What do you need to know about social and environmental information reporting?

Transcription

1 What do you need to know about social and environmental information reporting? The birth of the Luxembourg law on disclosures of non-financial and diversity information

2 On 23 July 2016 Directive 2014/95/EU of 22 October which amends Directive 2013/34/EU 2 as regards disclosure of non-financial and diversity information by certain large undertakings and groups was transposed into Luxembourg corporate law (the Law, the 23 July 2016 Law). The Law amends and supplements the Luxembourg Law of 18 December 2015 on the transposition of the European Directive 2013/34/EU on the annual and consolidated financial statements.

3 The need for transparency and disclosure of sustainability information is high on the agenda for businesses and for a wide range of stakeholders including investors, governments and civil society. Different users look at sustainability information from different perspectives and therefore accrue different benefits and insights. Investors may, for example, focus on the cost of capital and brand value. When read by employees, the information may particularly influence their motivation and have an effect on retention rates, whereas the wider society may look more at companies license to operate. The European Parliament acknowledges the importance of businesses information on sustainability such as social and environmental factors, with a view to identifying sustainability risks and increasing investor and consumer trust. Indeed, disclosure of nonfinancial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. The European accounting directives encourage the enterprises to go beyond the financial dimension reporting by providing in the management report in particular nonfinancial key performance indicators (i.e., as transposed into Luxembourg corporate law by the Law of 10 December amending the Articles 68 (1) b) of the Law of 19 December 2002 as amended, on the register of commerce and companies and the accounting and annual accounts of undertakings and 339 (1) of the Law of 10 August 1915 as amended, on commercial companies). These include information relating to environmental and employee matters. However practice shows that the reporting of nonfinancial information has not so far had the expected efficiency. In this context, the Law is intending to establish clearer requirements in order to focus on this hot topic that is sustainability, and to increase the relevance, consistency and comparability of information disclosed by certain large undertakings and groups. The Law aims to be a response to the needs of: Investors and other stakeholders in terms of comparability of non-financial information Consumers to easily access information on the impact of businesses on society The Law does not provide detailed guidance with regards to the form and content of the non-financial information, but aims to offer high flexibility in that respect taking into account: The multidimensional nature of corporate social responsibility The diversity of the related policies implemented by companies 1 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (thereafter the Directive) 2 The European Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC 3 Law of 10 December 2010 on the introduction of international accounting standards for undertakings 1

4 The Law in brief The Law is composed of two parts: the first one is related to the non-financial statement on information about inter alia environmental, social, human rights, and fight against corruption. The second one is about a new requirement to communicate information on diversity. Each part of the Law will be presented in this publication. The impact on Luxembourg s current legislation The Law modifies the amended versions of the laws of: 10 August 1915 on commercial companies (the 1915 Law) 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings (the 2002 Law) 8 December 1994 relating to the annual accounts and the consolidated accounts of insurance and re-insurance undertakings governed by Luxembourg law, the obligation regarding the drawing up and publication of the accounting documents of branches of insurance undertakings governed by foreign laws, respectively, as amended (the 1994 Law) Law Disclosures on non-financial information and diversity information apply to commercial companies, credit institutions, and insurance, re-insurance companies, to certain extent. Provisions are applicable for financial periods beginning on or after 1 January Date of application The below mentioned provisions will be applicable for the first time for financial periods beginning on or after 1 January

