Sustainability Reporting Special Issue
As nations throughout the world work to meet social and environmental goals, the informative potential of sustainability reporting has come to the forefront of the conversation in both public- and private-sector circles.
The European Union (EU)’s Directive 2014/95 mandates—for companies operating in its member states—disclosure of sustainability and diversity information. The Directive went into effect in December 2016 and is required to affect any company or organization operating in an EU member state with the following attributes:
Employs more than 500 people;
Falls into “public-interest” organizations, which are defined to include EU exchange-listed companies as well as some unlisted companies, such as credit institutions, insurance companies, and other businesses selected by member states (based on size, number of employees, and/or activities);
Have a balance sheet total of at least EUR $20 million (approximately USD $25 million) or a net turnover of at least EUR $40 million (approximately USD $50 million).
The Directive leaves to the governments the option to allow companies not to disclose information that is related to impending developments, or matters in the course of negotiation, to be omitted in exceptional cases and under specific conditions (i.e. safe harbor clause). Further, should policies in relation to the required sustainability matters not be in place, the company should provide an explanation (‘report or explain’ approach).
As of February 2017, 57 percent of EU member states have determined how they’re going to implement the Directive and have submitted their plans to the EU. While some EU member states are issuing environmental, social, and governance (ESG) reporting directives for the first time, many are altering existing mandates to achieve compliance. The image below lists countries that mandate at least some aspects of ESG reporting, as well as the EU member states, some of which are issuing directives for the first time.
As the Directive allows each member state some flexibility into how its requirements will be transposed into national legislation, some countries may issue disclosure requirements that exceed that of the Directive. Below are a few examples of how countries are building on the Directive, as well as a deep dive into requirements in Italy and the United Kingdom:
Mandatory report or explain
42 different KPIs (29 for non-listed companies)
Assurance is required
- Provided by an ‘accredited auditor. Assurance report has 2 parts:
- an “attestation regarding the completeness of CSR information”, and
- a “conclusion on the fairness of CSR information”.
Requires state-owned companies to present an independently assured sustainability report in accordance with GRI.
ESG reporting mandatory since 2009.
- Requirements apply to large companies, listed companies, state owned companies with limited liability, and financial service sector companies with more than 250 employees. Denmark is first country to put the new EU NFI Directive into force, which will broaden scope significantly.
While no one framework is mandated by the Directive, companies are encouraged and expected to rely on one of the internationally recognized instruments such as the Global Reporting Initiative (GRI) Framework , the UNGC Principles, the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, ISO 26000, the ILO Tripartite Declaration of principles concerning multinational enterprises and social policy and European Eco-Management and Audit Scheme (EMAS). As the most widely adopted sustainability reporting framework globally, GRI is likely to become the de facto international standard.
The GRI Standard includes references to other widely recognized frameworks, and is designed as a consolidated framework for reporting performance against different codes and norms for sustainability. This includes harmonization with other important global frameworks, including the OECD Guidelines for Multinational Enterprises, the UN Global Compact Principles, and the UN Guiding Principles on Business and Human Rights.
The Directive leaves flexibility to member states on whether to require that the disclosed information be verified by an independent assurance services provider. While GRI recommends the use of external assurance, as it has the potential to greatly enhance the credibility of sustainability disclosures, this is not a requirement in order for a company to prepare a report ‘in accordance’ with the standard.
While there is no national legislation in the United States mandating sustainability reporting, the Securities and Exchange Commission (SEC) has begun to explore the possibility with its Regulation S-K filing, which—among many other matters—sought to determine whether disclosure on sustainability and other matters related to social policy should be mandated.
Though no national mandate exists, some states are developing their own laws to regulate ESG issues and disclosure, with no state doing more than California. With a GDP rivaling that of France, California’s policy decisions carry a tremendous amount of weight in both domestic and global markets. In 2005, California Governor Arnold Schwarzenegger signed Executive Order S-3-05, which set a longer-term goal to reduce greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2050. This was followed by Executive Order B-30-15 in April 2015, which set an interim goal to reduce statewide GHG emissions to 40 percent below 1990 levels by 2030.
The state also leads the way in transparent disclosure. Its California Transparency in Supply Chains Act [PDF], which was signed into law in October 2010, requires large ($100M+ in revenue) retailer and manufacturing companies doing business in California to disclose specific actions to eradicate slavery and human trafficking. It’s also one of seven states (including CT, IL, MN, NY, & WA) that requires insurance companies with underwriting of $100M+ to complete annual climate risk disclosure survey.
Regardless of whether a company must comply with the EU Directive 2014/95, or with state legislation, it’s clear that the ESG information offered through sustainability reporting is of increasing importance to stakeholders—including regulators. To stay ahead of the curve, companies should be working now to assure that their impacts and efforts are measured, evaluated, and communicated through transparent reporting that makes use of both the flexibility and consistency offered by the global standards that are emerging.