Breaking new ground as the first country to require its companies to disclose their greenhouse gas emissions, the UK government is storming ahead with its business sustainability agenda and is now making it obligatory for all quoted companies to disclose information regarding their wider environmental practices.

Designed to reform current disclosure conventions of the annual business practices and achievements of listed companies, The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 [i] aims to simplify and strengthen companies’ non-financial reports. In addition to standard business and financial details, new-style Strategic Reports will be required to include discussions of environmental, social and ethical policies and practices. Specifically, ‘for an understanding of the development, performance or position of the company’s business’. From 1 October 2013 these amendments have made it a requirement for large and medium-sized UK quoted companies to analyse:

• environmental matters (including the impact of the company’s business on the environment; notably, carbon emissions),
• the company’s employees (notably, gender diversity);  and
• social, community and human rights issues (including related policies and their effectiveness).

Some will be celebrating another step in the right direction, others will bemoan yet another change in report-writing practices; who is right? Do we need such regulations to exist, or should the market be allowed to make its own changes?

A recent study by Manifest of global reporting regulations has shown that setting regulations seems to be a positive approach. France’s Grenelle Act II [ii] requires inclusion of ESG data in listed companies’ annual reports and verification of it by an independent 3^rd party. This change will need monitoring over time to see what difference it makes but as things stand, French companies are currently ahead of the crowd according to Manifest’s Say on Sustainability database. The key question for investors is whether the reports will evolve as new best practices arise or will they just stick with what’s required of the regulation? Requirements are quite specific , but coordinate with globally recognised standards – notably GRI 3.1 and ISO 26000 – and are not so specific in language that they are consequently inflexible.

Specificity in disclosure requirements has the potential to discourage open-mindedness and engagement with new ideas, and can encourage negativity among the indecisive or those of conflicting opinions.  The UK’s recent developments are comparatively open in their nature, requiring discussion of ‘environmental impact’; leaving whatever this may be at each company’s discretion.

Being this open does still leave the opportunity for those who consider most ESG-related issues irrelevant (notably qu0ted companies in the financial sector whose reports are amongst some of our lowest graded reports) to say very little – or nothing. However, it could be the stimulus needed to recognise the significance of considering their environmental impact. Particularly now that companies are required to include the methodologies they have used to reach their decisions regarding a topic’s relevance, plus their reasoning for any non-disclosure. The favourable supply of guidelines and requirements[iii][iv] also has the potential to encourage the less-informed or willing.

Given how discouraging recent news updates regarding Europe’s approach have been[v], we can hope that the UK’s balance between specificity and ambiguity will be more productive. Particularly given the encouragingly forward-looking position it now takes; including requirements to discuss future strategies and prospects and the setting of targets, not analysing past performance alone.

That’s not to say that this new approach is flawless. A final observation is on the report’s discussion of disclosure regarding charitable donations. At first glance, it appears that companies will no longer be required to disclose details regarding any donations of time or financial support to charitable organisations (see pages 5 and 6). Could this be an oversight in the efforts it takes to pass through Parliament? The subject of charitable engagement certainly receives no coverage in UK accounting standards. Having been a disclosure requirement for so many years, it seems unusual to remove it, particularly at a time when sustainability and community engagement are becoming the topics du jour. This is definitely an issue for further investigation.

Last Updated: 6 December 2013