Assess record for 'Disclosure of Non-Financial Information by Companies'

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1 Page 1 of 7 Assess record for 'Disclosure of Non-Financial Information by Companies' Meta Informations Creation date Last update date User name null Case Number Invitation Ref. Status Background Information For the purpose of analysis of this consultation you want to be identified as -single choice reply- Please specify the user type -single choice reply- N User NGO /Other organisation of stakeholders Name(s) (of respondent and of your organisation / company) -open reply- Hannah Ellis, The Corporate Responsibility (CORE) Coalition Country where your organisation / UK - United Kingdom company is located -single choice reply- Please provide the name and location of parent company The Corporate Responsibility Coalition Ltd, UK Your address Underwood Street, London, UK Your address: -open reply- hannahe@foe.co.uk Short description of the general activity of your organisation / company: The Corporate Responsibility (CORE) Coalition is an alliance of voluntary organisations, trade unions and companies. Our vision is of a world where all companies demonstrate respect for the rights of workers, local communities and the environment throughout their operations. We work in partnerships, advocating visionary proposals to help fill governance gaps in the way UK companies operate. Is your organisation registered in the Interest Representative Register? If your organisation is not registered, you have the opportunity to register here before you submit your contribution. Responses from organisations not registered will be published separately from the registered organisations. -single choice reply- Please specify the Register ID number in the Interest Representative Register - open reply- Can the Commission contact you if further details on the information you submitted is required? -single choice reply- Publication: Do you object to publication of the personal data on the

2 Page 2 of 7 grounds that such publication would harm your legitimate interests? -multiple choices reply- (optional) Questionnaire 1. How would you consider the current regime of disclosure of nonfinancial information applicable in your country? -single choice reply- Very poor In replying to this question, please provide information on what way current reporting provides useful information, and to what extent it is sufficiently tailored to the circumstances of the company. Please also comment on whether you find non-financial information useful for the decision-making of a company. Environmental and social reporting is incredibly important in helping stakeholders assess companies environmental and social performance. The regulatory requirements in relation to disclosure of non-financial information applicable in the UK in governed by The Companies Act (2006). Specifically, the provisions dictate the provision of a Business Review reporting requirement (section 417 of The Act) and a Directors Duites requirement (section 172 of The Act). Unfortunately, environmental and social issues relevant to a company s strategy, risks and opportunities are currently not being reported adequately and constitute a major gap in directors reporting. Many reports make vague statements relating to the seriousness of these issues to the company but there is a lack of transparency as to how such risks were identified and how directors have determined to manage them. This includes providing detailed and relevant information from a range of key issues and associated risks, combined with contextual information to clarify the choices made about which risk factors are highlighted. Findings of The CORE Coalition A recent report produced by The CORE Coalition highlights how The Companies Act (2006) reporting requirements has failed to make environmental and social reporting simpler and more effective. Analysis of FTSE100 company reviews revealed: 8% have no clearly identifiable business review, leading to confusion for shareholders and stakeholders alike. 17% made no reference to environmental issues, despite wide acceptance that climate change is a business risk. 8% completely failed to include any social issues in their business review. 14% failed to include any social issues other than labour. Lack of Compliance with the Spirit of the Requirements CORE s report also found that compliance with The Companies Act is far from comprehensive, with many companies not acting in the spirit of the reporting requirement. The reporting of non-financial information in business reviews was highly inadequate. For example, not a single company mentioned adaptation to climate change and extractive companies were silent on known areas of human rights risk, such as security around facilities. Of significant concern was also apparent lack of compliance with s.417 which requires that if a Business Review does not contain information about each of the specified key factors which underlie the business performance, then these omissions should be stated. Although information in many reports was sparse, no declaration of this sort was found in any of the Annual Reports reviewed. Quantitative information is critical in assessing business performance and although The Companies Act makes specific reference to the use of Key Performance Indicators (KPIs), CORE s study found few companies referred to KPIs in their reports. Furthermore, where quantitative information was reported, there was rarely any description or detailed specification of the indicators used. The most reported area of environmental information was emissions, effluent and