Corporate Sustainability Reporting – New EU Directive Applies to Many of the S&P 500 – Not Just for EU Companies

by Hank Boerner, Chairman, G&A Institute

Last week the G&A team released the results of the analysis of sustainability disclosure and reporting by the US large-cap companies included in the S&P 500 Index — 72% of the companies published reports in 2013.

That was a dramatic increase from the first year of our analysis (for year 2011, with just under 20% of companies reporting) and a fast rise from the 2012 level of 53% reporting (a clear majority of the S&P 500 were by then reporting on their sustainability).

What we see at the end of the year 2013 tally is that 28% of the companies are not reporting. A shrinking minority.  But wait — there is another important consideration for the S&P 500 universe and other U.S. companies. AND – for other companies in other countries.

Tune in to the European Union Directive, adopted recently, mandating that companies in the EU’s 28 states with 500 or more employees, or certain levels of revenue, or condition of the balance sheet, will have to begin publishing CSR reports. And that includes non-EU companies with issues trading on EU stock exchanges, such as the London, Frankfurt, Milan, Paris, Amsterdam, NASDAQ OMX, and others.

In reading the final Directive, we see this phrase: “The Accounting Directives regulate information provided in the financial statements of all limited liability companies which are incorporated under the law of a Member State or European Economic Areas (EEA). As Article 4(5) of the Transparency Directive refers to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive, the amendments [to the proposed] provision will also cover companies listed on EU regulated markets even if they are registered in a third country.”

We checked with the authoritative Europe Direct Contact Center to see if we understand this correctly — the center verified that the April 15, 2014 text as adopted by the parliament included this language.

So — the U.S. large-cps included in the S&P 500 benchmark not publishing non-financial reports at all will be covered by the Directive.

Note this: 118 S&P 500 companies are not publishing sustainability reports – and – are listed on an EU-regulated exchange. These companies are in various sectors, such as:

Consumer/Discretionary – 26 companies
Consumer/Staples – 5 companies
Energy – 15 companies
HealthCare – 16 companies
Industrials – 18 companies
Information Technology – 20 companies
Materials – 1 company
Telecomm Services – 2 companies

What is holding these companies back? Lack of understanding of the importance of non-financial reporting to stakeholders? Inertia? Resistance to the trend (with 72% of peers clearly setting the pace now)? Reluctance to disclose lagging ESG performance indicators? Belief that sustainability “costs” money? Just being stubborn?

Whatever the reason, at least two important drivers are now pressing in on holdout boards and managements — (1) peer pressure within the S&P 500 universe, and (2) the coming mandate for the 118 companies listed on EU stock exchanges, if we read the Directive correctly.

Add in other drivers — such as supply chain pressure (with major customers asking their prime suppliers for ESG performance information); and, rising investor expectations (many mainstream asset owners and managers are adopting sustainable investing approaches for portfolios).  It probably won’t be long before we see only a slim minority of the 500 large-cap companies holding out on publishing ESG performance information.

And then…we see the trend moving rapidly down the market cap food chain to other large-caps, mid-caps, small-caps, and on and on.  Until sustainability reporting is viewed to be as important (to get it right, and include material content of all kinds) as traditional financial reporting for public companies.  And – privately owned companies…for sure.

We have come so far, so fast in the expansion of corporate and institutional sustainability / responsibility reporting, haven’t we!

Does the Draft EU Directive for Mandatory Sustainability Reporting Apply to US Companies? AND – Stock Exchanges Move One Big Step Closer Towards GLOBAL Mandatory Reporting As Well

By Louis D Coppola @ G&A Institute..

I received an overwhelming response to the post on March 17, 2014 concerning the European Unions moves to make Sustainability / CSR reporting mandatory.  For those of you that have not read my original post you can take a look here:

http://ga-institute.com/Sustainability-Update/2014/03/17/european-union-moves-closer-to-make-sustainability-csr-reporting-mandatory-in-all-28-member-countries/

A question that came up a lot was whether or not this would apply to US companies operating in the European Union with more than 500 employees.  This is a great question and although I had heard through the grapevine that it would apply, I did not feel certain enough to state that fact because I could not find an official statement or clause that I had found in draft directives.  I had only heard this from other practitioners, in other articles etc that it would impact US companies.

