Position of German employers on European Commission s consultation on disclosure of non-financial information by companies

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1 Position of German employers on European Commission s consultation on disclosure of non-financial information by companies 25 January 2011 On 22 November 2010 the European Commission s Directorate General for Internal Market and Services started a consultation of interested stakeholders on disclosure of non-financial information by companies. Contrary to the voluntary character of CSR agreed jointly more than six years ago by all groups involved in the European Multi- Stakeholder Forum on CSR (EMSF), DG Internal Market wants to develop proposals for initiatives and legislative measures for disclosure of social and environmental information by companies on the basis of this consultation. In other words, the consultation relates to corporate social responsibility (CSR), a voluntary commitment by companies to society. In clear contradiction with what DG Internal Market now envisages, EMSF came to the conclusion that convergence of CSR practices and tools is occurring on a marketled basis through voluntary bottom-up and multi-stakeholder approaches, and other drivers, and that this can achieve quality and a good balance between comparability, consistency and flexibility. With this consultation, DG Internal Market disregards this consensus. Bundesvereinigung der Deutschen Arbeitgeberverbände (BDA) has been actively and constructively involved in shaping and developing CSR policy since the outset. BDA took part in the European Multi-Stakeholder Forum which presented its final report in June BDA has also been active in reporting workshops organised by DG Enterprise and Industry and has provided input for the debate inter alia with a position paper Transparency and CSR. BDA makes a concrete contribution to transparency and CSR with the German business community s CSR Internet portal CSR Germany. Against this background, BDA submits the following position on the consultation: General comments German employers are concerned about the absence of coherence within the European Commission that this consultation reveals. It is difficult to understand why, at this point of time, DG Internal Market is launching such a consultation which is essentially about the shape of a future CSR reporting obligation whereas DG Enterprise and Industry has separately announced a communication that will also address the issue of CSR reporting. It is not helpful for the issue or for dialogue between European Commission and the relevant stakeholders if different initiatives on the same theme are started without any apparent coordination. DG Enterprise and Industry has been the lead forum for CSR over many years, and held workshops on the issue from autumn 2009 to spring The fact that DG Internal Market s consultation overlooks all results jointly achieved to date without comment and ignores past developments in the area makes it clear that the lead role and responsibility for CSR must continue to lie unconditionally with DG Enterprise and Industry, since this is where the relevant

2 expertise is to be found. Furthermore, DG Enterprise and Industry can integrate the theme of transparency in a wider context. Beyond the question of competence, the procedure chosen here is highly questionable, since it does not consult relevant stakeholders, in particular the social partners, in a targeted fashion but instead addresses everybody regardless of accountability and expertise without any focus. It can be foreseen that there will be many respondents whose representativeness and relevance is not clarified in any way. There is a danger that many contributions whose legitimacy cannot be verified will feed into the conclusions of the consultation. In addition, evaluation of responses will be made more difficult by the fact that the German language version of the consultation was different from the English language version for several weeks. As a result of defective preparation of the consultation, DG Internal Market will receive different answers as a function of the language version used. The largely suggestive formulation of the questions in the consultation document also attracts criticism: they deal not with the question of whether there is a need for regulation of CSR reporting at EU level such a need is simply taken for granted but above all with the question of what shape such regulation should take. This passes over the basis jointly created in the European Multi-Stakeholder Forum in silence. The decisive questions are not even asked in the consultation document. This is all the more surprising given that the workshops on this issue organised by DG Enterprise and Industry revealed very different views on the advisability or otherwise of binding EU regulation of CSR reporting. Responses to individual questions How would you consider the current regime of disclosure of non-financial information applicable in your country? There are a total of around 10,000 information obligations on companies in Germany. Very many of them are non-financial in nature and relate for instance to information obligations vis-à-vis social insurance bodies, etc. However, when it comes to information on voluntary corporate social responsibility (CSR), companies in Germany have the discretion and the possibility to target the information needs of the relevant interest groups and to use the best communication channels to this end. Against this background, the German Multi-Stakeholder Forum on CSR, in which NGOs, trade unions, academia and business are represented, proposes that there should be no regulation in its recommendation report adopted by consensus in June Following in the footsteps of its European counterpart, the German Multi-Stakeholder Forum has confirmed the voluntary character of CSR. In reality, there are many different ways for companies to communicate CSR internally and to the outside world. Depending on the company and its specific interest groups, the need to make particular communication efforts also varies: In particular small and medium-sized enterprises (SMEs), which account for 99% of all companies in the European single market, often have no need to make any formal efforts to communicate their corporate responsibility. Firmly rooted in the local community, their employees, customers and local environment know the managers personally and are aware of their commitment and behaviour. Information is passed on informally in direct contacts. In B2B transactions and on the financial market, transparency is generated by answering targeted questions. Customer companies and SRI (socially responsible investment) funds send their suppliers questionnaires about their social commitment and behaviour. There is no generally recognised and standardised procedure for collecting and evaluating this information. 25 January

