2013 is the year for non-financial reporting, with a wave of legislation and best practice guidance. Legislation includes updates for the UK ‘quoted companies’ on human rights, diversity[1]and Green-House Gas reporting[2], and an EU proposal for a directive[3]. Best practice guidance includes the long anticipated International Integrated Reporting Council’s consultation draft[4], and the Global Reporting Initiative G4 Guidelines[5], and updated UK government guidance[6]. What is the risk of not complying with non-financial reporting legal obligations? Why use best practice guidance?
Legal Risk: the government and investors
Rio Tinto plc and BP are at least two of the examples of companies that have suffered as a result of non-compliance on non-financial reporting. The UK Companies Act 2006 requires large companies to report using non-financial key performance indicators on environmental and employee matters and ‘quoted companies’[7]to also include information about company policies on those matters and their effectiveness[8]. If companies fail to comply with these obligations, the directors and any person who failed to take all reasonable steps to secure compliance are liable to a fine. There is also the significant impact to the company’s reputation. For example Rio tinto plc was obliged by the Financial Reporting Council (FRC) to provide more information about environmental matters, social and community issues and related reputational risk in its 2008/9 annual report[9].
There are other legal angles. BP was successfully litigated against in the USA by their investors because of fraudulent and reckless claims about the potential of their clean-up operations. Directors were not found to be liable because they did not know information they received was false, but the company was because its claims were reckless. Where were the internal control procedures for data checking? In the UK there is the additional level, as directors must approve non-financial information within the report[10].
What about a company’s current and potential investors? Directors are liable to lose investors if they do not include the risks as investors cannot quantify the risk. If the directors disclose incorrectly to investors and know that investors will use this information to invest, they could be made liable for negligent misstatement. In either case the FRC, or potentially government organizations in other countries[11], could order the directors to report in line with obligations, fine the directors and use this information as evidence for potential directors disqualification. With more companies having to report on these issues, standards will improve, and those who don’t catch up, leave themselves exposed to their stakeholders.
Reward: the value of best practice guidance
Some organisations are looking to move ahead of competitors, driven by the pull of their stakeholders rather than the push of legislation. The IIRC and GRI are sustainability reporting frameworks developed by a wide variety of organisations, specialists, NGO’s, and government advisors. Using the IIRC Framework can help a company provide valuable information to investors. Investors are already starting to use this information in risk assessment through indices[12] and principles[13].
The GRI stamp provides credibility to a report and the process can help a company rank higher among all its material stakeholders. Best practice processes can also provide other benefits such as improved risk management, operational efficiencies, employee satisfaction, learning more about your organisation’s strengths and weaknesses, and improved relatinships with stakeholders. See the CLT envirolaw business case for more information on whether following best practice guidance will be right for your organization[14].
[1] The EU noted that there is similar legislation, Sweden adopted legislation in 2007; Spain in 2011; Denmark amended its legislation in the same year; the latest update in France dates from May 2012.
[2] Dow Jones sustainability index www.djindexes.com/sustainability FTSE4Good, www.ftse.co.uk/Indices/FTSE4Good_Index_Series/index.jsp Carbon Disclosure Project https://www.cdproject.net/
[3] www.unpri.org Principles for Responsible Investment
[1] http://www.bis.gov.uk/assets/BISCore/business-law/docs/F/12-979-future-of-narrative-reporting-new-structure.pdf for quoted company’s reports published on and from 1st October 2013
[2] https://www.gov.uk/government/consultations/consultation-on-greenhouse-gas-ghg-reporting-draft-regulations for quoted company’s reports published on and from 30th September 2013
[3] http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm EU proposal COM(2013) 207 final.
[5] https://www.globalreporting.org/resourcelibrary/G4-Exposure-Draft.pdf Final to be published 22nd May 2013
[6] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/82551/consult-kpi-document.pdf
[7] companies incorporated in the UK and listed on the UK official market, New York, Nasdaq or an EEA state
[8] https://www.ardeainternational.com/resources/ See Director’s Checklist for UK company reporting requirements for further information
[9] http://www.frc.org.uk/News-and-Events/FRC-Press/Press/2011/March/Statement-by-the-Financial-Reporting-Review-Panel.aspx
[10] s419 UK Companies Act 2006
[11] The EU noted that there is similar legislation, Sweden adopted legislation in 2007; Spain in 2011; Denmark amended its legislation in the same year; the latest update in France dates from May 2012.
[12] Dow Jones sustainability index www.djindexes.com/sustainability FTSE4Good, www.ftse.co.uk/Indices/FTSE4Good_Index_Series/index.jsp Carbon Disclosure Project https://www.cdproject.net/
[13] www.unpri.org Principles for Responsible Investment
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