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Disclosure of non-financial and diversity information by large companies and groups - Frequently asked questions

Commission Européenne - MEMO/14/301   15/04/2014

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European Commission

MEMO

Brussels, 15 April 2014

Disclosure of non-financial and diversity information by large companies and groups - Frequently asked questions

See also STATEMENT/14/124

1. What will change? What information will be disclosed and how?

Current EU legislation, in particular Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, addresses the disclosure of non-financial information. However, the requirements of the existing legislation have proved to be unclear and ineffective, and are applied in different ways in different Member States. Currently, fewer than 10% of the largest EU companies disclose such information regularly. Over time, some Member States have introduced disclosure requirements that go beyond the Directive. For instance: the UK introduced legislation in 2006 and updated it in 2013; Sweden adopted legislation in 2007; Spain in 2011; Denmark amended its legislation the same year and France in 2012.

This Directive amends Directive 2013/34/EU. The objective is to increase EU companies’ transparency and performance on environmental and social matters and, therefore, to contribute effectively to long-term economic growth and employment.

Companies concerned will be required to disclose in their management report relevant and material information on policies, outcomes and risks, including due diligence that they implement, and relevant non-financial key performance indicators concerning environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

Companies will retain significant flexibility to disclose relevant information in the way that they consider most useful, or in a separate report. They may use international, European or national guidelines according to their own characteristics or business environment (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code).

2. Why does business transparency matter? Is disclosure of environmental and social information important?

Transparency leads to better performance. This is true not only about disclosure of financial information, but also as regards information on environmental and social matters. Transparent companies perform better over time, have lower financing costs, attract and retain talented employees, and are ultimately more successful.

Investors are more and more interested in non-financial information in order to have a comprehensive understanding of a company’s development, performance, position and impact of its activity. They thoroughly analyse this information in their investment-decision process.

3. Why a legal requirement? Would a purely voluntary approach not be enough?

Over the years, we have seen the limits of a voluntary approach. Today, around 2 500 large EU companies disclose environmental and social information regularly, which is less than 10% of the EU large companies. Regulating some minimum requirements, whilst avoiding any undue administrative burden, in particular for the smallest companies, is the right decision at this time.

4. Who will benefit from this measure?

Each individual company disclosing transparent information on social and environmental matters will realise significant benefits over time, including better performance, lower funding costs, fewer and less significant business disruptions, better relations with consumers and stakeholders. Investors and lenders will benefit from a more informed and efficient investment decision process. Society at large will benefit from companies managing environmental and social challenges in a more effective and accountable way.

5. How does this legislation avoid undue administrative burden, in particular for small and medium-sized companies (SMEs)?

SMEs will not be required to disclose environmental and social information. This does not mean that they would not benefit from better transparency. The same logic applies as for larger companies. But smaller companies may lack appropriate human resources and information handling costs may be proportionately higher. Thus, the overall administrative burden may be disproportionately high.

In itself, this Directive will not result in a direct administrative burden for smaller companies. Nevertheless, as companies of all sizes develop their businesses, they are likely to experience transparency demands from their customers, employees, consumers, investors, lenders and other business partners and stakeholders.

Several measures have been taken to limit the administrative burden for larger companies too. For instance, the disclosure requirements may be fulfilled once at group level, rather than by each affiliate in the group, and auditing aspects are limited to an annual check.

6. How many companies will be subject to the new reporting requirement?

A fine balance has been achieved so that the benefits of enhanced transparency are realised, whilst any undue administrative burden, in particular for smaller companies, is avoided. To be clear, millions of EU SMEs will have no new obligation whatsoever.

Currently, around 2 500 large EU companies disclose environmental and social information regularly. The Directive will apply to large public-interest entities with more than 500 employees, i.e. approx. 6 000 large companies and groups across the EU. Public-interest entities include listed companies as well as some unlisted companies, such as banks, insurance companies and other companies that are so designated by Member States because of their activities, size or number of employees.

7. How much will this cost companies?

Costs associated with the required disclosures are commensurate with the value and usefulness of the information, and with the size and complexity of the business. It varies according to the internal use and external visibility. Many companies have realised the strategic value of reporting on social and environmental matters for their internal business-decision process, and for their external communications.

The Directive does not require comprehensive reporting on environmental and social aspects (although the Commission certainly encourages it). The Directive requires only the disclosure of certain information on policies, outcomes and risks. This is estimated to result in an additional direct cost for large companies of less than €5 000 per year, i.e. less than €30 million euro on an EU basis.

8. How does this Directive relate to integrated reporting?

The Directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting.

The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.

9. Why does the EU act on boardroom diversity?

Large listed companies often have important international activities in different sectors, while many of their shareholders may also be international. Evidence shows however that EU companies often do not have a diverse board. Company boards comprising members with a similar educational and professional background, age or gender may be dominated by a narrow "group think", which can lead to management decisions not being challenged effectively and to innovative ideas not being taken on board.

In view of the key role of the board in the governance of companies, it is important to ensure that listed companies reflect better on the composition of their boards. To this end, this Directive will require large listed companies to be transparent about their diversity policy. However, they remain free to define what kind of diversity policy is appropriate to their specific situation.

10. What is the connection with the Commission's initiative to increase the presence of women on boards of directors (IP/12/1205)?

The objective of both initiatives is similar: to diversify the composition of boards of directors so that they better supervise the company’s management. However, the logic is a little different. The initiative on increasing the presence of women on boards covers gender aspects only, and is based on reaching a certain percentage. This Directive also covers other aspects of diversity, such as educational and professional background and age. Companies will be required to disclose their diversity policies. This is expected to exert indirect pressure by encouraging more diversity. Therefore, both initiatives are complementary.

11. What is country-by-country reporting on tax matters and why is it important?

On 22 May 2013 the European Council called for some measures to fight tax evasion and fraud, including examining the Directive on disclosure of non-financial information with a view to ensuring country-by-country reporting by large companies and groups.

Country-by-country reporting refers to the requirement for large companies to produce certain information, notably on taxes paid, by each country where they have operations. With more transparency, tax evasion and fraud will become more difficult. Transparency is complementary with other measures, such as strengthening international cooperation.

The Directive requests that the Commission examines and reports back by July 2018 on the possibility of introducing an obligation requiring large undertakings to produce, on an annual basis, a country-by-country report, containing information on, as a minimum, profits made, taxes paid on profits and public subsidies received.


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