Then I received an email from Carly Greenberg and Tim Smith at Boston Trust thanking me for the post, and calling my post “informative”.  I am very fond of Tim Smith and a real fan of his tremendous work in driving SRI over his entire 40+ year career with ICCR and now with Walden Asset Management – I sometimes refer to him as one of the Godfathers (Hey – I’m Italian and from NY so.. forgive me )  of SRI so I was very humbled to get this email and I knew that I had to find the answer to this question.  I consider myself lucky that over my relatively short career in Sustainability (14 years) Tim and I have crossed paths, shared panels, and discussed issues in some depth.  He has truly impacted the field more than almost anyone (and continues to today), and has impacted my career / thoughts etc dramatically.  (Thanks Tim!)

EUREKA! – I did find the copy of the draft directive itself and after reading through it with a fine toothed comb I came across a clause which I believe to be the smoking gun which was under section 3 “LEGAL ELEMENTS OF THE PROPOSAL” (the bold part is the important part):

The Accounting Directives regulate the information provided in the financial statements of all limited liability companies which are incorporated under the law of a Member State or European Economic Area (EEA). As Article 4(5) of the Transparency Directive refers to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive, the amendements proposed to these provisions will also cover companies listed on EU regulated markets even if they are registered in a third country.

Based on this clause, any company that trades on at least one of the many stock exchanges in the European Union (most global companies) which you can see in this list taken from a Wikipedia article number over 100+:

Economy Exchange Location Founded Listings Link
European Union European Union Euronext Amsterdam 2000 1154 Euronext
GXG Markets Horsens 1998 GXG
Albania Albania Tirana Stock Exchange Tirana 1996 TSE
Armenia Armenia Armenian Stock Exchange Yerevan 2001 12 NASDAQ OMX Armenia
Austria Austria Vienna Stock Exchange Vienna 1771 99 WB
Azerbaijan Azerbaijan Baku Stock Exchange Baku 2000 BFB
Belarus Belarus Belarus Currency and Stock Exchange Minsk 1998 BVFB
Belgium Belgium Euronext Brussels Brussels 1801 213
Bosnia and Herzegovina Bosnia and Herzegovina
– Bosnia and HerzegovinaFederation of Bosnia and Herzegovina Sarajevo Stock Exchange Sarajevo 2001 SASE
– Republika Srpska Republika Srpska Banja Luka Stock Exchange Banja Luka 2001 BB
Bulgaria Bulgaria Bulgarian Stock Exchange Sofia 1914 BFB
GuernseyJerseyChannel Islands Channel Islands Stock Exchange Guernsey 1987 1000 CISX
Croatia Croatia Zagreb Stock Exchange Zagreb 1991 ZB
Cyprus Cyprus Cyprus Stock Exchange Nicosia 1996 HAK
Czech Republic Czech Republic Prague Stock Exchange Prague 1861 29 PX
Denmark Denmark Copenhagen Stock Exchange Copenhagen 1620 172 OMX Nordic Market
GXG Markets Horsens 1998 GXG Markets
Estonia Estonia Tallinn Stock Exchange Tallinn 1920 OMX Baltic Market
Faroe Islands Faroe Islands Faroese Securities Market Tórshavn 2004 VMF
Finland Finland Helsinki Stock Exchange Helsinki 1912 130 OMX Nordic Market
France France Euronext Paris Paris 1724 1301 Euronext Paris
MATIF Paris 1986 MATIF (Euronext)
Georgia (country) Georgia Georgian Stock Exchange Tbilisi 1999 261 SSB
Germany Germany Berliner Börse Berlin 1685 Börse Berlin
Börsen Hamburg und Hannover Hamburg/Hanover BÖAG
Börse München München 1830 Börse München
Börse Stuttgart Stuttgart 1861 Börse Stuttgart
Deutsche Börse Group Frankfurt Deutsche Börse Group
Eurex Frankfurt 1998 EUREX
Frankfurt Stock Exchange Frankfurt 1585 FWB
Gibraltar Gibraltar Gibraltar Stock Exchange Gibraltar 2006 GibEX
Greece Greece Athens Stock Exchange Athens 1876 ATHEX
Hungary Hungary Budapest Stock Exchange Budapest 1864 52 BET
Iceland Iceland Iceland Stock Exchange Reykjavík 1985 11 OMX Nordic Market
ICEX
Republic of Ireland Ireland Irish Stock Exchange Dublin 1793 ISE or ISEQ
Irish Enterprise Exchange Dublin 2005 IEX
Italy Italy Borsa Italiana Milan 1808 BIt
Kazakhstan Kazakhstan Kazakhstan Stock Exchange Almaty 1993 KASE
Latvia Latvia Riga Stock Exchange Riga 1816 OMX Baltic Market
Lithuania Lithuania Vilnius Stock Exchange Vilnius 1993 OMXV
Luxembourg Luxembourg Luxembourg Stock Exchange Luxembourg (city) 1927 Bourse de Luxembourg
Republic of Macedonia Macedonia Macedonia Stock Exchange Skopje 1995 MSE
Malta Malta Malta Stock Exchange Valletta 1992 Borza Malta
Moldova Moldova Moldova Stock Exchange Chişinău 1994 BVM
Montenegro Montenegro Montenegro Stock Exchange Podgorica 1993 MNSE
Netherlands Netherlands Euronext Amsterdam Amsterdam 1602 Euronext Amsterdam
Norway Norway Oslo Stock Exchange Oslo 1819 Oslo Børs
Poland Poland Warsaw Stock Exchange Warsaw 1817 439 WSE
Portugal Portugal Euronext Lisbon Lisbon 1769 66 Euronext Lisbon
OPEX Lisbon 2003 OPEX
Romania Romania Bucharest Stock Exchange Bucharest 1882 70 BVB
RASDAQ Bucharest 1996 1486 BVB
Sibiu Stock Exchange (futures) Sibiu 1997 BMFMS
Russia Russia Moscow Interbank Currency Exchange Moscow 1992 MICEX
Russian Trading System Moscow 1995 RTS
Saint Petersburg Stock Exchange Saint Petersburg 1811 SPBEX
Serbia Serbia Belgrade Stock Exchange Belgrade 1894 BELEX
Slovakia Slovakia Bratislava Stock Exchange Bratislava 1991 BSSE
Slovenia Slovenia Ljubljana Stock Exchange Ljubljana 1989 61 LJSE
Spain Spain Bolsa de Valores de Barcelona Barcelona Bolsa de Barcelona
Bolsa de Valores de Bilbao Bilbao Bolsa de Bilbao
Madrid Stock Exchange Madrid 1831 Bolsa de Madrid
Mercado Oficial Español de Futuros y Opciones Madrid 1989 MEFF
Bolsa de Valores de Valencia Valencia Bolsa de Valencia
Sweden Sweden Nordic Growth Market Stockholm 2003 NGM
Stockholm Stock Exchange Stockholm 1863 289 OMX Nordic Market
Switzerland Switzerland SIX Swiss Exchange Zürich 1850 SIX Swiss Exchange
Bern eXchange Bern 1888 BX
Turkey Turkey Borsa Istanbul Istanbul 1985 417 BIST
Ukraine Ukraine PFTS Ukraine Stock Exchange Kiev 2002 PFTS Stock Exchange
Ukrainian Exchange Kiev 2008 UX
United Kingdom United Kingdom London Stock Exchange London 1801 2800 LSE
PLUS Markets London 2004 [N 1] PLUS Markets