waste, which includes CO2 emissions; this information is often required by other regulation and so is more readily available. Yet even here, only one third of companies surveyed reported quantitative information and 18% did not mention the issue at all. CORE believe many environmental and social issues, such as CO2 production and a company s susceptibility to climate change should be widely considered and reported constituting a principal risk and uncertainty facing companies (Section 417 (3) (b)). While climate change was the single best reported issue other than economic performance, detailed quantitative information was provided by only 48% of companies. In general it was surprising to find that there were almost no analyses of the sensitivity of the company to climate change or what adaptation measures the company was adopting. Confusion Regarding Requirements During the process of liaison with companies in order to complete the study, there was evidently considerable confusion among company secretaries and CSR departments as to what a Business Review actually is, and what it should contain. At its worst, in some cases, this meant that it was not possible to identify the Business Review: eight Annual Reports appeared to have no identifiable Business Review section. Where Business Reviews were easily identifiable, there was a variety of practices concerning the status and use of external sources of non-financial information. For example, some companies referred to more detail on their websites, others referred generally to their CSR reports, while yet others made reference to an internet location at which further detail could be found. According to legal advice obtained by CORE, such general references should not be considered a part of a Business Review. Poor Quality of Information s.417 of The Companies Act (2006) describes the purpose of the Business Review to help them assess how the directors have performed their duty [to promote the success of the company] under section 172. Of significant value to making such an assessment would be information regarding the way the Business Review was prepared. Yet only a minority of companies included such information. Furthermore, information is often of extremely poor quality. Most companies fail to provide consistent, robust and properly contextualised information about environmental and social risks. For example, climate change reporting is rarely quantitative, often inaccurate and rarely evidenced with links to how this

3 Page 3 of 7 data has informed decision making by the company. This is also true in other issue areas. ClientEarth s complaint to the Financial Reporting Review Panel (FRRP) regarding Rio Tinto s 2008 annual report, considers the failure to mention numerous specific material issues, including the decision of a major shareholder to divest on environmental grounds, and the reputational and litigation risks associated with specific mining projects. Usefulness of Data: The Need for Standardised Measures The absence of comparable, standardised measures means that companies who improve their environmental and social footprint are often unable to demonstrate their success relative to their industry peers (or their key stakeholders). Readers are often sceptical of the information provided, particularly where reporting consists of vague language and grandiose statements. If companies report according to a common protocol, they will be able to demonstrate that they have used the appropriate process to assess risks, define boundaries, measure impact and report on them in a way that is meaningful, consistent and comparable. It is also currently not possible for investors and consumers to make sensible comparisons between companies. In relation to climate change, this lack of transparency undermines efforts to assess and then reduce the contribution of UK companies to national or international carbon emissions targets. 2. Have you evaluated the effects, and costs and benefits, of any current corporate disclosure of environmental and social information? -single choice reply- Please see our report The Reporting of Non-Financial Information in Annual Reports by the FTSE100 by Professor Adrian Henriques of Middlesex University, is available for download here responsibility.org/wp/wp-content/uploads/2010/04/reporting-of-non-financial-information-by-the- FTSE1003.pdf 3. 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? The EU should introduce legal requirements for multi-national enterprises (MNEs) to report on the impacts and risk of their operations both in the EU and internationally, with the introduction of mandatory, clear, auditable, comparable and enforceable standards for large and medium-sized companies. The standards should be based on international conventions listed in Annex III of the EU Generalized System of Preferences. The corporate disclosure of non-financial information should: be mandatory (regardless of the materiality of such information to the financial position of the reporting company) be based on clear indicators form a part of the annual financial report sent to the regulatory authorities be requested from medium and large-sized companies (but not from small companies) extend to all organisations that the reporting company can control (in particular companies should describe their supply chain and identify their suppliers to ensure traceability of their products) include a description of violations and risk of violations of international standards for human rights and environmental protection as a result of company's operations or the operations of its subsidiaries, suppliers or subcontractors. This description should provide objective data on facts and figures constituting relevant risks and violations. be subject to independent review; and in the event that the company fails to accurately report the information required, it should be liable to effective, proportionate and dissuasive sanctions be enforceable by members of the public; in particular those who depend on access to this information to be able to exercise their rights should be able to challenge any failure to provide that information in the courts. The courts should also have power to require the disclosure of information and to impose sanctions on any company that has failed to report. 