Reasons for reporting
Reporting on your company's environmental and social performance may no longer be an optional extra. Peter Hughes looks at the latest thinking on reporting policy
The government's White Paper Modernising Company Law, circulated for public comment during the second half of 2002, set out reforms designed to eliminate much of the red tape that ties the hands of company directors and - post-Enron - to make the activities of businesses more transparent. A key proposal in the paper is the introduction of a mandatory Operating and Financial Review (OFR) for one thousand or so of the UK's largest firms.
The White Paper indicates what kind of information ministers would like to see covered by an OFR. Significantly, the list includes a company's relationship with the wider community and its impact on the environment.Enforced disclosure
The prospect of compulsory sustainability reporting as part of a new Companies Bill has been welcomed by the Association of Chartered Certified Accountants (ACCA), which takes a close interest in corporate reporting. "If the legislation goes ahead as planned, it will enforce far wider disclosures of environmental and social risks than UK-listed companies have historically been required to make," says Rachel Jackson, the association's head of social and environmental issues. "The OFR reporting requirement will increase the level of transparency with regard to environmental and social issues."
In its formal response to the paper, ACCA says: "We believe that, whether disclosed in the OFR or elsewhere, the review offers the opportunity for significant progress to be made in the area of environmental and social reporting. While private-sector encouragement for companies to address and report on these issues has had considerable success in recent years, it has still not attained the depth and spread that we think it should." Mandatory reporting, under the umbrella of the OFR, could be just what the doctor ordered.Good news for investors
Environment minister Michael Meacher, who believes that shareholders deserve to know the truth, however brutal, shares this view. "[The introduction of OFR] should be good news to the socially responsible investment community, which has been calling for greater disclosure for a long time," said the minister recently. "But it should benefit all investors, and business too, because today's impacts could be tomorrow's liabilities."
Kathy Sutton, director of Fellows, a consultancy specialising in corporate responsibility, agrees. However, she warns that the legislation needs to be tough if it is to have any value. "The move towards OFRs is welcome," she says. "However, the OFR regime in itself will not necessarily lead to practical improvements in corporate sustainability programmes unless the reporting system has teeth and stakeholders can use the system to challenge the veracity and completeness of the information reported."
In particular, Sutton believes the reporting process would carry more clout if stakeholders were allowed to mount a legal objection against a director's assessment of what is material.Setting a framework
The White Paper set out criteria for deciding which firms should be required to undertake an OFR. It suggested public companies that met two of the following three conditions: a turnover greater than £50m, a balance sheet greater than £25m, and more than 500 employees. In the case of private companies, these thresholds are multiplied tenfold.
As civil servants sift through the responses to the consultation exercise, a crucial outstanding question is how much prescription there needs to be in telling firms what to put in their OFR. The proposals as they stand leave it up to company directors to decide what information is material - and what can be left out. The problem, of course, is that this judgement can be dangerously subjective.
With this conundrum in mind, the DTI has delegated to the Accounting Standards Board (ASB) the all-important task of drawing up rules about what the OFR contains. As a first step, an independent panel has been brought together to provide guidance about what information constitutes material.
Some commentators outside the business community are worried that if the rules for writing an OFR are not sufficiently prescriptive, the statement will come to be seen as a hand-waving exercise rather than a rigorous assessment of a company's impacts. To this end, ACCA has drawn up a list of items that it believes firms should be required to disclose in their OFRs. These include the name of the director responsible for environmental issues, the existence or otherwise of an environmental management system (EMS), a list of fines and penalties recently incurred, and an account of what the directors regard to be the principal environmental impacts of the organisation.
But Sutton believes the primary legislation should set out just the general framework for OFRs, namely overall objectives, broad areas for reporting, and methods for enforcement. "It does not make sense to provide for prescriptive lists of issues on which companies should report," she argues. "That would be at odds with continuous improvement because, for example, technologies are constantly developing, requiring the list to be constantly updated or fall out of date. "However, there is an argument for standards councils to require mandatory reporting on issues of central importance. That would help provide for greater standardisation of information, but also allow for diversity in reporting, reflecting the different issues facing companies within different sectors."Making preparations
If environmental and social reporting is to become compulsory for many, how prepared is business to rise to the challenge? The online directory CorporateRegister.com contains up-to-date information on some 3,700 corporate sustainability reports, more than a fifth of which are from UK firms. British businesses publish nearly twice as many reports as the USA, and are well ahead of Europe.
The number of sectors producing environmental and social reports has increased dramatically as well. In 1991, just five industry categories were represented in the CorporateRegister.com database, but by 2001 the number of sectors had expanded to 39. Traditional strongholds of environmental reporting like forestry, chemicals, oil and mining have been joined more recently by companies involved in 'softer' sectors like food and drink, financial services and leisure.
Much of the pressure for sustainability reporting is coming from the investment community. For example, it is now two years since Morley Fund Management set the scene by introducing a requirement for all FTSE 100 companies in which it invests its clients' money to publish a comprehensive environmental report.
More recently, the Association of British Insurers (ABI), whose members own 20% of all shares listed on the London Stock Exchange, has chalked up the first anniversary of its socially responsible investment (SRI) guidelines. The ABI reckons that UK industries - at least the larger players - are generally giving a good account of their environmental and social impacts. However, the number of smaller companies that make the grade is smaller, confirming that this is where most of the work still needs to be done.
"We hope our guidelines will set the tone for effective reporting under the new OFR," says the ABI's director-general, Mary Francis. She believes that the real skill in writing a sustainability report lies in identifying the crucial issues. "We are not looking for a long report, but for one that concentrates on the issues that really matter to a company," says Francis. "If companies can demonstrate that by following our guidelines they are singling out the real risks, it will be easier to avoid overloading the OFR with surplus information."
The ABI's recently published survey of nearly 600 annual reports produced by UK firms reveals the star players to be companies dealing in tobacco, chemicals, electricity, water and packaging. The worst performing sectors are distribution, IT, real estate, and entertainment. The lesson is clear: some industries are scoring straight As for their reporting, but the verdict on others is: 'Could do better.'
In a post-Enron world, honesty and truthfulness are expected from the business community as never before. And that means directors need to be candid about the way their company affects people and the environment. Now more than ever, it seems that honesty is the best policy.