3 In B2C transactions, companies devote considerable effort to supplementary voluntary information on packaging or label, or in direct communication with consumers, designed to inform the latter about the product and the production process. Via Internet visits, contact forms and s or via hotlines, consumers and companies are in close contact with each other. In this way, companies generate transparency also in relation to their social and environmental behaviour. It is legitimate in this respect that companies also use transparency in the area of CSR to build their profile and image at the same time as advertising their social commitment to their customers. Companies organise workshops as a forum for contact with stakeholders to give an account of their behaviour and discuss social and environmental issues. Companies use press information to report on current developments, initiatives and projects. Ever more companies also produce a CSR or sustainability report in which they report on their social and environmental behaviour. Lastly, they present themselves with their experiences on CSR websites, in good practice collections and presentations. Companies prepare so-called progress reports on implementation of the principles of the UN Global Compact. In addition, there are numerous, sometimes sectoral initiatives, e.g. as in the Wittenberg process instituted by social partners in the chemicals industry in which companies and employees, employer federations and trade unions work together on social responsibility in the sector. The type and form of CSR communication is aligned on the company s possibilities, the needs of its stakeholder groups and on costbenefit considerations. Companies must have the flexibility to deploy the best approaches for its situation. CSR communication is a constantly evolving medium which will continue to develop. But a voluntary approach to transparency does not mean a lack of commitment. On the contrary, the great efforts made by companies continuously to improve transparency vis-à-vis employees, consumers, local environment, investors and society show how much transparency and CSR has become a core issue in corporate activity. Have you evaluated the effects, and costs and benefits, of any current corporate disclosure of environmental and social information? According to an official measurement by the German government, companies in Germany are confronted by around 10,000 information obligations which cost them more than 43 billion euros each year. Some 24 billion euros of this can be traced back to EU directives. 1 It must be a priority policy goal to cut back massively these irresponsibly high costs, which squeeze out growth and jobs. Given the existing financial burdens, even to consider a new information duty would be economically and politically irresponsible. Furthermore, thought must be given to the economic structure in Germany, as in the EU as a whole: in all deliberations on transparency and credibility, it should not be forgotten that SMEs constitute the overwhelming majority of companies. In Germany, only 0,14% of all companies employ 500 workers or more. More than 90% of European companies have fewer than ten employees. Small and medium-sized enterprises are very active in society, without having the resources to communicate their commitment to society in a formal manner. In almost all cases, companies are not yet talking about CSR. Requiring these companies to engage in reporting in both B2C and B2B completely disregards reality. Even without CSR reporting, the social and environmental behaviour of these companies is known to important stakeholder groups in the local environment and entrepreneurs have for centuries relied on a good reputation. Hence, reporting would not only overburden companies but would not add any real value for the 1 German government s 2010 report on implemenetation of the standard cost model and the status of regulatory streamlining, December January