4. In your opinion, should companies be required to disclose the following (check all relevant boxes): -multiple choices reply- (optional) Whether or not they have a CSR policy, and if they do, how they implement that policy and what the results have been The principal business risks and opportunities arising from social and environmental issues, and how they are taken into account in company strategy. Key information regarding issues such as employee engagement (e.g.: employee training policy, equality and diversity, etc.); customer satisfaction (e.g.: customer loyalty); public perception of the company (e.g.: stakeholder dialogue); environmental policies (e.g.: energy efficiency, waste reduction); and innovation (e.g.: R&D expenditure). Other Other, please specify: -open reply- The EU reporting framework should recognise that human rights and environmental considerations are relevant to a company s commercial activities. It follows that companies should be required to report on any risk of violations of international human rights and environmental standards that may occur or that have ocurred as a result of their operations or as a result of the operations of their subsidiaries or suppliers, and that companies should also report on any steps taken to mitigate against such risks and violations and to fulfil company's responsibility to respect human rights and environmental standards. In addition, the EU should encourage companies to provide an overall picture of a company's performance on CSR beyond the legal requirements,

4 Page 4 of 7 enabling investors, shareholders and other stakeholders to assess the company's performance 5. In your opinion, for a EU measure on reporting of non-financial information to achieve materiality and comparability it should be based upon (check all relevant boxes): - multiple choices reply- (optional) 5a) In case you consider that Key Performance Indicators (KPIs) would be useful, would you think that they should be (check all relevant boxes): - multiple choices reply- Principles Key Performance Indicators (KPIs) Other General for all economic sectors Sector specific 5b) Please indicate which indicators you would consider to be the most relevant for all economic sectors: For an effective framework to ensure materiality and comparability, requirements need to be dictated at both a headline (principle and general level) and a detailed level (with KPIs and sector specific requirements). Other, please specify: -open reply- For an effective framework to ensure materiality and comparability, requirements need to be dictated at both a headline (principle and general level) and a detailed level (with KPIs and sector specific requirements). 6. In your opinion, what should be the process to identify relevant principles and/or indicators (whether general or sector-specific)? In replying to this question, please comment on whether the Commission should endorse or make reference to any existing international frameworks (or a part of them), such as Global Reporting Initiative (GRI), UN Global Compact, the OECD Guidelines, ISO 26000, or other frameworks; or whether companies should be required to select relevant indicators together with their investors and other stakeholders and to disclose information according to such indicators, depending on the use that different stakeholders would make of such information. Reporting obligations under new requirements should consist of principles developed in accordance with: - International conventions on human rights; - ILO standards; - Environmental protection requirements; - Climate Change Commitments; - Anti-corruption legislation; - Provisions contained in Annex III of the EU Generalized System of Preferences; - Other relevant environmental and social EU policies which are impacted by the private sector (eg. tackling climate change, promoting sustainable public procurement, and consumer protection) and a requirement to disclose company performance in relation to its contribution to, or undermining of, these key public policy objectives; - The work of the UN Special Representative on Business and Human Rights. Companies should also be required to report on: - Impacts and risks to the company associated with human rights violations of their operations or operations under their control (such as the operations of subsidiaries, suppliers or joint venture partners); - Breaches (or risk of breaches) to international environmental standards of their operations or operations under their control (such as the operations of subsidiaries, suppliers or joint venture partners); - Corruption risks and breaches associated with their operations or operations under their control (such as the operations of subsidiaries, suppliers or joint venture partners); - Steps taken by the company to minimise, mitigate and manage these risks. Additional to these principles, companies should be required to report based on specific indicators (KPIs). These KPIs should be developed