5 Non-financial statement The following amendments apply to the preparation of both the management report and the consolidated management report. The requirement of a non-financial statement is transposed into Luxembourg law by the following provisions: The 1915 Law: a new Sub-Section 3bis is inserted between Sub-Section 3 on the content of the consolidated management report and the existing Sub-Section 3bis renumbered Sub-Section 3ter on the duty and liability for drawing up and publishing the consolidated accounts and the consolidated management report The 2002 Law: a new Article 68bis is inserted between Article 68 on the content of the non-consolidated management report and the existing Article 68bis renumbered Article 68ter on corporate governance statement The 1994 Law: new Articles 85-2 and Credit institutions obligations are included in the scope of the 2002 Law Articles 68bis and 68ter and in the scope of the 1915 Law Article 339bis, pending a more comprehensive review of the Law of 17 June For insurance and reinsurance companies, the provisions on non-financial information are incorporated directly in the 1994 Law (i.e., Articles 85-2 and 124-1). In the meantime, the legislator has also added a chapter referring to the reporting provisions on payments made to governments contained in the 18 December 2015 Law (i.e., Chapter 5bis Article 124-2). Undertakings in scope Entities in scope of the non-financial statement are larged-sized PIE having more than 500 employees. Undertakings required to report on non-financial information include: Entities in one of the following legal forms, public limited company (société anonyme S.A.), European company (société européenne S.E.), partnership limited by shares (société en commandite par actions S.C.A.), private limited company (société à responsabilité limitée S.à r.l.), certain 4 unlimited companies (société en nom collectif S.N.C.) or certain common limited partnership (société en commandite simple S.C.S.), that further meet all the criteria below: Public interest entities 5 (PIEs) (i.e.,: entities governed by the law of a Member State, whose transferable securities are admitted to trading on a regulated market of a Member State, or a credit institution, or a (re-)insurance company) Large-sized companies 6 Average number of employees exceeding 500 during the financial year Groups which are subject to the requirement to prepare consolidated accounts, where the parent company has one of the above legal forms, is a PIE and further meets the mandatory criteria mentioned above on a consolidated basis (i.e.,: large-sized groups 7, and average number of 500 employees) 4 S.N.C or S.C.S subject to Article 77 2 and 3 of the 2002 Law. 5 Public Interest entities are defined in the Article 1 (20) of the 14 July 2016 Law on audit profession. 6 Large-sized companies are undertakings which on their balance sheet date, and during two consecutive financial years, exceed the limits of two of three of the criteria disclosed in Article 47 of the 2002 Law. 7 Large-sized groups are groups which on their balance sheet date, and during two consecutive financial years, exceed the limits of two of three of the criteria disclosed in Article 313 of the 1915 Law. 3

6 Non-financial statement content The Law sets out that companies should at a minimum produce information on: 1. Environmental matters 2. Social and employee aspects 3. Respect of human rights 4. Anti-corruption and bribery issues In relation to these aspects the Law expressly addresses the following elements: The business model The policy pursued (including due diligence process) The result of the policy pursued The principal risks and the management of these risks Non-financial key performance indicators The non-financial statement is presented either in the management report or in a separate report. The content of the non-financial statement shall include: Information, necessary for an understanding of the undertaking s development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters, including: (a) A brief description of the undertaking s business model (b) A description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented (c) The outcome of those policies (d) The principal risks related to those matters linked to the undertaking s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks (e) Non-financial key performance indicators relevant to the particular business Where the undertaking does not pursue policies in relation to one or more of those matters, the non-financial statement shall provide a clear and reasoned explanation for not doing so The non-financial statement shall also, where appropriate, include references to, and additional explanations of, amounts reported in the annual/consolidated accounts Entities fulfilling the obligation of a non-financial statement shall be deemed to have fulfilled the obligation relating to the analysis of non-financial information set out in the management report Article 68 (1) b) of the 2002 Law, Article 339 (1) of the 1915 law and Articles 85 1 b) and b) of the 1994 Law. 4

7 Which topics may the nonfinancial statement cover? Safe, good health and well-being Personal development Gender equality Products innovation Clean water and sanitation Affordable and clean energy Decent work and economic growth Sustainable cities and communities Responsible consumption and production Climate action Non-financial information involves issues related to sustainability, corporate responsibility, environmental, social, and governance (ESG), ethics, human capital and environment, health and safety (EH&S). These could include matters dealing with: Safe, healthy, diversity, personal development, quality working lives for employee Products innovation that accelerate more sustainable lifestyles Products that create sustainable infrastructure Efficient use of resources and high recycling rates Trusted user of air, land and water Energy efficiency or renewable energy-based products and services, climat change, responsible energy user that helps create a lower carbon future Human rights impacts within company s supply chains that customers trust Waste and materials use Consumer protection and non-compliance issues Active and welcomed member of the community Transparent and efficient corporate governance. Contribution to society, measured, shared and valued. Partnership, sponsoring. Business ethics, human rights 5

