UK companies might have felt relieved when the government decided to scrap the Operating and Financial Review (OFR) in November last year but many do not realise that under existing EU regulations, they are still required to disclose their environmental impacts in annual reports published after March this year, Simon Thomas, chief executive of Trucost, an environmental research company, explains that help is at hand to ensure that companies know how, why and what to report.

The OFR had become almost synonymous with mandatory reporting of so-called extra-financial aspects of corporate performance such as environmental and employee matters but what few companies know is that the OFR was the UK implementation of the underlying EU Accounts Modernisation Directive (AMD), and it is not widely understood that this underlying reporting requirement is still in place and that the environmental requirements are nearly identical to those in the OFR.

Very few companies are aware of this. During the week that the OFR was abolished, Trucost conducted a survey to determine how many UK-listed companies knew about their obligations under the AMD and the results were conclusive – only nine per cent of those contacted had heard of the AMD.

EU AMD requirements

The AMD, which is effective for financial years beginning on or after 1 April 2005, requires a mandatory addition to the Business Review which currently appears in annual reports and accounts. Large and medium-sized companies must produce a Business Review with a ‘fair review’ of the business of the company, and while both groups are encouraged to include non-financial matters (explicitly environment and employee matters) using key performance indicators (KPIs), large companies must do so “to the extent necessary for an understanding of the development, performance or position of the business of the company”. Any company that satisfies two or more of the following criteria is a large company according to the EU: turnover of more than £22.8m, balance sheet total of more than £11.4m or more than 250 employees.

Elliot Morley, environment minister, recently said: “All quoted and large private companies preparing the new Business Review will need to report significant environmental issues.” It is clear, therefore, that the scrapping of the OFR does not mean that companies no longer have environmental reporting obligations, and that there is an urgent need for guidance on how businesses should prepare for the AMD.

New environmental Guidelines

To help companies catch their breath and understand what, how and why they have to report, Trucost and Defra (the Department for Environment Food and Rural Affairs) published a set of guidelines in January this year to make it easier for companies to report on environmental matters. The guidelines, Environmental KPIs – Reporting Guidelines for UK Business, were produced to help businesses address their most significant environmental impacts and report on these in a way that meets the needs of their shareholders and other stakeholders.

They outline how environmental impacts can be measured through KPIs – in many cases making use of standard business data that may already be collected – and how to report them easily. In fact seventy one per cent of UK businesses have just four or fewer significant environmental KPIs against which the Guidelines recommend they should report their performance.

Mr Morley, who sent a letter about the Guidelines to thousands of businesses, says: “The Business Review represents a significant advance in narrative reporting standards, including those for environmental reporting. But these reports required under the EU AMD need not be a burden. To help companies make the most of these opportunities, we have produced a set of new easy-to-use guidelines. They have been designed to help make reporting much sharper and more focussed on key impacts – this is about cutting out the fluff.”

Best practice

Despite scrapping the OFR, Chancellor of the Exchequer Gordon Brown, said: “Best practice is, of course, for companies to report on social and environmental strategies relevant to their business.” The aim of these Guidelines is to provide a means by which all companies can reach the standard of the best in a cost efficient way. In fact we believe that companies with experience of environmental reporting already report in accordance with these Guidelines – they represent current best practice.

Mr Morley says: “These guidelines seek to set a standard which will give business some assurance that it has reported its environmental performance to an appropriate minimum level of accuracy and detail.”

Even if companies do report their environmental performance and possible impacts on business, they are very often in the dark about how they perform against peers in their sector and how they can highlight best practice. Trucost provides a low-cost benchmarking service to companies comparing their current environmental reporting with selected peer group companies and these new Government Guidelines. The report identifies gaps in environmental disclosure and provides useful guidance as to which environmental disclosures are important enough to migrate from separate environmental, CSR and sustainability reports into the Business Review section of the Annual Report and Accounts.

Simon Thomas is chief executive of Trucost, a UK-based environmental research organisation. For more information on the Guidelines:

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