Environmental and social transparency under the ... - ClientEarth

26 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 27shareholders of the business of the company in that financial year. Thereremains a strong sense of this in legal requirements. 36 The law sets outrequirements as to what kind of information shareholders need in orderto have an understanding of the way the business is performing, and theway that company directors are managing the company and performingtheir duty to promote the success of the company. The legal requirementsof the Companies Act 2006 for annual accounting and reporting includeobligations on companies to disclose information on environmental andsocial matters. The law provides explicitly for quoted companies to reporton their environmental and social impacts. However, there is a lack ofclarity and detail in these explicit requirements. There is also a lack ofclarity in relation to the reporting requirements for ‘unquoted’ companies,which are not explicitly required to report on environmental or socialmatters in the Companies Act 2006, but which inevitably must do so insome circumstances, to the extent that they are business issues in theirown right, and therefore fall within one of the provisions of section 417other than 417(5).The law also establishes a number of legal mechanisms to scrutinise thestandard of accounting and reporting in practice and ensure that companydirectors deliver reports that fulfil legal requirements. Externalaudit, regulatory oversight, and the laying of the accounts and reportsbefore the company at its Annual General Meeting (AGM) provide thisscrutiny. However, there are currently problems with these mechanisms,some in law or principle and some in practice, which render them inadequateto their task of ensuring appropriate standards in reporting. Thisis particularly the case in relation to legal requirements to account andreport on environmental and social matters.Annex 1 contains further examination of the accounting and reportingobligations of companies relating to environmental and social matters,to provide additional detail to the overview given by this Chapter. It alsocontains analysis of accounting and reporting requirements under the FSA(Financial Services Authority) Rules governing the London Stock Exchangeand Alternative Investment Market.1.1 Legal requirements for accounting and reporting ofenvironmental and social impactsUnder the Companies Act 2006, companies are required to prepareannual accounts and reports on certain matters of company business. 37They must prepare detailed accounts 38 to give a view of the financial situationof the company. They must also prepare a directors’ report, 39 to giveinformation that is either difficult to accurately express in numerical form,or that is more contextual, but which is nonetheless extremely importantto understanding the position of the business. The directors’ report isalso intended to inform members of the company (shareholders), and helpthem to assess how the directors have performed their duty to promote thesuccess of the company under section 172 Companies Act 2006. 40Statutory accounting and reporting requirements at UK level implementand satisfy minimum European Union requirements stemming from anumber of European Directives, most importantly the Fourth CouncilDirective on the annual accounts of certain types of companies (Directive78/660/EEC), as amended by the Accounts Modernisation Directive(Directive 2003/51/EC). The EU Directives do not directly place legal obligationson companies, 41 only placing obligations on the UK to implementtheir requirements, 42 which the UK has done. See Annex 3 for furtherdiscussion of the EU legal context.1.1.1 Contenti. Annual accountsCompanies may prepare their individual annual accounts in accordancewith either the Companies Act 2006, or International Accounting Standards.43 If preparing accounts under the Companies Act 2006, detailedrequirements as to form and content are provided by the Large andMedium-sized Companies and Groups (Accounts and Reports) Regulations2008. 44 Otherwise, detailed requirements for form and content areprovided by the various International Accounting Standards. 45While these requirements do not explicitly require accounting of environmentalor social information, they inevitably do require the accountingof some such issues. ‘Environmental’ and ‘social’ issues do not exist ina vacuum; they are also business issues. 46 Some environmental or social