Environmental and social transparency under the ... - ClientEarth

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94 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 955. The review must also include -(a) information about persons with whom the company has contractual orother arrangements which are essential to the business of the company;and(b) information about receipts from, and returns to, members of the companyin respect of shares held by them.6.- (1) The review must include analysis using financial and, where appropriate, otherkey performance indicators, including information relating to environmentalmatters and employee matters.(2) In sub-paragraph (1), “key performance indicators” means factors by reference towhich the development, performance or position of the business of the companycan be measured effectively.Reference to and explanation of company’s accounts7. To the extent necessary to comply with the general requirements of paragraphs 1and 2, the review must, where appropriate, include references to, and additionalexplanations of, amounts included in the company’s annual accounts.Compliance with standards8. The review must -(a) state whether it has been prepared in accordance with relevant reportingstandards, and(b) contain particulars of, and reasons for, any departure from suchstandards.Application of Schedule to group operating and financial review9. In relation to a group operating and financial review this Schedule has effect as ifthe references to the company (other than the last such reference in paragraph 1)were references to the company and its subsidiary undertakings included in theconsolidation.”Auditors’ reports on operating and financial reviews10. In section 235 of the 1985 Act (auditors’ report), after subsection (3) insert -“(3A) If the company is a quoted company, the auditors must state in their report-(a)(b)whether in their opinion the information given in the operating andfinancial review for the financial year for which the annual accounts areprepared is consistent with those accounts; andwhether any matters have come to their attention, in the performance oftheir functions as auditors of the company, which in their opinion areinconsistent with the information given in the operating and financialreview.”The OFR Regulations required a ‘balanced and comprehensive analysis’ ofthe development, performance and position of the business, the main factorsand trends underlying the development, performance and position ofthe company, and those likely to affect the company’s future development,performance and position. The Regulations included a requirement for adescription of the principal risks and uncertainties facing the companyand, to the extent necessary for the general requirements of the review,information about environmental matters, social and community issues,and persons with whom the company has contractual or other arrangementswhich are essential to the business of the company. The Regulationsalso required the statutory audit to have regard not only to the annualaccounts in their assessment of non-financial reporting, but to any mattersthat had come to their attention while carrying out their audit function.Supplemental to the Regulations, the Accounting Standards Board issuedReporting Standard 1: Operating and Financial Review (RS 1), a detailedinterpretive standard that set out the way that quoted companies wererequired to carry out the OFR. It set out detailed interpretive principlesfor the general elements of the OFR (the equivalent provisions to sections417(3) - (4) Companies Act 2006).However, RS 1 did not add legally binding further detail to the specificrequirements for information on environmental and social matters, simplyrestating the provisions of the Regulations. The only further provisionsmade by RS 1 in relation to these matters were incidental to broaderprinciples.REPORTING STANDARD 1: OPERATING AND FINANCIAL REVIEW“32. The OFR shall include a description of the business and the external environmentin which it operates as context for the directors’ discussion and analysisof performance and financial position......34. Every entity is affected by its external environment. Depending on the natureof the business, the OFR shall include discussion of matters such as the entity’smajor markets and competitive position within those markets and the significantfeatures of the legal, regulatory, macro-economic and social environment thatinfluence the business. For example, an entity may disclose the fact that it hassignificant operations in a number of different countries, which could have animpact on the future development and performance of the business......35. The OFR shall discuss the objectives of the business to generate or preservevalue over the longer-term......37. The nature of the industry will affect the directors’ determination of an appropriatetime perspective for reporting in the OFR. For example, a business thatfocuses on large long-term projects must carry out its strategic planning overthe full project lifecycle, which may be 20 years or more. Furthermore, where aproject has a long-term impact on the environment, this is likely to affect long-
