Environmental and social transparency under the ... - ClientEarth

92 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 93that the audit requirement of the Companies Act 2006 for the directors’report provides adequate scrutiny to the reporting of environmental andsocial matters (as discussed in Chapter 1.2.1 and Annex 4). However, ClientEarthdoes accept that the cost burden to business of higher mandatoryaudit standards would be considerable, and considers that because auditrequirements impose obligations on all companies, regardless of the qualityof their reporting, it is not the most efficient way to provide scrutinyto the reporting process. Therefore ClientEarth is not pursuing highermandatory auditing requirements. However, the lower standard of auditrequirement currently in statute is only acceptable if the other meansby which scrutiny is provided to the reporting process (by the FinancialReporting Review Panel and at company Annual General Meetings) areenabled to play a greater and more effective role.A.2.1Environmental and social reporting in reviewThe idea that companies need to report non-financial information in orderto properly reflect the position of the company and satisfy the needs of theusers of the report is not new in company law review. For example, in1992, the Cadbury Committee 263 recognised that there would be an advantageto users if they were provided with some explanation of the factorslikely to influence a company’s future progress. 264 It recommended theOperating and Financial Review (OFR) as an appropriate means to servethis purpose, which was at that point being developed by the AccountingStandards Board (ASB).A.2.2The ‘Operating and Financial Review’The ASB originally issued the Statement ‘Operating and Financial Review’in 1993. Building on existing ‘best practice’ in industry, the Statementprovided a framework for directors to discuss the main factors underlyingthe company’s performance and financial position. 265 In this form, theOFR remained not as a binding legal standard but as recommended bestpractice for many years.In 2001, the Company Law Review Steering Group recommended in itsfinal report that the OFR be made mandatory for quoted companies. Followingthis recommendation and the consultation response to the 2002White Paper ‘Modernising Company Law’, the government decided to putthe OFR into law, and require quoted companies to prepare and publishOFRs. 266 After consultation on drafts, the OFR Regulations 267 were passedinto law in March 2005, to take effect from April 2005.The Companies Act 1985 (Operating and Financial Review and Directors’ Reportetc.) Regulations 2005Objective and contents of operating and financial reviewSCHEDULE 7ZAReview objective1. An operating and financial review must be a balanced and comprehensive analysis,consistent with the size and complexity of the business, of -(a) the development and performance of the business of the company duringthe financial year,(b) the position of the company at the end of the year,(c) the main trends and factors underlying the development, performance andposition of the business of the company during the financial year, and(d) the main trends and factors which are likely to affect the company’s futuredevelopment, performance and position,prepared so as to assist the members of the company to assess the strategiesadopted by the company and the potential for those strategies to succeed.Other general requirements2. The review must include -(a) a statement of the business, objectives and strategies of the company;(b) a description of the resources available to the company;(c) a description of the principal risks and uncertainties facing the company;and(d) a description of the capital structure, the treasury policies and objectivesand the liquidity of the company.Details of particular matters3.- (1) To the extent necessary to comply with the general requirements of paragraphs 1and 2, the review must comply with paragraphs 4 to 6.(2) If the review does not contain information and analysis of each kind mentionedin paragraphs 4 and 5, it must state which of those kinds of information andanalysis it does not contain.4.- (1) The review must include -(a) information about environmental matters (including the impact ofthe business of the company on the environment),(b) information about the company’s employees, and(c) information about social and community issues.(2) The review must, in particular, include -(a) information about the policies of the company in each area mentioned insub-paragraph (1), and(b) information about the extent to which those policies have been successfullyimplemented.