 

If you are a publicly traded company and trade on any of the exchanges above you will be affected by this directive.

Also, it is interesting to see that NYSE and NASDAQ both are represented in some ways on this list above. For example NYSE and Euronext are owned by the same parent company – The IntercontinentalExchange Group (ICE).  Euronext has connections to the markets in Belgium, France, the Netherlands, Portugal, and the UK.

The NASDAQ OMX seems to have its name (both OMX and NASDAQ) associated with several exchanges above including Armenia, Denmark, Estonia, Finland, Iceland, Sweden etc.

I’m not sure how these connections tie into this directive, but I think its interesting to point them out as the world becomes more global and exchanges become truly global how do regulations like the EU directive, with the clause above effect these global exchanges?  And what does that mean going forward?

It gets even more interesting when you look at the fact that the NYSE and the NASDAQ are both signatories of the Sustainable Stock Exchanges Initiative (SSEI): http://www.sseinitiative.org/.

The initiative comes from a collaboration between PRI, UNEP, UNCTAD, and UNGC and many of the partners in the initiative already have listing requirements for Sustainability reporting (ex, JSE , BM&F Bovespa).

To become a partner exchange SSEI asks that the exchange publicly endorses the following statement:

We voluntarily commit, through dialogue with investors, companies and regulators, to promoting long term sustainable investment and improved environmental, social and corporate governance disclosure and performance among companies listed on our exchange.

