policy
in those areas; the results of that policy; and any associated
risks. Where a company prepares an annual report for the same
financial year, it will be exempted from the obligation to produce
the non-financial statement, so long as the report covers the
required topics and content, relies on national, EU-based, or
international frameworks, and is annexed to the annual report.
However, where a company does not pursue a policy in relation
to any of these areas, it must provide an explanation.
9.3 At the same time, the Commission also sought
to address the insufficient diversity of boards, which it suggests
may lead to a similarity of views ("group think") and
resistance to innovative ideas. It therefore proposed that listed
companies should be required to include in their corporate governance
statement information on their diversity policy; on its objectives
and implementation; and on the results obtained. Again, companies
not having such a policy would have to explain why that is so.
The Government's view
9.4 As we noted in our Report of 21 May 2013, the
Government remained to be convinced that a minimum level of comparability
between Member States in terms of non-financial disclosure is
essential. However, it said that the new requirements would be
very similar to those due to come into force in the UK in October
2013, except for the disclosures on human rights and anti-corruption
measures, which would be new. The UK also requires companies
to disclose information "to the extent necessary for an understanding
of the business", and, if a company has decided not to cover
one or more of these issues, it must state that this is the case,
allowing users to see that the information in question has not
been omitted as an oversight. The Government observed that the
proposal went further by requiring a company to explain why it
has no policy, and suggested that, whilst this may have a positive
effect on transparency, it could lead to a policy being created
simply so that it can be reported. Finally, the Government said
that the requirement for all listed companies to disclose their
board diversity policy also went beyond current UK requirements,
but was in line with the
objectives of the Davies review of gender diversity.
9.5 The Government's Explanatory Memorandum was accompanied
by an Impact Assessment checklist, which suggested that the proposals
would increase the number of those preparing non-financial reports
from around 1,000 listed companies to between 2,400 and 4,800
large private companies, and would create burdens for those preparing
reports for the first time. On that basis, and, taking the Commission's
estimates of the administrative burden, it put the overall costs
of the measures at between £21 million and £328 million,
but said that it would continue to revise these figures, with
further work being needed to assess whether the benefits outweighed
the costs. In addition, it estimated that there would be some
additional costs in the region of £200,000 per annum for
the Financial Reporting Council (FRC),[41]
due to an increase in companies required to produce non-financial
information.
9.6 The Government also noted that it was working
on reforms of the structure and content for non-financial reporting
to improve corporate transparency, to re-focus reporting on strategic
issues, and to allow companies to communicate key information
in a way which is right for them and their shareholders, and that,
subject to Parliamentary approval, these reforms were due to come
into force in October 2013. Should this proposal be adopted, officials
did not foresee difficulties in incorporating the changes, although
this would become clearer in the development of the Commission
proposals and in negotiation.
9.7 We commented that, although these proposals appeared
to be broadly in line with existing, or intended, UK policy, they
nevertheless gave rise to a number of important issues, including
costs, and we also noted that further work was needed to assess
whether these would be outweighed by the benefits, this being
one of the areas which the Government intended to cover in a stakeholder
group which would be established. In view of this, we thought
it right to draw this document to the attention of the House,
but to hold it under scrutiny, pending further information.
Minister's letters of 8 February and 17 March
2014
9.8 We next received a letter of 8 February 2014
from the Minister for Employment Relations and Consumer Affairs
(Jenny Willott), saying that the negotiations had progressed
to the point where the Presidency hoped to reach a First Reading
agreement before the European Parliament elections, and asking
us to consider raising the scrutiny reserve. However, our Chairman
replied saying that we would first need a more complete picture,
not least as to how far the estimated costs referred to in the
Government's original Explanatory Memorandum would be reduced
by a projected change in scope of the proposal (reducing it from
all large public and private companies to just large public companies).
He also asked about the views of the proposed stakeholder group,
and what, in the light of its earlier reservations, the Government's
current view was on the requirement that companies without a policy
in any of the areas covered by the proposal should explain why.
9.9 We have now received from the Minister a further
letter of 17 March 2014, reiterating that the Government had sought
to ensure that the thinking behind the UK's approach was reflected
as far as possible in the EU negotiations, the primary objective
having been to avoid imposing unnecessary burdens on businesses,
in particular by reducing its scope to exclude private undertakings,
whilst ensuring that reporting is useful for companies and meaningful
for investors. She says that, although the figures will be looked
at further for a full impact assessment for the Regulatory Policy
Committee when the proposals are transposed into UK law, the Government's
current provisional estimate is of an average annual cost per
year of £2.3 million to all companies, and a total cost over
ten years of £32.2 million, compared with the much higher
previous estimates, this being due primarily to the reduction
in scope of the proposal.
9.10 As regards stakeholder views, the Minister says
that the positions expressed by the business, investor and civil
society communities have confirmed their support for a proposal
which balances an EU-wide approach to corporate reporting, whilst
recognising that a certain level of flexibility is necessary.
She confirms that stakeholders have indicated that they are broadly
content with the final compromise proposal, and that the Government
shares their view that this strikes the right balance. As regards
the position of companies which do not have policies in particular
areas, the Minister points out that the EU non-financial reporting
requirements are now subject to a materiality test similar to
that in UK legislation, where companies need to report on their
policies to the extent necessary for an understanding of their
business, or explain why they do not have them.
Conclusion
9.11 We are grateful for the Minister for this
further information, particularly as regards the significant reduction
in the costs of the proposal, as compared with the version put
forward initially by the Commission, and we are now clearing the
document.
39 (32702) 9283/11: see HC 428-xxvii (2010-12), chapter
7 (18 May 2011). Back
40
(33327) 16606/11: see HC 428-xliii (2010-12), chapter 13 (7 December
2011). Back
41
The UK regulatory body overseeing non-financial reporting. Back
|
