Sustainability Reporting in capital markets: A Black Box? (ZIFO nr. 30) 2022/1.1.8.1:1.1.8.1 The EU CSR legal framework

Sustainability Reporting in capital markets: A Black Box? (ZIFO nr. 30) 2022/1.1.8.1

1.1.8.1 The EU CSR legal framework

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The disclosure of non-financial information is currently addressed in four EU Directives, the Accounting Directive (2013/34/EU), the Accounts Modernization Directive (2003/51/EC), the Capital Requirements Directive, “CRD IV” (2013/36/ EU) and the Non-Financial Reporting Directive (2014/95/EU).

Previously to the Accounting Directive (2013/34/EU), the EU legislation referred to non-financial reporting in Article 46(1)(b) of the Fourth Company Law Directive (78/660/EEC) on the annual accounts of certain types of companies, as amended by the Modernization Directive (2003/51/EC) on a voluntary basis leaving it to companies’ discretion to decide on whether to publish data related to environmental and employee matters as well as the choice of data to be published. The Fourth Company Law Directive (78/660/EEC) for individual financial statements together with the Seventh Council Directive (83/349/EEC) for consolidated financial statements were updated by the Accounting Directive (2013/34/EU). This Accounting Directive (2013/34/EU) has merged and improved the Fourth and Seventh Directives.12The requirement of non-financial disclosures is set out in Article 19, pp. 1 and 4, concerning the contents of the management report. See the article transcription below.

Article 19 (Contents of the management report)

1.

(…) To the extent necessary for an understanding of the undertaking’s development, performance or position, the analysis shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters. (…)

2.

Member States may exempt small and medium-sized undertakings from the obligation set out in the third subparagraph of paragraph 1 in so far as it relates to non-financial information.3

Directive 2003/51/EC of June 2003 or EU Accounts Modernization Directive on annual company accounts, amended Article 46 (1) (b) of the Fourth Company Law Directive. It invited companies for the first time to take the opportunity, since the 1st of January of 2005, to publish non-financial data (key performance indicators – KPIs) on environmental and social matters in addition to the financial requirements in their annual reports to the extent necessary for an understanding of the company’s development, performance or position;4 This was then, the most important Directive for sustainability reporting in Europe. The member states, however, had the possibility to exempt small and medium-sized companies from their disclosure obligation.

Article 46(1)(b) of the Fourth Company Law Directive

(b) To the extent necessary for an understanding of the company’s development, performance or position, the analysis shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters;

On the harmonization of transparency requirements, there is the Company Reporting Directive (2006/46/EC) of the European Parliament and of the Council, of the 14th of June of 2006.5 It amended the following Council Directives: the Company Law Directive (78/660/EEC) on the annual accounts of certain types of companies, the Seventh Council Directive (83/349/EEC) on consolidated accounts, the Bank Accounts Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions, and the Insurance Accounts Directive (IAD) (91/674/EEC) on the annual accounts and consolidated accounts of insurance undertakings. Point 10 of the preamble6 and article 7 of the Company Reporting Directive,7 added transparency requirements for the European companies.

Point 10 of the preamble of the Company Reporting Directive requires the following:

“(...) Furthermore, where relevant, companies may also provide an analysis of environmental and social aspects necessary for an understanding of the company’s development, performance and position.”

The Transparency Directive8 is responsible for the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market which damended the Directive 2001/34/EC. Although the European Commission carried on a consultation process addressing the issue of regulating the disclosure of non-financial information, the incorporation of non-financial information disclosure norms was not part of the proposal on the modernization of the Transparency Directive. Concerning this issue there was a public consultation on disclosure of non-financial information by companies (launched by the European Commission on the 22nd of November of 2010), which closed on the 29th January 2011.9 This consultation was part of the Single Market Act (COM (2010) 608 final/2) announced by Commissioner Barnier on the 27th of October of 2010. The consultation gathered views on how to improve the EU framework for non-financial reporting.10

However, the Transparency Directive (2004/109/EC) was updated and from the financial year of 2016 onwards, under the Accounting Directive (2013/34/EU) adopted in June 2013 and under the Transparency Directive (2004/109/EC), certain undertakings operating in oil, gas, mineral and mining industries and other active in the logging of primary forests must report payments exceeding €100,000 EURO to governmental authorities in a special report adjacent to the annual report.1112The reasoning behind the new requirements is to inform civil society about any profit made by Governments through the exploitation of natural resources.13

On the 23rd of June of 2013, the EU adopted a Directive (2013/36/EU) on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (the Capital Requirements Directive) and the Capital Requirements Regulation (575/2013), on prudential requirements for credit institutions and investment firms, which is directly applicable to companies within the EU.14 It requires banks and other financial institutions to publish certain basic information including, turnover and public subsidies received on a country-by- country basis for each country in which the institution has a subsidiary or branch. This information must be audited and published as an annex to the annual report.15

The most recent EU CSR regulatory initiative is the Non-Financial Reporting Directive 2014/95/EU of the European Parliament and of the Council, of the 22nd of October of 2014, on the disclosure of non-financial and diversity information by certain large undertakings and groups.16 This Directive, adopted in November 2014, amends the Accounting Directive (2013/34/EU) adopted in 2013, and will apply for the financial year of 2017. Under this directive, EU listed companies or operating in the banking and insurance sectors operating in the EU, around 6000 large undertakings with more than 500 employees, are required to disclose ESG risks about their business activities, in their annual reports. The first reports are expected to be published in 2018 referring to financial year 2017, and member states were required to transpose the Non-Financial Reporting Directive into their domestic legislation by the 6th of December of 2016.17 The companies and public interest companies (which includes insurance companies and credit institutions) will have to meet at least two of the Directive’s criteria, which includes i) having more than 500 employees; ii) a net turnover of more than EUR 40 million; and iii) total assets of more than EUR 20 million.

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