New environmental reporting guidelines and draft reporting regulations published replacing the ‘business review’ with a ‘strategic report’ The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 and the new environmental reporting guidelines

Mandatory reporting on non financial information continues to grow in the UK. New regulations are being introduced designed to increase the accountability of companies. The principal aim of these regulations is to improve reporting and help to foster transparency and reinstate stakeholder and public confidence in the way companies are run, thereby ensuring stable and long-term private sector growth.

Environmental reporting guidelines have been issued alongside these regulations to assist companies in complying with mandatory requirements under the Climate Change Act 2008 and move towards standardising their voluntary reporting initiatives.

The Regulations will come into effect for the reporting years ending 1 October 2013. This means companies subject to the Regulations must currently be gathering the relevant information for their next strategic and directors’ reports, whether that is for publishing in January 2014 or April 2014.

The measure will put in place improvements regarding non-financial reporting following consultations run by the government in 2010 and the publication of the Future of Narrative Reporting by the Department for Business Innovation & Skills (“BIS”) proposing a new format for reports. In some ways it co-incides with the issue of GRI’s G4 guidance that puts ‘materiality ‘ analysis at the heart of non- financial reporting. The focus is on a more strategic approach to how companies determine what affects their products or services.

Which companies will be affected?

The regulations apply to ‘quoted companies’ within the UK ‘Qutoted companies’ are those companies incorporated in the UK  and listed in New York, UK or an EEA state.

The new format would replace the current ‘business review’ with a ‘strategic report’, requiring quoted companies to report on, in generally state terms, the following:

• their strategy
• their business model
• gender diversity at different levels in the organisation

What about environmental, social and human rights issues? 

In s7(a)(iii) of the draft Regulation specifies that a “strategic report must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include information about social, community and human rights issues, including any information about any policies of the company in relation to those matters”. Should a report not contain such information, or information on environmental matters and the company’s employees, then this must be clearly highlighted in the content.

Whilst themes such as diversity, particularly at board level, and environmental accountability have been addressed in previous consultations on governance codes, the express reference to human rights might be something that companies are not prepared for. There may have been pressure resulting from the endorsement of the UN Guiding Principles on Business and Human Rights in 2011 and the enactment of the California Human Trafficking Act, which, inter alia, requires companies to disclose their efforts to eliminate trafficking in their supply chains.  Albeit of paramount importance, it is a relatively new area of corporate responsibility and many companies will not know where to start on tackling this aspect. The European Commission’s recently published human rights guidance for three business sectors and resources for smaller businesses may shed some light on the issue.

The draft Regulations were proposed under the powers conferred by sections 416, 468, 473(2) and 1292(1) of the Companies Act 2006(a) and have been approved by a resolution of each House of Parliament in accordance with sections 473(3), 1290 and 1292(4) of that Act.

They will be cited as the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Key issues on the guidelines:

The Environmental Reporting Guidelines in themselves are not mandatory although they address mandatory requirements. The guidelines solely address environmental matters and do not make any reference to employee matters in relation to all large companies, or social and community issues in the case of quoted companies only. There is insufficient information about what key performance indicators should be used but there is guidance surrounding principles of data quality. Although the sector specific suggestions may be useful, there should have been greater reference to standardised best practice indicators such as the Global Reporting Initiative or the Carbon Disclosure Project.

Key challenges for companies:

Challenges include:

• determining whether an organisation falls subject to mandatory reporting on the matter
• identifying the scope of an organisation’s emissions
• gathering sufficient and accurate information from suppliers and staff
• ensuring that data is verified and of high quality; and collating the data into a final and compliant report on time
• Defra’s guidance provides different control aspects, both financial and operational

What about enforcement? 

There is also a potential for more penalties and litigation being instigated by the Financial Reporting Council (“FRC”) which monitors annual reports and accounts of public and large private companies for compliance with the requirements of the Companies Act 2006. It has the powers to apply to court under section 456 for a declaration that the annual report or accounts of a company do not comply with the requirements of the Act and for an order requiring directors to prepare a revised report or set of accounts.

Lawyers will have to cooperate with consultants in order to understand the practical implications of the Regulations. They will also have to be able to advise their clients on adequate procedures for ensuring disclosures are not misrepresentative. If the directors disclose incorrect information knowing that investment decisions will be made based on this information, they could be made liable for negligent misstatement. In either case the FRC could order the directors to report in line with obligations, fine the directors and use this information as evidence for potential directors disqualification ( see previous blog on lawyers and sustainability) .

Why does this matter? 

Pressure from stakeholders, growing  voluntary efforts followed by increased mandatory requirements (accompanied by clear guidelines) will hopefully result in better quality environmental reporting with transparent information intelligible to stakeholders.

There will also likely be growing demand from stakeholders to employ standardised frameworks and have reports externally assured for added credibility.

Moreover, there will be a rise in sustainability reporting rather than environmental reporting, specifically, particularly given the recent adoption of a proposal by the EC for a directive on enhancing the transparency of certain large companies on social and environmental matters. Other countries are already implementing more co-ordinate and comprehensive schemes, such as the Danish government’s Responsible Growth Action Plan for Corporate Social Responsibility 2012-2015.

Such initiatives are also raising awareness of the importance of putting in place supply chain management systems which adequately assess and disclose ethical and environmental risks.