EU NON-FINANCIAL REPORTING DIRECTIVE: NEW REQUIREMENTS FOR MANDATORY ENVIRONMENTAL REPORTING FOR UK COMPANIES MARCH 2017

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1 1 EU NON-FINANCIAL REPORTING DIRECTIVE: NEW REQUIREMENTS FOR MANDATORY ENVIRONMENTAL REPORTING FOR UK COMPANIES MARCH 2017

2 2 WHAT ARE THE REGULATIONS? The EU Non-Financial Reporting Directive (NFRD) 2014/95/EU entered into force in December 2014 and has now been transposed into UK legislation by The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations WHY HAVE NEW REGULATIONS BEEN INTRODUCED? The aim of the new regulations is to elevate the quality of non-financial reporting to the high standards already exemplified by the best UK companies. The policy is designed to make non-financial reporting consistent across the European Union and increase the performance of large Public Interest Entities (PIEs). There are three main aims: 1. Improving the transparency of large PIEs, by strengthening and clarifying the existing requirements. This will increase the relevance, quantity, consistency, and comparability of the non-financial information currently disclosed. 2. Encouraging companies to better assess risks relating to bribery and corruption through its incorporation into business strategies and models. 3. Increasing employee diversity at all levels through enhanced transparency of diversity policies. This will help to facilitate a more effective oversight of management and governance across a company. DOES MY COMPANY FALL WITHIN THE SCOPE OF THE NEW REGULATIONS? Currently, only quoted (listed) companies in the UK are subject to greater non-financial reporting requirements. The new rules extend this to all companies who employ more than 500 employees within the UK (averaged over the financial year) and are deemed to be of public interest. This refers to companies which: have transferable securities admitted to trading on the EU regulated market; or are credit institutions and/or insurance undertakings. Therefore, this targets businesses whose activities are likely to have the biggest impact on the environment and society and includes companies such as banks, insurers and financial services. As such, these changes now capture a large number of companies which were not previously required to disclose non-financial information. The below table from the BEIS Impact Assessment provides a useful summary of the likely scale of the impact to UK business: Best estimate of number of reporting companies Best estimate of number of subsidiaries Total number of companies affected Large quoted companies needing to start reporting on anti-bribery and corruption matters. 61 6,906 6,968 Large unquoted PIEs needing to start reporting on antibribery and corruption matters. 92 1,519 1,762 Large quoted companies needing to start reporting on diversity matters ,662 12,774 Large unquoted PIEs ,430 2,578

3 3 WHAT WILL COMPANIES HAVE TO REPORT? The key reporting requirements for businesses falling within the scope of the new regulations are summarised in the figure below. For quoted companies already reporting their performance under the Enhanced Strategic Report requirements, the regulations bring in two additional requirements: 1. It will now be necessary for companies to disclose information on anti-bribery and corruption, and diversity policies. 2. Where no information is supplied on a specified non-financial matter, the current UK requirement is to state that it has not been provided. Under the NFRD, the company is now required to provide a reasoned explanation for the cause of the omission. This allows investors to make a judgment on whether companies are adequately managing their risk across relevant non-financial issues. REPORTING REQUIREMENTS What are the key non-financial matters which need to be reported? As a minimum this must include; environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. Which KPIs should be selected? Companies are required to use the KPIs which they deem to be material. GHG emissions may be one such factor; however this will not change the necessity to also disclose annual emissions in a company s director s report. What if any of the key non-financial matters cannot be reported? What data needs to be collected and included in the report? What is the geographical scope of reporting? If the company does not pursue policies in relation to any of the key matters, clear and reasoned explanations as to why are required. A description of the company s business model; A description of the company s policies on the required non-financial matters; The outcome of implementation of these policies; Assessment of the principle relevant risks in these non-financial areas; and A description of the non-financial key performance indicators (KPIs) relevant to the business. The scope of the report covers both UK and international performance if companies also operate overseas. Will any reporting guidelines be provided? Guidance on the revised framework will be available from Companies House, but international guidelines such as the UN Global Compact and ISO can also be followed.

