Will the EU Non-Financial Reporting Directive make a difference to reporting on human rights?

Richard Karmel is the Global Head of Human Rights at Mazars. He has recently advised multi-national companies on their understanding of their human rights impacts upon their operations, workers, suppliers and communities.

This week on www.richardkarmel.co.uk, Richard Karmel considers if the EU Non-Financial Reporting Directive will affect the way companies report on human rights?

EU Non-Financial Reporting Directive

In April 2014, the EU Commission passed a directive requiring all EU states to adopt their non-financial reporting directive, within two years.  This directive contains amendments to be included into a pre-existing directive.

One of the key amendments is Article 19A, which starts as follows:

“Large undertakings which are public-interest entities exceeding on their balance-sheet dates the criterion of average number of employees during the financial year of 500 shall include in the management report a non-financial statement containing information to the extent necessary for an understanding of the undertaking’s development, performance and position and of the impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters…

….Where the undertaking does not pursue policies in relation to one or more of those matters, the non-financial statement shall provide a clear and reasoned explanation for not doing so.”

Now compare this to the SI 1970, which amended the Companies Act 2006 with effect from 1 October 2013:

“In the case of a quoted company the strategic report must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include:

(a)  the main trends and factors likely to affect the future development, performance and position of the company’s business, and

(b) information about—

(i) environmental matters (including the impact of the company’s business on the environment),

(ii) the company’s employees, and

(iii) social, community and human rights issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies.

If the report does not contain information of each kind mentioned in paragraphs (b), (i), (ii) and (iii), it must state which of those kinds of information it does not contain.”

It’s essential for companies to disclose their human rights issues

Both of these amendments are laudable and I’m sure come with good intentions.

However, based on the implementation of The Companies Act in 2013 annual reports, it appears that disclosure was minimal because of the interpretation of ‘to the extent necessary for an understanding’!

It appears that the problem could be that the majority of companies don’t realise the importance of this information and therefore chose not to refer to it, or only referred to it to tick a box.

Whilst the reporting is important, it is the behaviour of the company that is key.

The public reporting is just a manifestation of those behaviors.  The two overriding key behaviours that all stakeholders want to understand (or at least should want to understand) are:

(i) are there robust risk management procedures in place; and

(ii) does the company adequately engage with all its stakeholders (and by stakeholders I mean its workers, suppliers, communities, customers, investors, governments and civil society)

The business landscape is changing – and companies need to too

Regarding the first point about robust risk management procedures, it’s important for companies (and their non-executive directors) to understand that the business landscape is evolving rapidly and very differently from even three years ago, let alone last year!

Social media is rising exponentially. Stories about companies are being shared and discussed on Twitter and Facebook, and it is very difficult for companies to respond.

However, if the companies were in a position where they could tell their story first, particularly if it was fair and balanced, it may help prevent potential untruths about companies being perceived as reality.

So this boils down to companies understanding their risks and when there are negative impacts (as there inevitably will be), the company understands how transparency is a potential friend not a corporate enemy.

Engagement is a key factor in reporting

The matter of whether a company engages adequately with stakeholders is the key to the long-term sustainability of the business. Many studies show the link between engagement, trust and confidentiality.

My favourite survey though, is one that was undertaken by an arm of Goldman Sachs, GS Sustain. They reviewed 80 global companies over a two year period and found that those companies which reported on their ESG (Environment, Social and Governance) practices outperformed their peers by 18%.

As Bob Eccles notes in his book, One Report, whilst GS Sustain could not find any direct correlation between specific indicators within ESG that would link to greater financial value, the conclusion was that management which understood these areas and were prepared to report on them were more likely to understand how they contributed to the longer term success of the business.

Accordingly, as Bob Eccles notes, Goldman Sachs view that ESG performance: “is a good overall proxy for the management quality of companies relative to their peers.

In conclusion, whilst the lack of adequate interpretation of SI1970 to the Companies Act 2006, may not fill the commissioners at the EU with much hope that their directive is going to lead to any tangible change in behaviours in the short term. It might just be that if the message is repeated again and again, the corporate world may just tune into the fact that EU and the UK government are actually trying to help them.

Richard Karmel

Richard.karmel@mazars.co.uk

Mazars LLP