by: (1) The principles outlined above; (2) Due reference to existing (voluntary) guidelines such as the GRI, ISO and UN Global Compact. These (voluntary) guidelines may also provide a reference point for the development of mandatory sector specific reporting. While companies might choose to report on additional issues, reporting on these core indicators must be mandatory to ensure an effective, comparable and meaningful framework. In short companies should report on activities/impacts which they have the ability to influence with due regard to: - compliance with national law and international norms, - contribution to/undermining of key public policy objectives - social and environmental impacts arising from strategic objectives of a company - priority issues of concern to stakeholders of the company - how the company has minimised, managed and mitigated the above. More useful guidance on the development of KPIs can be found in The Harvard Kennedy School Report From Transparency to Performance: Industry- Based Sustainability Reporting on Key Issues Reporting requirements should also specify a need for publication of human rights impact assessments, as recommended by The UK Parliament s Joint Committee on Human Rights in their recent report Any of Our Business? Human Rights & The UK Private Sector which states: Although the Companies Act 2006 represented a positive step forward for reporting on human rights impacts in the UK, we reiterate our earlier view that it could have gone much further to promote respect for human rights by UK companies. We welcome the recognition by the CBI that the business review process involves UK companies

5 Page 5 of 7 reporting on the human rights impacts of their operations. However, we share the concerns of a number of witnesses to our inquiry that these reforms have a number of limitations. Inconsistent reporting of human rights impacts in the business review will undermine its value. There is a case for clearer guidance on what reporting standards should apply and what issues should be considered material for the purposes of the review. We recommend that the Government should draw up and publish such guidance by the end of 2010 so that it can be informed by the forthcoming review of the Companies Act We again recommend that the Government considers amending the Act to require companies to undertake an annual human rights impact assessment as part of the business review, in the light of the recommendation of Professor Ruggie that all responsible companies should conduct such an assessment as part of their human rights due diligence. 7. In your opinion, should companies be required to disclose the steps they take to fulfill the corporate responsibility to respect human rights? -single choice reply- In the UN Special Representative for Business & Human Rights draft 'Guiding Principles', the Special Representative makes it clear that reporting is an important way in fulfilling the corporate responsibility to respect. This is outlined in Principle 19 which states: "...In order to account for their human rights performance, business enterprises should be prepared to communicate publicly on their response to actual and potential human rights impacts when faced with concerns of relevant stakeholders. Those business enterprises with significant human rights risks should report regularly on their performance. The frequency and form of any communications on performance should: a. Reflect and respond with adequate information to an enterprise's evolving human rights risks profile..." The commentary accompanying this principle explains: "...Reporting provides a measure of accountability to groups or individuals who may be impacted and to other relevant stakeholders, including investors. The reporting should cover topics and indicators that reflect the business enterprise s actual and potential adverse impacts on human rights. Third party assurance of human rights reporting can strengthen its content and creditability. Sector-specific indicators can provide helpful additional detail.." Principle 18 also states; "Tracking human rights performance should be integrated into relevant internal reporting processes. Business enterprises might employ tools they already use to track their performance on other issues, including performance contracts, reviews, surveys and audits." The report also suggests that: "'...Financial reporting requirements should clarify that human rights impacts in some instances may be material or significant from the investors point of view and indicate when they should be disclosed." Not only is reporting an important element of a companies' responsibility to respect human rights, but an effective mandatory human rights reporting framework is also part of a states duty to protect human rights. As the report states in Principle 2: "... states should encourage business enterprises domiciled in their territory and/or jurisdiction to respect human rights throughout their global operations, including those conducted by their subsidiaries and other related legal entities." The commentary accompanying this principle suggests that this may be done through requiring companies to report on their performance. CORE supports this recommendation and believes this EU review of existing reporting requirements offers an important opportunity to operationalise this principle. 8. 