This paper tries to point out the indispensable need of an enhanced business transparency on social and environmental matters, whilst it reviews the current and future frameworks regarding the non-financial information disclosure, which can be found within the European Union.
Given the fact that non-financial reporting is not a new concept in the corporate world, the European Commission adopted a proposal for a Directive, to amend the current legislative framework on non-financial information disclosure within the European Union. Regarding this matter at the European Union level, The European Commission defines corporate social responsibility, in the Renewed EU Strategy 2011-2014 for Corporate Social Responsibility, as ‘the responsibility of enterprises for their impacts on society’. Responsibility or not, it is a sure thing to say that only a few large companies, adopted the procedure of voluntary submitting such non-financial reports in the past. Moreover, only a few included relevant information. Therefore, the European Commission initiated this motion, with a goal in mind: for this reporting to significantly contribute to the European Union’s treaty objectives of sustainable development, and for a competitive social market economy at the same time. Although progress has been made in the past years, when talking about corporate transparency, the legislative framework is still uncertain and full of shortcomings and gaps, waiting to be filled. This being said, the proposal launched by the European Commission on non-financial information disclosure is a significant and effective step to address this issue.
The issue of social and environmental disclosure is no foreign matter for the European Union, since it has been on its agenda for at least a decade. More specifically, the disclosure of non-financial information is currently addressed in the European Union legislation via the Accounting Directives. These require companies to include into their annual reports, environmental and employee-related information, but only when it is considered appropriate and to the extent to which it is supposed to be necessary for an understanding of the company's development, performance or position. Therefore, the uncertainty of this legislation could be easily used to benefit the opposing party. Although other European Union frameworks that address this specific issue, such us the Accounting Directives, could be identified, the concept of transparency is still uncertain and not yet fully understood. The issue of non-inadequate transparency, when it comes to non-financial information, has been the subject of public debates for a while, since non-financial performance appears to be considered increasingly important for investment strategies, particularly with a long-term perspective. But what is the cause for this lack of transparency?
According to the European Commission’s impact assessment, the drivers of this inadequate level of transparency appear to be caused by both market and regulatory failure. Although some steps have been made forward, some enterprises still do not have enough incentives to disclose non-financial information. For example, the obligation introduced by current Directives could be considered to be ineffective, mainly due to its ambiguity and openness to interpretation. Enterprises can easily enact the current reporting system as purely voluntary since the present wording ‘where appropriate’ and ‘to the extent for an understanding of’ clearly fails to provide a straight obligation for the enterprises.
The instability of the current legislation, which can be found both at European Union’s and at the Member States’ level, will not provide in the future, a clear perspective on what disclosure should look like and on what obligations a company has, regarding the issue of social and environmental disclosure. Therefore, we cannot expect for significant improvement to be made in the absence of a stable and clear legislative framework. The EU’s initiation of such a proposal, was a long overdue act, since more transparency for both internal and external stakeholders is considered to be an important asset for companies, in order to improve management of risks and to deliver better results.
The proposal itself provides that large companies should disclose non-financial information supported by a set of requirements, shaped so that it can increase transparency but noting that it will not put any undue administrative burden on companies. Although several Member States recently adopted legislation that requires additional disclosure in the field, this proposal respects the principle of subsidiary. Since these initiatives proved ineffective because of diversity and fragmentation of the legal environment that can easily lead to difficulties in implementing the concept itself. As far as the recipients of this proposal are concerned, the disclosure requirements under this Directive will only apply to companies whose average number of employees, during the financial year, exceeds 500. Comparing the threshold found in the current Accounting Directives (250 employees), it can be easily observed that changes were made. These concern the audience to whom it is addressed, this being a consequence of the Directive’s authors try to avoid administrative burden on smaller companies, hence the difficulty they face in collecting and analysing information. The European Commission’s proposal, as a novelty, also requires large companies to provide information regarding their diversity policy, including aspects in the matter of age, gender, geographical diversity, and educational and professional background.
Although it could be admitted that this new proposal for a directive adopted by the European Commission brings a new perspective on the non-financial reporting and also on its currently uncertain obligations, it is safe to say that even though it was recently adopted by the European Parliament, on 15 April 2014, there is a long way ahead since it first needs to be adopted by the Council and published in the EU Official Journal, in order to become mandatory and to produce full effects. As the implementation of this Directive, the Commission will have to develop a series of guidelines in order to forward the disclosure of non-financial information by companies.
Nevertheless, this type of action found at the European Union’s level was much needed in order to further coordinate the non-financial reporting field and to ensure a proper functioning internal market. Better and more transparent disclosure of non-financial information could be a valuable tool to further increase the number of European Union enterprises that are successfully integrating and reflecting sustainability and environmental responsibility into their organizational culture.