4 4 WHAT ARE THE REPORTING REQUIREMENTS FOR SUBSIDARIES? The new requirements apply to all companies who meet the criteria, including international companies and subsidiaries. For example: An international company which is not listed in the UK, but has more than 500 staff based in the UK, would still have to report. Equally, if an international company was below the threshold in the UK, but exceeded it in another country within the scope of the EU directive; they would still have to report in the respective country, but not in the UK. Any subsidiary company registered in the UK and meeting the criteria (aggregated across all UK based sites) would need to report, unless it is already being included within a group strategic report. If a parent company totalled more than 500 employees, but an individual subsidiary did not exceed the threshold, the subsidiary would not be expected to report. However, assuming the parent of the subsidiaries was based in an EEA state, the subsidiary would be expected to be included within a group strategic report. WHEN SHOULD THE REPORT BE SUBMITTED? The new regulations will apply for financial years commencing on or after 1st January 2017, with the first reports expected to be published by September WHO WILL MONITOR COMPLIANCE WITH THE NEW REGULATIONS? Compliance with the new regulations will be monitored by the Financial Reporting Council (FRC), with the criteria for success indicated by an improvement in the content of non-financial disclosure. This will particularly relate to the new anti-corruption and diversity inclusions. Should a company fail to adhere to the new reporting requirements, the Exchange may issue disciplinary action against them. This could be in the form of a fixed penalty, warning notice and/or a referral to either an Executive Panel or a Disciplinary Committee. These new regulations will undergo a post-implementation review in HOW SHOULD THE REPORT BE SUBMITTED? Following a consultation, it was decided that this information should be published within a company s Annual Report, and not as a standalone document. This will need to be uploaded to Companies House as per business as usual and will not have to be submitted to the FRC. WILL THE REPORT NEED TO BE INDEPENDENTLY VERIFIED? There s no requirement for this, however companies may voluntarily seek independent verification if they wish.

5 WILL BREXIT MAKE A DIFFERENCE? The UK remains a full member of the European Union until exit negotiations are concluded. Therefore, all rights and obligations of EU membership still apply. The Government will continue to negotiate, implement and apply EU legislation and Commission reports during this time. 5 WHAT STEPS SHOULD MY COMPANY TAKE NEXT? We would recommend that large companies begin to review how these changes might impact your business. Follow our checklist below to determine what we think your next steps should be. Does your company have more than 500 UK based employees? YES NO Are you a UK quoted company, already producing an Enhanced Strategic Report? You are unlikely to be required to adhere to the new regulations. YES NO As you are already required to report on some nonfinancial matters, complete a gap analysis to ensure alignment with the new regulations surrounding antibribery, corruption and diversity. Is your company deemed a PIE (traded company, banking company, authorised insurance company, or carrying out insurance market activity)? YES NO You will need to begin reporting in accordance with the new regulations. Consider which non-financial matters are material to your business. Determine the KPIs needed to support reporting requirements. Establish simple systems to start gathering this data now, so you re ready to report. It is likely you are out of scope however we still recommend that you start considering these changes, as you may be required to begin reporting in the near future.

6 6 ABOUT WSP PARSONS BRINCKERHOFF WSP Parsons Brinckerhoff is one of the world's leading engineering professional services consulting firms. Our 36,700 people, based in more than 500 offices, across 40 countries provide engineering and multidisciplinary services in a vast array of industry sectors, with a focus on technical excellence and client service. In the UK, 7,100 people (including Mouchel Consulting) provide consultancy services to all aspects of the built and natural environment working across both the public and private sectors, with local and national governments, local authorities, developers, contractors and co-professionals. The combined business has been involved in many high profile UK projects including the Shard, Crossrail, Queen Elizabeth University Hospital, the Bullring shopping centre in Birmingham, the re-development of London Bridge Station, Manchester Metrolink, M1 Smart Motorway, and the London Olympic & Paralympic Route Network. WSP-PB.CO.UK CONTACTS To find out more about the Non-Financial Reporting Directive and learn how we can help you meet the requirements, please contact: David Symons david.symons@wspgroup.com +44 (0) Robbie Epsom robbie.epsom@wspgroup.com +44 (0) WSP Parsons Brinckerhoff WSP House 70 Chancery Lane London, WC2A 1AF Sources: Tel: +44 (0) Fax: +44 (0) The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (2016 No.1245) Explanatory Memorandum to the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (2016 No.1245) AndNon-FinancialReporting)Regulations2016 BEIS Impact Assessment on the EU Directive on Non-Financial Reporting (BISCFA001) Written information request from BEISA 2016 WSP Parsons Brinckerhoff. All rights reserved. The contents of this publication may not be reproduced by any means in whole or in part, without prior written consent from the publisher.