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? -single choice reply- Corruption and bribery are issues which the EU have identified as a significant concern and much in need of tackling. Companies clearly have a key role to play in ensuring the effective mitigation of corruption and bribery and the EU has already identified as a priority the efforts of the private sector to raise integrity and corporate responsibility should be supported. (Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - On a comprehensive EU policy against corruption [COM(2003) 317]). Markets rely on consistency of information to operate effectively. Allowing companies to selectively disclose information to different stakeholders is not consistent with the need to make vital information readily available to all interested parties. Other sources of information are not a substitute for comprehensive and transparent information that is in the public domain. At a minimum, stakeholders need access to enough information to decide which issue areas give cause for concern and further analysis or engagement. Much existing reporting does not come close to meeting this bare minimum. Specifying reporting requirements in relation to these issues is clearly not enough in itself to tackle these issues in their entirety, but will go some way in helping to mitigate against corporate corruption and bribery. 9. In your opinion, what companies Medium-sized & Large companies (listed and non-listed) should be required to disclose nonfinancial information (check only one box)? -single choice reply- 10. In your opinion, should institutional investors be subject to specific or additional disclosure requirements, for example to

6 Page 6 of 7 disclose whether and how they take into account environmental and social issues in their investment decisions? -single choice reply- In replying to this question, please provide information on which issues seem to be the most relevant and why; and which institutional investors should be subject to such an obligation. Such information would make it easier for members of the public and socially responsible investors to consider environmental and social issues when making investment decisions. However, there is also a need for enforcement and sanction mechanisms for institutional investors found not to be implementing their own policies. The European Commission should also develop a mandatory framework specifically for this kind of reporting, requiring institutional investors to answer specific questions. 11. In your opinion, should European policy promote the concept of "integrated reporting"? Integrated reporting refers to a report that integrates the company's key financial and non-financial information to show the relationship between financial and non-financial performance (environmental, social, and governance). -single choice reply- In replying to this question, please indicate the advantages and disadvantages of an integrated report, as well as possible specific costs of integrated reporting. Annual reports should include an analysis of the financial risks for a company of human rights and environmental abuses resulting from the company's operations. However, this should not limit the requirement to report on non-financial issues to only those that are perceived as relevant to a company s financial performance. This could produce undesired effects, potentially marginalizing important issues that do not directly affect the financial position of a company but that could have great negative impacts for communities or the environment, and would not result in a simple and straight-forward reporting framework. It should also be noted that some company activities that involve even the most serious human rights abuses can be profitable, at least in the short term, because they occur in areas where there is weak governance and the company is not under any pressure to conform to human rights standards. 12. In your opinion, should disclosed non-financial information be audited by external auditors? -single choice reply- In replying to this question please provide any evidence you may have regarding costs of auditing non-financial information, as well as your views on other possible forms of independent reviews besides external auditing. Verification of the information in company reports, and of the process followed to generate this information, is essential to ensuring its reliability. The mandatory audit should be comprehensive in content and scope. As well as content, the audit should concern itself with the process the company has undertaken to produce its business review. However, much research undertaken in relation to social audits, illustrates the lack of reliability of these audits for verifying claims made by companies (For example, research conducted by the Ethical Trading Initiative, and War on Want s research on the garment industry, which refers to a number of high street retailers recognising the failure of their audits in capturing the reality of conditions in their supplier factories. See Fashion Victims: The True Cost of Cheap Clothes at Primark, Asda and Tesco Report available at ). In order to be effective, there is a clear need for these audits be supplemented with interviews with key stakeholders including trade unions, local community representatives and relevant civil society actors. Audit is not however an effective substitute for enforcement. Enforcement of the law is fundamental to the effectiveness of the law. The regulator responsible for monitoring and ensuring compliance with the law must do exactly this. This

7 Page 7 of 7 includes taking positive action to ensure legal requirements are met. 13. If you have relevant documents you want to share with us, please attach them here. (optional) -multiple choices reply- (optional) Uploaded files: I attach additional documents additional documents.doc PRINT EXPORT RECORD