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European Parliament agrees to non financial reporting rules

Members of the European Parliament (MEPs) have voted in favour of introducing non financial and diversity reporting rules into law, by 599 votes to 55, with 22 abstentions.

The rules were agreed by the European Parliament's (EP) Committee on Legal Affairs at the end of March, and sources predicted to The Accountant that the draft would pass through the EP during the April plenary at the time.

The agreed rules require all public interest entities with over 500 employees to provide non-financial statements on the impact of their activities related to environmental, social and employee matters.

Public listed entities include listed companies, credit institutions and insurance companies, as well as companies designated by member states as public-interest entities because of their significant public relevance.

MEPs agreed that entities which do not produce these reports are to provide "a clear and reasoned explanation for not doing so," otherwise known as the "comply or explain" principle. The European Commission (EC) released a set of recommendations over how companies were to apply this comply or explain principle earlier in April.

Companies only need to disclose information relevant to understanding the development, performance, position and impact of their operations, which MEPs hope will lessen the administrative burden.

MEPs inserted a clause in the directive requesting the EC to prepare non-binding guidelines, developed in cooperation with stakeholders, on how to report non-financial information.

They also agreed that the EC should consider by 2018 the possibility of introducing a requirement for large companies to produce a country-by-country reports for each jurisdiction in which they operate.

The directive also requires listed companies of over 250 employees to publish information on their diversity policy for administrative and supervisory bodies, including age, gender, and education and professional background.

The legislation still needs to be approved by the member states. Countries will then have two years to add it to national laws.
According to MEP Raffaele Baldassarre investors and civil society are increasingly demanding greater transparency and accountability.

"The new rules will enable forward-looking business leaders to address this demand and to fully make use of the huge potential of CSR [corporate social responsibility] in order to increase their competitiveness," Baldassarre said.

Global Reporting Initiative deputy chief executive Teresa Fogelberg described the vote as an historic moment and hoped it would bring "a new era for transparency and sustainable growth" in the European Union (EU).

More cautiously, the Institute of Chartered Accountants of England and Wales Nigel Sleigh-Johnson head of financial reporting faculty warned it was important to avoid boilerplate disclosure.

"The UK introduced enhanced requirements for the reporting of narrative and non-financial information, including on diversity, just last year, so for most UK businesses this EU requirement should not represent the major challenge it will in some other EU member states," he added.

The UK Financial Reporting Council (FRC) chief executive Stephen Haddrill said these non-financial disclosure requirements for EU companies complement the FRC's work on UK Guidance on the Strategic Report.

"The FRC worked closely with European Union institutions and the UK government to ensure that the risk of proliferation of 'boilerplate' was removed. This will ensure that investors receive only relevant and proportionate information," Haddrill said.

The Association of Chartered Certified Accountants head of corporate reporting Richard Martin noted the directive mandated disclosures by companies on specific issues that are important to the society in which they operate.

"However it will create a legal environment that is consistent and will provide no obstacle to the more extensive reporting under national initiatives such as the Strategic Report in the UK or Integrated Reporting internationally," he continued.

Related stories

JURI backs non-financial reporting deal

European Commission enhances 'comply or explain' principle

Related link

European Parliament

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