4 local environment, the different interest groups or the company itself. But the use of resources to develop and maintain reporting is also considerable for large companies. This relates not only to preparation of the report but also to the investment in suitable systems and trained personnel. In addition, more far-reaching requirements are added every year and it is sometimes very difficult for companies to keep up. If you think that the current regime of disclosure of non-financial information should be improved, how do you suggest that this should be done? All initiatives to strengthen transparency and credibility in relation to CSR must take account of the German and also European economic structure. All state-initiated CSR measures need to make allowance for the limited possibilities and particular needs of SMEs and to avoid burdening companies with further information obligations. The aim must be to support companies and especially SMEs in their CSR communication activities instead of swamping them with far-reaching requirements. Policy-makers should support exchange of practical experience, awareness-raising and information campaigns visà-vis companies as well as incorporation of CSR as a theme for manager training. The German government sets a good example in this regard: in the CSR strategy it adopted on 6 October 2010, the German government announces that it will support SMEs with a special advice and coaching programme. Moreover, it is considering creation of a central information portal on which companies can voluntarily present their commitment in an appropriate matrix, thus providing interest groups with comparative information and enabling companies to demonstrate their commitment to a wide public. German employers invite the European Commission to continue along the path it followed with the European Alliance for CSR in 2006, jointly with the business community, based on partnership, exchange of experience, dialogue and transfer of knowledge. The German government s CSR strategy offers a good guide in this respect. In your opinion, should companies be required to disclose certain information? The discussion on a binding framework for sustainability reporting is by no means new as already highlighted. In the European Multi-Stakeholder Forum of CSR, the question was already answered unambiguously more than six years ago by all groups involved: the state should not create a framework. The final report of EMSF states that convergence of CSR practices and tools is occurring on a market-led basis through voluntary bottom-up and multistakeholder approaches, and other drivers, and that this can achieve quality and a good balance between comparability, consistency and flexibility. The proposals that the European Commission sets out here all go in the wrong direction. At their core is a desire to create a binding framework for corporate sustainability and CSR reports. This ignores that the fact that the diversity and complexity of CSR practices generates a wide choice of communication approaches and methods for companies which cannot be squeezed into such a framework. As already pointed out, a medium-sized company faces different transparency challenges from, say, a multinational. Furthermore, an IT firm has completely different issues than for instance an energy group. A straitjacket for sustainability reporting would ultimately suit no company but would only restrict companies of all sizes and sectors in their freedom to shape their own actions, and hence stand in the way of optimal solutions. 25 January

5 The existing standard for non-financial reporting (GRI, etc.) are too strongly standardised to be able to capture and evaluate completely the essence of corporate activities in the field of CSR. In your opinion, should companies be required to disclose the steps they take to fulfil the corporate responsibility to respect human rights? The overwhelming majority of companies do business within the single market and hence not in countries with weak protection of human rights. Requiring obligatory declarations and information on this aspect would constitute a bureaucratic burden not matched by any benefit for the public, stakeholders or companies themselves. Rather, it is a question of supporting companies which do business in countries where deficits in respect for human rights by the state are observed in their corporate responsibility for human rights. In your opinion, should companies be required to disclose the risks they face and the policies they have in the field of corruption and bribery? As already indicated, challenges relating to corruption vary widely within the EU. Country-specific risks are set out in the Global Corruption Index EU member states range between first and 78 th place. The corruption challenges faced by companies differ immensely depending on the countries in question. Given these differences, EU-wide rules make no sense and/or would place an unnecessary burden on companies in many countries. In your opinion, what companies should be required to disclose non-financial information? on companies, it should also be borne in mind that the development of helpful CSR reporting is a continuous process. Not only companies but also a wide range of stakeholders academics, information service providers, NGOs are looking for best solutions to increase transparency. For instance, the Global Reporting Initiative (GRI) developed voluntarily by companies has already twice revised the GRI reporting guidelines presented in At the present time, the guidelines are in a further revision phase for adoption of GRI 3.1 with considerable amendment intentions. This dynamic development should not be impeded and made more difficult by bureaucratic legislative initiatives. State regulation in this area would result in companies concentrating on ticking boxes instead of seeking best solutions jointly with stakeholders. Furthermore, it is already usual for CSR or sustainability reports which go beyond statutory reporting requirements in the framework of the business report to be produced on a voluntary basis especially among large listed companies. In terms of quality and format, high and constantly growing ambitions have prevailed in the free market in particular on the basis of the expectations of financial investors and other stakeholders. But ever more unlisted companies as well as medium-sized companies report, on a voluntary basis, either in their own CSR or sustainability reports, or in other formats (e.g. on their website), on aspects of their sustainability policy. All situation reports by DAX-30 companies and in 94% of situation reports by the 100 largest German companies address sustainability-related themes, in particular employee interests and environment. 85% of all DAX-30 companies also report in accordance with GRI. No companies should be required to report non-financial information relating to voluntary social commitment. Alongside the regulatory argument that such an obligation would run counter to the voluntary character of CSR and would lead to new bureaucratic burdens 25 January

