Answering 10 Common Questions on the EU Sustainability Reporting Directive
Outcome documents from the most relevant recent international sustainable development initiatives and conferences (the Rio+20 UN Conference, SDG 12.6, etc.) recognize the importance of corporate sustainability reporting and encourage companies to consider integrating sustainability information into their reporting cycle.
With the entry into force of the EU Directive on the Disclosure on Non-Financial and Diversity Information, for an estimated 6000 companies across the EU, non-binding global encouragements are about to materialize into specific national requirements on the disclosure of ESG data and meaningful information on policies, main risks and outcomes.
EU-based sustainability managers, compliance and reporting officers, and those wanting to learn more, can scan our list of 10 Common Questions on the Directive and find out more on its content and requirements :
1. What is it?
Created as an amendment to the EU Accounting Directive (2013/34/EU) with the goal of increasing “the relevance, consistency and comparability of information disclosed by certain large undertakings and groups across the Union”, the 2014 EU Directive on the disclosure of non-financial and diversity information by certain large undertakings and groups (2014/95/EU), mandates EU Member States to bring into force (‘transpose’) the national laws, regulations and administrative provisions necessary to comply with its requirements.
2. What does this mean in practice?
This means that by the 6th of December of this year, the Directive will be effective in all EU member states and certain companies will need to report according to its requirements for the upcoming Fiscal Year, starting on January 1st 2017. As a result, the first company reports under the Directive are expected to be published in 2018, covering financial year 2017-2018.
3. Who will be required to disclose?
- Companies with an average number of employees greater than 500, a balance sheet total of 20 million Euros or a net total of 40 million Euros, and that are listed on a EU regulated exchange market.
- Companies with an average number of employees greater than 500, a balance sheet total of 20 million Euros or a net total of 40 million Euros, that are not exchange listed on a EU regulated exchange market, but are defined by Member States as public-interest entities, (including credit institutions and insurance undertakings)
4. What aspects will my company have to disclose information on?
Companies are required to disclose policies, outcomes and risks related to at least:
- Environmental matters
- Social and employee aspects
- Respect for human rights
- Anticorruption and bribery issues
- Diversity in their board of directors
The non-financial statement should also include information on the implemented due diligence processes, and (where relevant) information on supply and subcontracting chains, in order to identify, prevent and mitigate existing and potential adverse impacts.
5. What type of data should we disclose?
- According to the wording used in the Directive, Environmental matters, ‘should contain’:
- Current and foreseeable environmental impacts
- Health and safety impacts, as appropriate
- Use of renewable energy and/or non-renewable energy
- Greenhouse Gas emissions
- Water use
- Air pollution
- Social and employee aspects ‘may contain’:
- Actions taken to ensure gender equality
- Implementation of fundamental conventions of the International Labor Organization (ILO)
- Working conditions
- Social dialogue
- Respect for the right of workers to be informed and consulted
- Respect for trade union rights
- Health and safety at work
- Dialogue with local communities
- Actions taken to ensure the protection and development of those communities
- Respect for human rights ‘could include’ information on the prevention of human rights abuses.
- Anti-corruption and bribery ‘could include’ information in instruments in place to fight corruption and bribery.
- Diversity in the board of directors can include the disclosure of diversity policies in relation to the administrative, management and supervisory bodies concerning aspects such as age, gender, educational and professional backgrounds.
The Directive is based on the principle of ‘report or explain’, meaning that if an issue is not applicable to an organization, or there are confidentiality constraints, an explanation will be enough. If the company does not have a diversity policy in place, for instance, there is no obligation to do so but the corporate governance statement should clearly explain why this is the case.
6. Why disclose non-financial information?
Other than the fact that affected companies will be required to report under the directive, preparing for its implementation will help organizations measure, monitor and manage their own business performance and impacts, meet future (and increasingly common) mandatory requirements, demonstrate transparency, promote stakeholder engagement and attract investor attention, while providing stakeholders with a meaningful and comprehensive view of the company’s positioning and performance.
The Directive itself highlights the importance of business divulging non-financial information “to better identify sustainability risks and increase investor and consumer trust”, and as a vital element in managing change “towards a sustainable global economy by combining long-term profitability with social justice and environmental protection”.
7. What if our company already reports?
If the company already reports and discloses relevant information according to well-known international, national and European guidelines (for instance, the UN Global Compact, GRI, the OECD Guidelines for Multinational Enterprises, ISO 26000, or certain ILO Declarations of Principles), then the company is already likely to comply with the Directive.
8. What if we already publish a sustainability report, separately from our annual report?
A separate sustainability report will be accepted under the Directive as long as it fulfills the following conditions:
- It covers the topics required by the Directive
- It is based on a recognized EU or International framework
- It is annexed to the annual report
- It covers the same financial year as the annual report
9. What if our company has several subsidiaries?
If the annual report published by the parent corporation covers the subsidiaries and that report meets the requirements of the Directive, then only one report will be necessary.
10. So how can I start preparing?
This might be the most important question. Those that are familiar with corporate sustainability reporting processes probably know that good planning and starting early are key. Gathering data, managing teams and creating report content takes time, and while Member States still have around 10 months left to transpose the Directive, preparing a report to be published in 2018 (covering the past financial year), means that operative internal processes should be in place in 2017. Starting to plan, coordinate and adapt this year will help save time, resources and unexpected workloads in the next.
- Sustainability Managers and reporting officers can start by bringing the Directive to the attention of the Executive Management, and liaising with their Chief Sustainability Officer, where applicable.
- Then, much of the work will focus on identifying obligations in the country of the highest parent corporation. EU Directives require Member States to achieve particular results without dictating the means of achieving them and, as a result, some countries may choose to go beyond minimum requirements.
- Checking regulation already in place will help avoid double and overlapping efforts. In France for instance, to comply with the Grenelle II legislation, many organizations already track and report on dozens of non-financial indicators, which means that they might already be meeting many of the Directive’s requirements.
- Finally, a compliant framework will have to be selected if one is not already in place, and after identifying its scope and gaps according to the Directive, the task of creating, reviewing and publishing the report should take place normally. As an example of a useful resource, this GRI report on linking G4 guidelines to the Directive (including clear ‘linking tables’), will provide some GRI-specific guidance.
- It’s worth noting that at the national scale, the European Commission is also organizing transposition workshops to assist national authorities, and preparing non-binding guidelines on the non-financial reporting methodology, to be made public in 2016.
Once your report is ready to be published, finding innovative ways of communicating on it (think digital, interactive, responsive and social media friendly) will help you reach a wider audience while facilitating internal collaboration and reducing reporting costs. Stakeholder engagement platforms like the Publisher can help you achieve just that. Find out more.