They have also both done their own GRI Sustainability Reports:

NASDAQ: http://www.nasdaqomx.com/digitalAssets/84/84295_2012nasdaqomxsustainabilityreportv2.pdf

NYSE: https://www.nyx.com/sites/www.nyx.com/files/14977_2012_cr_report_130803.pdf

AND

BREAKING NEWS out of Boston (Mar 26th, 2014) – as I write this article CERES, BlackRock (the largest asset manager in the world) and other major institutional investors released their recommendations for listing requirements on exchanges titled:

Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting

These standards will be sent directly to the World Federation of Exchanges (WFE – the trade group for exchanges) who has launched a Sustainability Working Group to discuss and debate sustainability disclosure issues with member exchanges (virtually all global exchanges in the world).

Here’s what NASDAQ had to say:

“We need a joint solution that will help bring more consistent and comparable information to all markets, and will not leave any one exchange at a competitive disadvantage for taking leadership in this space,” NASDAQ OMX CEO Robert Greifeld said, speaking of the sustainability disclosure engagement process. NASDAQ OMX and Ceres have been working together for almost two years on this issue. 

NASDAQ OMX Vice Chairman Meyer “Sandy” Frucher stressed, “What we hope comes out of this process is strong support by exchanges around the globe to move together to create a more uniform approach to sustainability reporting.

“We committed last year, at the urging of institutional investors within Ceres’ Investor Network on Climate Risk, to provide thought leadership for our listed companies on sustainability reporting guidance,” Frucher continued. “To provide us with greater clarity on what investors want in such guidance, INCR, with support from the Principles for Responsible Investment, launched a global consultation among investors, and presented us with a proposal that we are now discussing with other exchanges.”

Here’s what BlackRock had to say:

“Cross border collaboration by stock exchanges will help shift public companies towards more comparable and meaningful disclosure of ESG (environmental, social and governance) risk factors,” said Gwen Le Berre, Vice President of Corporate Governance and Responsible Investment at BlackRock, the world’s largest asset manager with $4.3 trillion in assets under management. “This will enable investors to more accurately value companies and make better informed investment decisions.”

 

Here is the full release which has many other quotes from very important people in very important places demonstrating their commitment to moving this forward:

http://www.ceres.org/press/press-releases/world2019s-largest-investors-launch-effort-to-engage-global-stock-exchanges-on-sustainability-reporting-standard-for-companies

To read the release on the WFE launching its Sustainability Working Group, visit: http://www.businesswire.com/news/home/20140325006381/en/World-Federation-Exchanges-WFE-Launches-Sustainability-Working#.UzL2styt-_Y

The following exchanges came together to initially launch the WG:

  • BM&FBOVESPA
  • Borsa Istanbul
  • Borsa Malaysia
  • CBOE
  • CME
  • Deutsche Börse
  • InterContinental Exchange/NYSE
  • Johannesburg Stock Exchange
  • NASDAQ OMX
  • National Stock Exchange of India
  • Shenzhen Stock Exchange

So when you take all of this into account, why are you still reading this article, and why haven’t you already started working with me to get started on Sustainability reporting? 😉

That was a joke of course, but seriously – one way or another you will be affected – so get in front of these coming regulations/mandates because if you are not, you will be scrambling to get in compliance, and in a position of weakness compared to any competitors that are already doing it.  If you are already reporting, kudos to you, and you will be in a position of strength against your competitors – you have strategically positioned yourself well in the new global environment.   Just make sure you are covering all your bases and your reporting is in-line with whats expected and global standards.

This is not to mention the additional pressures for disclosure and transparency coming from:

  • Key Customers
  • Employees
  • Suppliers
  • NGOs
  • Investors
  • Government
  • Community
  • and other Stakeholders

Which I could write a whole additional book about.

I think its clear to see that the question is not SHOULD you start reporting, its HOW will you get started as quickly as possible.  Your window of opportunity to be prepared is closing, and the time is now to move on this if you have been questioning whether or not to get started.

At G&A we continue to watch these trends shaping the global markets.  We position ourselves at the intersection of corporations and the capital market.  We monitor the groups that shaping corporate valuation and reputation in today’s modern global marketplace.  If you have any questions or would like to talk more about these topics please reach out to me at lcoppola@ga-institute.com.

Best,

Louis D Coppola

For your reference here is a copy of the EU draft directive in full:
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013PC0207

And Here is the EU portal for non-financial disclosures:
http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm

 

 

European Union Moves Closer To Make Sustainability / CSR Reporting Mandatory in All 28 Member Countries

Council of the European Union

By Louis D Coppola @ G&A Institute..

