Responsible Business and Non-Financial Reporting: What is imposed by European Union rules?

Moving towards a more sustainable global economy, improving social justice and boosting environmental protection are goals covered by The 2030 Agenda for Sustainable Development. Reaching these goals will not be possible without the active participation of all public and private stakeholder in both developed and developing countries. In recent years, great efforts have been focussed on increasing companies’ commitment to those objectives.Null

Following the international trend, and aiming to promote a responsible approach to business, increasing transparency, and making companies more resilient and well-performing in the long-term, the European Union has developed rules to require companies to disclose non-financial information about how they manage social and environmental issues.

The Directive 2014/95/EU regarding disclosure of non-financial and diversity information by certain large undertakings and groups is the EU law that determines the obligations for Member States. This Directive entered into force on 6th December 2014. This was a development of the Directive 2013/34/EU on annual financial statements, consolidated statements and related reports of certain types of undertakings.

Member States were appealed to incorporate the Directive 2014/95/EU into national regulations by 6th December 2016. Companies concerned had to start applying the Directive as of 2018, on information relating to the 2017 financial year.

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European Parliament. Photo by on Pixabay

To help companies in this process, the EU elaborated the non-bindingGuidelines on non-financial reporting whichwere publishedinthe Communication from the Commission 2017/C 215/01 on 5th July 2017.

At the moment, the reporting obligations stipulated by the Directive are only binding to large public-interest companies with more than 500 employees, such as listed companies, banks, insurance companies, and other companies designated by national authorities as public-interest entities. However, for the European Commission, small and medium-sized enterprises (SMEs) “are the backbone of Europe's economy”, representing 99% of all businesses in the EU, providing two-thirds of the employment in the EU’s private sector and creating 85% of new jobs. For these reasons, they are also recommended to undertake sustainable practices and are encouraged to report, although in a more simple and concise format.

Some of the European support bodies or portals particularly focused on SMEs are: the European Commission’s page Entrepreneurship and small and medium-sized enterprises (SMEs), the European Executive Agency for SMEs (EASME), the European Green Action Plan for SMEs (GAP) and the Small Business Standards (SBS), which recently published the report Small Business Standards User Guide for European SMEs on ISO 26000 Guidance on Social Responsibility.

The idea is that non-financial reporting shall help companies, including SMEs, to effectively communicate the actions they are undertaking in sustainable accounting and corporate social responsibility (CSR). It will also permit investors, consumers, policy makers, auditors, and other stakeholders to evaluate the non-financial performance of companies. 

EU members had to incorporate the appropriate changes into their laws and approve new regulations in compliance with the Directive 2014/95/EU. Although these new laws are focused on large companies, most of them also include some aspects which are relevant to and have an impact on SMEs. For instance, the Italian Legislative Decree 254/2016 requires big companies to report on information about risks related to the relevant use of subcontracting procedures in their day to day activities, whereas this in not a requirement for SMEs and only has an indirect effect on them . However, the Spanish Royal-Decree Law 18/2017 states that the description of a company’s diversity policy included in the annual corporate governance report must include, when it comes to SMEs, the measures undertaken on gender equality. Additionally, countries such as Greece have extended obligations to SMEs with a minimum number of employees and/or amount of turnover, although at a lower level of compliance than for larger companies.