Environmental and social transparency under the ... - ClientEarth

30 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 31Detailed provisions have been made under the Large and Medium-sizedCompanies and Groups (Accounts and Reports) Regulations 2008 as tocertain matters that must be disclosed as part of the directors’ report. Inthese detailed provisions, no environmental matters are covered. Thesocial issues covered are primarily a restatement of those previouslyrequired by Schedule 7 of the Companies Act 1985, the very requirementsthat the Company Law Review process sought to and determined toimprove upon. This is not an adequately detailed regulatory framework.It is also important to note that even ‘unquoted’ companies, to which section417(5) does not apply, are required to report on some environmentalor social issues, where that information is necessary: for a fair review ofthe company’s business; 54 as part of a description of the principal risksand uncertainties facing the company; 55 as part of a balanced and comprehensiveanalysis of the development and performance of the company’sbusiness during the financial year, 56 and the position of the company’sbusiness at the end of that year. 57Section 417 of the Companies Act came into effect on 1 October 2007, 58and applies to all reporting years starting on or after that date. For reportsfor financial years before this date, the provisions of the Companies Act1985 applied.The directors’ report before the Companies Act 2006Under the Companies Act 1985, the legal requirements for the directors’report were considerably less extensive. The report only had to containa fair review of the development of the business of the company and itssubsidiaries during the year, its position at the end of it, 59 and the informationwhich was required by Schedule 7 of the Companies Act 1985. 60Schedule 7 set out a range of matters which the directors’ report had toinclude. 61 The requirements were considerably less demanding than therequirements of the Companies Act 2006, and it was considered by theCompany Law Review that they did not represent a coherent philosophy,and invited “standard and valueless statements”. 62To avoid the environmental and social reporting requirements of theCompanies Act 2006 encouraging similarly ‘standard and valuelessstatements’, Regulations are needed to provide specificity and detail asto the precise scope of those requirements, complemented by robust andeffective mechanisms to provide scrutiny to the process. This would representa considerable improvement on the 1985 Act in terms of ensuringthat broader contextual, non-financial information is included in annualreporting where appropriate.The ‘Operating and Financial Review’ (OFR) is also worth noting here(discussed in detail in Annex 2), as the predecessor to the directors’ reportof the Companies Act 2006. The OFR was initially a guidance frameworkdesigned to help directors effectively report on the main factors underlyingthe company’s performance and financial position, 63 including informationon non-financial factors. 64 In March 2005, a legal requirement forquoted companies to produce an OFR was introduced, 65 including explicitrequirements to report on environmental and social matters. However,just over half a year after enactment, it was announced that that statutoryobligation was to be abolished.The content requirements for environmental and social reporting whichhave been subsequently brought into law by the ‘business review’ requirementsof section 417 Companies Act 2006 are for the most part the sameas those of the OFR Regulations and Reporting Standard. 66 The mainprevailing impact that the OFR’s removal has had in this area of law is onthe standard of scrutiny that environmental and social reporting is subjectto from external audit. The cost to business of the OFR’s higher auditstandard was the central justification for its removal. ClientEarth considersthat its proposals would not be in conflict with this policy decision,as it seeks to establish a regulatory framework that is cost-effective and‘light-touch’, scrutinising only those companies which are problematic,rather than imposing burden and expense on all companies regardless ofthe quality of their reporting practices.1.1.2 CoverageCompany operations and impacts are often very complex, especially inthe multinational context, and especially in industries such as mining andother extractives. Companies will often have a variety of close economicrelationships with other legally distinct companies, making up structuresof merged interests, operations and control. These relationships, and theenvironmental and social impacts of such related companies, are extremelyrelevant to a company’s business performance.