8 Non-financial statement publication requirements The provisions for the publication of a non-financial statement are as follows: When included in the management report, the provisions remain unchanged as embedded in the existing requirements for the publication of the annual accounts and the management report, as disclosed in the Article 79 of the 2002 Law, Article 341 of the 1915 Law and Articles 87 and 126 of the 1994 Law When presented in a separate report, either: The separate report is published together with the management report in accordance with the Articles mentioned above This report is made publicly available within a reasonable period of time, not exceeding six months after the balance sheet date, on the undertaking s website, and is referred to in the management report Exemptions Exemption as regards disclosure of non-financial information may apply to: An entity which is a subsidiary under the definition of Article 309 of 1915 Law, if that entity and its subsidiary undertakings are included in the consolidated management report or in the separate report of a parent, drawn up in accordance with the Law Sub-group (a parent undertaking which is also a subsidiary undertaking, together with its subsidiaries), if that exempted sub-group is included in the consolidated management report or in the separate report of another parent undertaking, drawn up in accordance with the Law Control of the report by an independent auditor or another professional This new report/statement is not intended for now to be submitted to the supervision by the person in charge of the statutory audit or by another professional. However the statutory auditor checks whether the non-financial statement or the separate report has been provided. Non-financial statement preparation framework The non-financial statement constitutes a novelty in Luxembourg Law, which raises the question of the framework to be choosen by a company. Voluntary reporting standards have been developed to guide organizations in preparing sustainability reports. It is noted that various frameworks, standards and other guidance coexist today, such as: The Global Reporting Initiative (GRI) SASB (non-financial disclosures requirements for SEC listed companies) ISO Accountability 1000 The United Nations Global Compact The guiding principles of the OECD (Organisation for Economic Co-operation and Development) 6

9 Coverage Subject matter Social and Ethical Environmental Financial Economic Policy UN Global Compact AA1000 SES ISO14001 Accounting SA8000 DJSI Sarbanes - Oxley Assurance AA1000 Assurance Standard Reporting GRI A new requirement to communicate information on diversity In requiring the disclosure of the non-financial information, the Luxembourg legislator providing that the undertakings may rely on national, European or international frameworks, requires the entities to specify which frameworks they have relied upon. Diversity information to be disclosed by larged-sized PIE Diversity policy may include: Stressing on the roles of nonexecutive directors as well as the importance of independence of the board Emphasising the significance of balancing skills and experience of the board members Gender diversity via woman representation In order to introduce the obligation to communicate information on diversity, several changes are made to Article 68ter of the 2002 Law (existing Article 68bis that is renumbered Article 68ter) and Article 85-1 of the 1994 Law on the statement on corporate governance, namely: The addition of a point (g) in subsection (1) introducing a requirement to report: A description of the diversity policy applied in relation to the company s management with regard to aspects such as, age, gender, or educational and professional backgrounds The objectives of that diversity policy, how it has been implemented and the results in the reporting period If no such policy is applied, the statement shall contain an explanation as to why this is the case The precision that the statutory auditor s responsibility with respect to the provision of information on diversity is limited to a verification that the information has been provided The requirement to communicate information on diversity is limited to large-sized PIE. Moreover, companies which have only issued securities other than shares admitted to trading on a regulated market 8 are exempted from the application of the new point (g) of paragraph 1 of this Article, unless such companies have issued shares which are traded in a multilateral trading facility 9. 8 A regulated market within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments. 9 within the meaning of point (15) of Article 4(1) of Directive 2004/39/EC. 7

10 How EY Luxembourg can help The challenges of non-financial reporting, and performance management generally, depend on the maturity of the organization: Starters are just commencing with non-financial performance management, typically facing challenges related to definitions, data collection, governance and organizational competence Front-runners are advanced users of non-financial information, typically facing challenges related to reporting complex supply chain disclosures (e.g., supply chain emissions) and developing the systems and information necessary to enable a practitioner to perform a reasonable assurance engagement In between the two are those in the middle-of-the-pack, who are striving to further hone their non-financial reporting capabilities Companies face a number of common pitfalls that can impact their ability to develop reliable non-financial reporting. An overview of the challenges is provided in the table below: Phase Description Typical challenges Starter Organizations that commence with non-financial information performance management and external reporting Setting uniform definitions, boundaries and scope, and aligning these to available standards, such as GRI, GHG and <IR> Defining governance and controls Mobilizing non-financial information competence within remote operations Setting SMART 10 management targets Obtaining senior management buy-in Middle-of-thepack Front-runner Organizations that have the ambition to take further steps in monitoring non-financial information performance and external reporting, including adopting the GRI reporting standard (GRI G4) Leaders in sustainability and advanced users of nonfinancial information with the ambition to achieve maturity at the same level as their financial information Involving the finance function and refining internal control functions Building an effective third line of defense (internal audit) through enabling terms of reference for audits of material operations and disclosures Enabling technology for non-financial information data management, including performance dashboard and smart data analytics Driving organizational change management and integrated thinking Managing audit trails, effective processes and IT general controls Managing (complex) supply chain impacts and developing data collection and aggregation controls Assessing the correlations between financial and non-financial information over time and integrating financial information and non-financial information to enable collaborative thinking and decision making 10 SMART is specific, measurable, achievable, relevant and time-based. 8

