Corporate sustainability reporting has come a long way since the first reports published by the chemical industry in the 1980s. Today, thousands of sustainability reports are released by companies and organizations of all types, sizes and sectors worldwide, with the overarching goal of promoting transparency and accountability to help improve internal processes, engage stakeholders and persuade investors. All of this has been voluntary — until now.
On Sept. 29, the European Council voted to adopt a "Directive" — which holds the force of law — requiring certain companies to begin publicly reporting on environmental and social strategies, actions, policies and programs. The European Parliament adopted the Directive in April, which will enter into force after being published in the EU Official Journal. Member states will have two years to transpose the Directive into national legislation, with companies expected to begin reporting as of financial year 2017.
EU leaders claim companies, investors and society at large will benefit from this increased transparency because companies that already publish information on their financial and non-financial performances take a longer-term perspective in their decision-making. They often have lower financing costs, attract and retain more talented employees, and tend to be more successful.
But the Directive not only will affect European firms — several U.S. companies listed on EU regulated exchanges also will be required under the Directive to begin reporting, many of which are not currently reporting on sustainability.
Are you one of them? If so, here is what you need to know:
1. Size matters
The new rules will apply only to large public-interest companies with more than 500 employees and a balance sheet of $25.3 million and higher, or a net turnover of $50.7 million or more. The EU says this is because the costs for requiring small and medium-sized enterprises to apply the rules could outweigh the benefits. Public-interest entities are defined as: exchange-listed companies; credit institutions; and insurance undertakings. Others may be defined by member states as being in the public-interest.
2. Briefer is better
Rather than a fully fledged and detailed report, companies will be required to disclose concise, useful information necessary for an understanding of their development, performance, position and impact of their activities. Disclosures also may be provided at group level, rather than by each individual affiliate within a group.
3. There's freedom to choose
The Directive gives companies significant flexibility to disclose relevant information in the way that they consider most useful, or in a separate report. Companies may use international, European or national guidelines which they consider appropriate. Companies can use the UN Global Compact, ISO 26000 or the German Sustainability Code, to name a few. The Directive provides for further work by the Commission to develop guidelines in order to facilitate the disclosure of non-financial information by companies, taking into account current best practice, international developments and related EU initiatives.
4. Environmental element required
Reports should contain information on current and foreseeable impacts on the environment, health and safety, renewable energy, greenhouse gas emissions, water use and air pollution.
5. Social and employee issues
Companies will be required to provide information on their diversity policy, including age, gender, educational and professional background. Disclosures will set out the objectives of the policy, how it has been implemented and the results. Companies which do not have a diversity policy will have to explain why not — this approach is in line with the general EU corporate governance framework. Reports also should include information pertaining to respect for the right of workers and trade unions rights, health and safety and working conditions, social dialogue and engagement and protection of local communities. Companies should disclose information on prevention of human rights abuses and tools in place designed to fight corruption and bribery.
All of this might seem overwhelming for companies not currently reporting on sustainability. First things first; a great place to start would be taking a look at the Global Reporting Initiative’s G4 framework, which is fully aligned with the Directive’s requirements. The Sustainability Reporting Guidelines, cornerstone of the framework, has become a de facto standard in sustainability reporting.
GRI’s approach is based on multi-stakeholder engagement — all framework elements are created and improved using a consensus-seeking strategy, and considering the widest possible range of stakeholder interests. The organization’s governance structure helps to maintain its independence — geographically diverse stakeholder input increases the legitimacy of the framework. GRI’s basis in multi-stakeholder engagement contributes to its ability to unite and mediate relations among different actors and sectors, including business, the public sector, labor unions and civil society.
Every year, an increasing number of reporting organizations adopt GRI’s Guidelines. From 2006 to 2011, the yearly increase in uptake ranged from 22 to 58 percent. GRI has been endorsed by several national governments as part of their sustainable development policy, such as Norway, the Netherlands, Sweden and Germany. The framework even was referenced in the Plan of Implementation of the U.N. World Summit on Sustainable Development in 2002.
GRI will host a webinar at 11 a.m. ET Oct. 27 about how the Directive may affect company operations.