Not financial reporting. Ready to account?

11 October Oct 2016 1049 11 October 2016

Businesses increasingly find themselves under the spotlight to demonstrate that they are operating not only in accordance with the law, but also in an ethical and socially responsible manner.

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Businesses increasingly find themselves under the spotlight to demonstrate that they are operating not only in accordance with the law, but also in an ethical and socially responsible manner.

Sustainability issues have risen to the fore following the COP 21 Paris agreement and launch of the UN Sustainable Development Goals in 2015, and their impact on businesses will only increase going forward. A growing body of evidence shows that companies with a strong corporate social responsibility (CSR) also have a strong financial performance: social and environmental aspects and a strong governance are positive factors for dealing with risks and opportunities.

As investors and stakeholders are becoming more interested in ESG (Environmental, social and governance) issues, their expectations regarding financial reporting and disclosures has evolved. They expect companies to be transparent about their ESG exposures and opportunities.

The EU’s new non-financial reporting requirements are seen as an important step to manage change towards a sustainable global economy.
The Directive 2014/95 enters into force at the end of the year requiring over 6,000 large companies, EU public-interest entities, to report annually on environmental, social and employee-related matters, respect for human rights, anti-corruption and bribery. They will also need to publish information on aspects of employees diversity such as age, educational and professional backgrounds.

The new rules include listed companies as well as some unlisted companies, such as banks, insurance companies, and other companies that are so designated by Member States because of their activities, size or number of employees. For example, clothing companies will have to explain how responsibly they act throughout their supply chain. Member States have time until 6 December 2016 to transpose the new regulations into national legislation, so they will apply from 1 January 2017. The first reports are expected to be published in 2018 about 2017 financial year activities.

However, many argue that the UE’s efforts to raise the transparency levels of the social and environmental information provided by big businesses can fail to produce its intended effect.
The reform lacks mechanisms to provide effective compliance and enforcement. Simply put, the reporting is mandatory, yet flexibility is given to companies by the “comply or explain” approach with the result that if a company fails to pursue policies relating to the areas covered by the Directive, it must explain why in its annual report.

Indeed, through reporting, businesses can show their contributions to the global goals. In this regard, a new study from global sustainability consultancy Corporate Citizenship have revealed that most companies have failed to move beyond initial planning stages to build upon an increased business awareness of the SDGs, since the framework was launched by the UN last September.

In particular the researchers asked to companies which Goals they thought their company could make the biggest contribution to addressing. Goal 8 on promoting decent work and economic growth remained the most favoured choice. But they also found some dramatic shifts in other Goals. For example, in 2015, 14% of companies picked ‘promoting peaceful and inclusive societies as one of their top three choices. This year, just 3% did. Responsible production and consumption increased from 11% to 31%. This may reflect a more realistic consideration of the Goals by business and a more nuanced understanding of where companies can and cannot make the biggest difference.

We have seen lots of announcements ‘recognizing’ the Goals. But what we haven’t yet seen is much evidence of companies taking to heart all 17 goals and asking searching questions internally about the changes needed to respond to the challenge they present – how we innovate, who we employ, what we sell, where we raise our finance, when to work with Governments and, ultimately, whether our business models are sustainable for a 2030 world.

Mike Tuffrey, Corporate Citizenship co-founder

In a word, the research shows that awareness among companies is growing, but action to change is still minimal. What business can do in order to effectively contribute to the Global Goals? The researchers strongly show that objectives will only be achieved through new partnerships that involve others in your sector, civil society organizations and governments, regulators and public sector agencies.

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