11 EY Luxembourg can support you at every stage related/leading to the disclosure of non-financial and diversity information including: Providing assistance to the definition of your Sustainability Strategy Supporting your team during the Stakeholder engagement process Developing a Data Management platform Giving assistance during the development of the Report Reviewing the level of practice related to the sustainability management (including the reporting process) Providing external assurance on non financial reporting Strategy & Planning Actions Reporting & Communication Assurance Vision and strategy 1 Clientèle Finance Développement Durable Organization Processus Stakeholder engagement 3 Sustainable reporting system Defining opportunity Risks Sustainable actions according to the triple bottomline : Reporting 4 International standards Assurance Action plan 2 Social Economic Environmental Internal and external communication 9

12 EY can tailor its support to your specific context and maturity regarding the requirements of the Law: Companies are required to comply with the Law (on disclosure of on non-financial information) Companies haven t started a Sustainability/Non financial reporting initiative Companies that have already initiated (fully or partly) a Sustainability/Non financial reporting process Companies that are not required to report on non-financial information and that would like to start a Sustainability/ Non financial reporting initiative A limited overview of how we can help is provided below: EY support Starter Middle-of-the-pack Front-runner EY support as your assurance provider 4 EY support as your advisor Perform a criteria assessment to identify any potential gaps against internal and/or external reporting standards Perform assurance-readiness on selected material non-financial information disclosures Assess efficacy of process/control and data flow documentation Provide advice on how to draft definitions for the non-financial information disclosures that are available and suitable Provide support on governance setup Help identify and define the scope and boundaries for nonfinancial information disclosures following the different reporting frameworks Help develop standard operating procedures and data flows to ensure data accuracy as well as reporting efficiency Provide advice on how to design the processes, identify risks and implement controls Perform a gap assessment to identify any potential areas of improvements against selected reporting frameworks (e.g., G4) Perform assurance engagement on non-financial information disclosures Create a road map to prepare for assurance engagement Assess technology for nonfinancial information reporting, including data conversion and definition of process and controls Support data gathering (and audit trail) for non-financial information disclosures to prepare for an assurance engagement not performed by EY Assist internal audit through procedures or co-sourcing of internal audit activities Provide internal audit training on non-financial information Perform assurance engagement on non-financial information disclosures Assess current reporting of non-financial information against innovative standards for integration (e.g., <IR> standard) Provide advice on the reporting process and controls for Scope 3 or other complex disclosures Help prepare the organization for the journey toward integrated reporting Provide advice and support on impact measurement and reporting Provide advice and support on measuring and valuing stock of capitals 10

13 Key questions to ask Organizations need to assess whether their management of non-financial information is optimized to reliably and efficiently deliver the right information. Here are several key questions to help organizations on their journey to optimize how they manage nonfinancial information: 1. Are you concerned about brand reputation, stranded assets, business resiliency or license to operate? 2. Do you get sufficient business value from non-financial reporting? 3. What is the current state of non-financial information management in your organization? 4. What information matters most and who is most likely to use the business information that is reported publicly? 5. Do investors use non-financial information to assess risk and the outlook for your organization? 6. Are you confident that non-financial information governance, processes and definitions are sufficiently reliable? 7. Is the finance function involved in non-financial information management? 8. Do you use technology effectively to support credible reporting and optimize resources? 9. To what extent do you plan to integrate sustainability reporting and annual (financial) reporting? 10. Can you gain efficiencies by obtaining sustainability report assurance and financial auditing from the same provider? 11

14 EY Thought Leadership For more information and other relevant pubilcation, visit ey.com/lu/climate-change The road to reliable nonfinancial reporting The road to reliable non-financial report Tomorrow s Investement rules 2.0 Emerging risk and stranded assets have investors looking for more from non-financial reporting EY Sustainability reporting: the time is now Our journey towards sustainability EMEIA Financial Services Sustainability Report

15 13

16 Contacts Werner Weynand Partner, Commercial Industry Assurance Leader David Cau Director, Business Advisory Services Thierry Bertrand Partner, Financial Accounting, Advisory and Reporting Services Leader Bernard Lhoest Partner, Financial Services Assurance Leader Brice Lecoustey Partner, Business Advisory Services Jeannot Weyer Partner, Commercial Industry Leader, LuxGAAP Technical Desk Leader Caroline Nicoletti Senior Manager, IFRS and LuxGAAP technical expert EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young S.A. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/luxembourg