96 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 97term value and shall therefore determine the time perspective for reporting in theOFR. By contrast, a service industry with few physical assets and depending onthe supply of particular employee skills for its source of competitive advantage,will plan over a period consistent with its ability to recruit, train and develop itsstaff, which may be much shorter.”RS 1 was also accompanied by non-binding ‘Implementation Guidance’,which included some further guidance relating to the reporting of environmentaland social matters:RS 1: IMPLEMENTATION GUIDANCE“This guidance accompanies, but is not part of, the Reporting Standard...IG9. Paragraph 29 (a)-(e) of the Reporting Standard requires that, to the extent necessaryto meet the requirements set out in paragraph 28 of the Reporting Standard,the OFR shall include information about a number of particular matters, e.g.employees, and environment. As explained in paragraph 28 of the ReportingStandard, the OFR shall provide the information necessary to assist membersto assess the strategies adopted by the entity and the potential for those strategiesto succeed. Accordingly, where the management of a particular matter couldsignificantly affect the entity’s ability to successfully implement its strategies orthe entity’s short or longterm value, that matter shall be addressed within theOFR...Environmental mattersIG21. Environmental matters, particularly environmental risks and uncertainties,impact to some extent on all businesses, as they can affect investment decisions,consumer behaviour and Government policy. Poor management of energy, naturalresources or waste can affect current performance; failure to plan for a futurein which environmental factors are likely to be increasingly significant mayrisk the longterm future of the business. Proper attention to the environmentalimpacts of supply chains and products and to regulatory compliance of the company’sown operations are both important for a business’ public reputation andfor its licence to operate.IG22. Environmental matters cover a very wide range of areas. The matters that willbe of concern to a particular entity will vary depending on both the industry inwhich it operates and the strategies it has adopted. However, some consensus asto the generic environmental concerns facing all companies has been reached$,which might serve as a useful reference point for directors:- Water use;- Energy use;- Waste;- Climate change, including global warming contribution or emissionsmanagement;- Ozone depleting substances.IG23. Entities in industries that have a significant environmental footprint may setobjectives and adopt strategies to specifically address key environmental risks,as illustrated in IG Examples 12 to 14. 268 For others, whilst the managementof environmental risks will impact the company’s reputation, monitoring ofperformance in this area will not be considered a KPI. However, as set out inparagraph 20 of the Reporting Standard, the directors shall support the informationprovided in the OFR with other evidence, for example consumption rates ofscarce resources (energy and/or water) if this significantly impacts the entity’sreputation, by providing the information required in paragraphs 43 and 44 ofthe Reporting Standard...Social and community mattersIG28. The management of an entity’s social and community matters can affect itsreputation and licence to operate in a similar way to the management of environmentalmatters. Social concerns with regard to product safety, e.g. geneticallymodified foods, product responsibility, underage drinking or smoking, andthe ethical management of the supply chain are all examples of issues that cansignificantly impact on the reputation of an entity. Furthermore, disregard forlocal community concerns can result in successful opposition to developmentapplications.IG29. As with the other areas noted under particular matters, the areas that will be ofconcern to a particular entity will vary depending on both the industry in whichit operates and the strategies it has adopted.IG30. Currently, there is no commonly held definition of social and community matters,nor is there a common understanding of the generic issues. It is also thecase that specific matters within the broad social and community category canchange as new issues arise. However, areas that directors might want to considerinclude:- Public health issues, such as obesity, perceived safety issues related to highuse of mobile phones, smoking;- Employee health and safety (can also be considered an area under employees,see IG26);- Social risks existing in the supply chain, for example the use of child labourand payments of ‘‘fair wages’’;- Diversity in either the employee (see IG26) or customer base;- Impact on the local community, for example noise, pollution, transportcongestion (these areas could also link to environmental matters);- Indigenous and human right issues relating to communities local to overseasoperations.IG31. Entities where reputation is a key concern might set objectives and adopt strategiesthat specifically address key social or community concerns, as illustrated inIG Examples 17 and 18. 269 Alternatively, the monitoring of social and communitymatters may not be considered a KPI, however, directors will still monitor theirperformance in these areas. In such situations, it would be appropriate for theOFR to include these as other performance indicators.”
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