6 In your opinion, should institutional investors be subject to specific or additional disclosure requirements, for example to disclose whether and how they take into account environmental and social issues in their investment decisions? Socially responsible investment (SRI) is a growing market in which investment decisions are openly disclosed in any event. Investors who attach a special value to social and environmental interests will invest in sustainability funds where they are informed in detail about the investment criteria. Statutory disclosure requirements would tend to be counterproductive and would not be tailored to customer wishes. In your opinion, should European policy promote the concept of integrated reporting? European policy should not aim specially to promote the concept of integrated reporting. As already explained, companies communicate their CSR activities very differently, as a function of their size, sector, market and target group. To do so, they use the best ways to reach their target groups as fully as possible. For many companies, this may be in the framework of integrated reporting. For many companies, this will not be the case. It should be remembered that integrated reporting does not automatically lead to the same degree of completeness as separate reporting. As already quoted, the European Multi-Stakeholder Forum on CSR has established very clearly that it is not the task of policy-makers to lay down requirements in this area. In your opinion, should disclosed non-financial information be audited by external auditors? There should be no requirement for CSR reports to be audited by external auditors. CSR is responsibility as it is experienced and only credible as such. Untrue statements will be quickly uncovered by press, trade unions and NGOs, and will lead to enormous reputational damage. An obligatory audit by external auditors would be extremely costly for the great majority of companies without any added value for society, stakeholders or the companies themselves. Already high costs generated by information requirements would be pushed much higher. It is essential to achieve exactly the opposite. Conclusion European businesses are conscious of their social responsibility and are committed to environmental and social aspects beyond the statutory norm. The numerous activities and initiatives in the framework of the European Alliance for CSR underline this awareness of responsibility. Companies meet heightened expectations in relation to CSR and transparency, and communicate their commitment to the relevant target groups using the most appropriate possibilities. The European Commission s aim of strengthening and disseminating CSR is welcome. However, a reporting requirement would not contribute to this objective and should be rejected for many reasons: Companies in Germany are already confronted by around 10,000 information obligations which cost them more than 43 billion euros a year, around 24 billion of which as a result of European directives. The aim must be to reduce and not increase this burden. CSR is too complex and the responsibilities of, say, a local baker, a mediumsized automotive supplier in Bochum, a textile dealer operating globally with suppliers in Bangladesh, an energy group and a globally active IT business are too diverse to be squeezed into a sensible reporting standard. There are many different ways for companies to communicate internally and to the outside world. Companies need discretion to develop the best solution for themselves, for society locally and for the relevant stakeholder groups as a function of the nature of the business. 25 January

7 Development of helpful CSR reporting is a continuous process. Regulation in this area would result in companies concentrating on ticking boxes instead of seeking best solutions jointly with stakeholders. Support exchange of practical experience, awareness and information campaigns vis-à-vis companies as well as incorporation of CSR as a theme for manager training. In cases of doubt, reporting obligations would divert resources from company management proper: According to all studies, the overwhelming majority of companies are active vis-à-vis society beyond what is required by law. Reporting obligations threaten to weaken this commitment instead of strengthening it, because resources would then have to be devoted to reporting rather than to the actual commitment. For promotion of CSR, it is genuinely experienced corporate social responsibility for workers, the environment and the local community that must be the focus and not the quality of reports, documentation and explanations. Accordingly, the European Commission should instead: Relate the theme of social responsibility (SR) not only to companies but look at it much more widely and develop an approach to promotion of SR which encompasses organisations of all types, i.e. also NGOs, state institutions, trade unions, media, etc. It is no longer a matter of demanding social responsibility from companies in a one-sided manner but of implementing more generally standards that are addressed to society as a whole. This will give social responsibility a completely different basis and relevance. German employers are there as partners and are willing to continue to contribute actively to the process. Create a central contact point for CSR in DG Enterprise and Industry which helps companies to give form to their CSR commitment and develops a uniform CSR strategy for the EU. Contribute to dissemination of CSR through the award of a European CSR prize. Construct a central European CSR Internet platform on which companies can present themselves voluntarily with their commitment. Contact: European and International Affairs T europa@arbeitgeber.de BDA Confederation of German Employers BDA is the leading organisation dealing with social policy on behalf of the German private business sector as a whole. It represents the interests of small, medium-sized and large companies in all sectors on all issues linked to social and collective bargaining, labour legislation, labour market policy as well as education. BDA works at national, European and international level for the interests of one million businesses which employ 20 million workers and are linked to BDA through their voluntary membership of 6,500 employer confederations. These employer confederations are organised in the 56 national sectoral organisations and 14 regional associations which are direct members of BDA. 25 January