We have been closely tracking the European Union’s draft directive for the disclosure of non-financial and diversity information by certain large companies.  A major hurdle has just been cleared to adopt this directive,  it has cleared an important stage in the EU legislative process.

On February 26th, 2014 the Council of the European Union’s Committee of Permanent Representatives endorsed an agreement on the draft directive.  The agreement still needs to be formalized by the European Parliament and the Council, this is expected to take place on April 15th, 2014 which is now less than a month away.

This regulation will apply to all companies with over 500 employees in any of the 28 European Union member countries – which represent the largest economic area in the world.  It is estimated that some 6,000 companies will fall under the scope of the directive.  To put this in perspective there are currently ~2500 global organizations Sustainability reports in the GRI Global Database, whichrepresents one of the most comprehensive databases of sustainability reporting.  Full disclosure:  G&A Institute is the exclusive data partner for the US, UK, and Ireland and is responsible for analyzing all reports of organizations HQ in these countries, and feeding that data into the global GRI database.  You can find out more about the Institute’s important data partner role here:  http://www.ga-institute.com/gri-reporting-data-partner.html

Companies will be required to report annually on:

  1. Environmental Matters
  2. Social Matters
  3. Employee-Related Matters
  4. Respect for Human Rights
  5. Anti-Corruption Matters
  6. Bribery Matters
  7. Diversity Policy

The report will need to include a description of the policies, outcomes and the risks related to these matters.

Directly from the EU Council press release:

The new measures are aimed at strengthening the company’s transparency and accountability, while limiting any undue administrative burden, and ensuring a level playing field across the EU. They will be incorporated into the directive on the annual financial statements and reports of certain types of undertakings, which was adopted on 26
June 20132

This regulation is modeled after the Global Reporting Initiative (GRI) approach of “Report or Explain”.  Any company that does not pursue policies in the area of these matters, will have to publicly and thoroughly explain/state why it has chosen not to do so.

The GRI is one of the frameworks that is referenced in the introductory part of the legislative proposal and the new G4 covers all of the matters in the proposal from environmental to bribery.

Additional Background from the release:

The necessity to improve undertakings’ disclosure of social and environmental information is a part of the EU strategy to promote corporate social responsibility adopted in October 2011, which acknowledged the importance of businesses divulging certain information with a view to identifying risks and increasing investor and consumer trust.

Non-financial reporting is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. It also helps monitoring undertakings’ performance and their impact on society.

The European Union sees this as a matter of competitiveness in the global marketplace.  As such, the person heading this initiative is the president of the EU Competitiveness Council, Kostas Hatzidakis.  In the official press release Kostas has this to say:

“this decision provides the European Union with the first legislation on non-financial information reporting. Corporate Social Responsibility is an enabling tool for business productivity and contributes to a smart and sustainable growth. It is not only for shareholders but also for stakeholders and citizens that it adds value”.

And the GRI Deputy Chief Executive Teresa Fogelberg commented on the new steps taken by the Europena Union Committee of Permanent Representatives (COREPER) of the governments of the EU member states:

 “This is a great step towards establishing a more robust EU policy framework for reporting and transparency. I praise the determination and cooperation of the EU institutions, particularly the Greek Presidency and the European Parliament Rapporteur Mr Baldassarre, as well as the other actors involved, for such a positive and encouraging achievement. I am confident that, if adopted, this policy would have a great impact on making progress towards smart, inclusive and sustainable growth in Europe and beyond.”

 

Carrots & Sticks III (2013 Edition)

The Governance & Accountability Institute continues to watch this regulation, and many other global regulations as part of its monitoring and research.  G&A contributed the United States portion of the bi-annual GRI research report “Carrots and Sticks” which deep dives into Sustainability reporting policies worldwide, this 2013 report covering 45 countries and regions.

If you’d like to learn more about global regulations you can download the 2013 Carrots and Sticks research publication from our website here:
http://www.ga-institute.com/research-reports/ga-institute-contributes-to-carrots-sticks-iii-2013-edition.html

 

 

The official press release from the Council of the European Union can be seen here: http://gr2014.eu/sites/default/files/Hatzidakis%20COREPER.pdf

 

 

Tuning in to the European Union Changes in Corporate Reporting

By G&A Institute

In April, the European Commission (EC) acted on a proposal calling for new rules – officially, to implement, for a Directive of the European Parliament and of the Council to mandate disclosure of non-financial information and diversity information by large companies (500+employees).

The proposal (prepared by a working group) calls for mandating publication of non-financial information to be included in annual and consolidated financial statements and related reports.

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