German companies take their social responsibilities seriously and get involved on a large scale. So far, they communicate their commitment to society in ways that are appropriate to their individual circumstances, i.e., depending on their industry, level of international involvement, type of stakeholders and consumers, as well as the needs of the public.
But this is not enough for the European Commission. The European Commission has called for legislation that requires companies to report on their corporate social responsibility (CSR)-related information. According to the Directive adopted by the European Parliament on April 15, 2014, due to be implemented into national law by the individual Member States by January 1, 2016, companies are now supposed to supplement their financial information with extensive non-financial information about sustainable governance practices. The goal is to promote a sustainable global economy and for the companies themselves to achieve greater operational efficiency.
The enhanced disclosure requirements are meant to apply only to large companies and groups, especially those with more than 500 employees. Therefore, small and medium-sized enterprises will be exempt. Nevertheless, SMEs, e.g., those that function as suppliers, may feel real pressure to introduce sustainability reporting anyway in order to avoid being put at a disadvantage to the competition.
Although Germany has already imposed a requirement for companies to disclose information about certain non-financial key performance indicators, such as environmental and employee matters (Sections 289 (3) and 315 (1) of the German Commercial Code), as part of an expanded framework for management reporting that was introduced in the German Commercial Code (HGB) and with German Accounting Standard (GAS) 20 last year, the European Commission believes this action does not go far enough. In the Commission’s opinion, this financial and non-financial information is no longer sufficient in and of itself for gaining an understanding of a company’s future development. Pursuant to the Directive on disclosure of non-financial and diversity information, in the future companies will be required to disclose information about their policies, risks and outcomes as regards environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters as well as diversity on their boards. With respect to environmental matters, for example, companies will be expected to present information about the foreseeable impacts of their operations, including on health and safety, their use of renewable and non-renewable energy, their greenhouse gas emissions and air pollution. As regards the other matters, comparable items have been specified.
If companies do not have a specific policy in place for any of the areas listed in the Directive, they will have to explain why (“comply or explain”).
The Directive, which is based on the European Commission’s proposal, will massively expand the scope of management reporting and thus lead to significantly more bureaucracy. The idea is for companies to assess their performance and risks in addition to providing a basic presentation of their corporate policies. They are to present risk-related information that may contain sensitive corporate information. In order not to encroach too heavily on companies’ autonomy, the disclosure of internal corporate information will be at the discretion of a company’s management and supervisory bodies.
In principle, companies should prepare a non-financial statement for inclusion in the management report that then falls within the audit engagement of the external auditors. At a minimum, the non-financial statement must contain information relating to environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters along with a description of the policies, outcomes and risks related to these matters and how they are handled. In addition, non-financial key performance indicators need to be analyzed. Thus, in addition to the basic presentation of corporate policy, companies will also be providing performance and risk assessments that their external auditors will review. This means an evaluation of the underlying control systems of the company by the external auditors. Such systems audits are complex and not currently part of the statutory audit of the annual financial statements. Apart from that, certain information will be difficult to verify for practical reasons. For example, how could the external auditors manage to prove respect for human rights?
As an alternative to providing a non-financial statement in the management report, companies have the option of preparing a separate sustainability report, which would exempt them from the requirement to provide a non-financial statement in the management report. This is especially appealing to those companies who already report on their corporate social responsibility voluntarily.
But even if the reporting requirements are being expanded, it is certainly welcome for purposes of comparability that the new rules are meant to be applied consistently across the EU. However, we must be careful not to overburden the management report with insignificant declarations of intent that may impair its clarity and readability as a whole.