Environmental and social transparency under the ... - ClientEarth

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98 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 99A.2.3The removal of the OFR requirementHowever, just over half a year after the OFR Regulations’ enactment, theChancellor of the Exchequer announced in his Pre-Budget Report 2005 270that the statutory obligation on quoted companies to publish OFRs was tobe abolished. Regulations to repeal the OFR requirement 271 were laid inDecember 2005 and came into force on 12 January 2006. With its removal,the ASB’s Reporting Standard 1 also lost its legal force. 272The unfortunate decision to remove the OFR requirement was framed intwo strongly related ways in the Treasury press release: regulatory reformso as to ‘regulate only where necessary’, ‘reducing the burden on businessby £33 million’ while ‘maintaining enhanced reporting standards’; 273 and‘meeting the productivity challenge’ by ‘taking measures to reduce costson business by removing unnecessary regulatory burdens’. This decision,it was also argued, was consistent with the government’s general policynot to ‘gold-plate’ regulation; not to impose regulatory requirementson UK businesses over and above the relevant EU Directive minimumrequirements. 274There was also opposition to the mandatory OFR from some membersof the business community, which was expressed during the consultationperiods. 275 In a 2005 poll, 48% of ‘business leaders’ polled opposedthe OFR requirements. 276 However, it is important to note that much ofthis opposition from business focused on the timing of the requirement’sintroduction, in the context of broader changes to corporate governanceand reporting regulation, 277 and indeed that many in the business communityexpressed considerable disappointment and frustration at theremoval of the OFR requirements. 278A.2.4A.2.4.1The removal of the OFR requirement as relating toClientEarth’s proposalsSubstantive requirements for reporting on environmentaland social issuesSince the removal of the OFR, the Companies Act 2006 has entered intostatute, and section 417 Companies Act 2006 now provides the explicitlegal standard for company reporting on environmental and social issues.As already mentioned, section 417 Companies Act 2006 brought into lawthe great majority of the specific content requirements for these issues thathad been lost with the removal of the OFR. 279Regardless of this fact, it is important to stress that ClientEarth’s proposedRegulations to supplement section 417(5) Companies Act 2006 would notimpose any further requirements on companies than already exist. Theproposed Regulations would simply give a detailed framework for theproper interpretation of existing and currently applicable legal provisions.Therefore the substantive differences between the OFR and the CompaniesAct 2006 are for the most part irrelevant to ClientEarth’s proposal.A.2.4.2 Scrutiny requirements for environmental and socialreportingThe main difference between the requirements of OFR and the CompaniesAct 2006 in relation to reporting on environmental and social issues is thescope of the audit that is required for such information.THE COMPANIES ACT 1985 (OPERATING AND FINANCIAL REVIEW ANDDIRECTORS’ REPORT ETC.) REGULATIONS 2005Auditors’ 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) 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; and(b) whether 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.COMPANIES ACT 2006s496 Auditor’s report on directors’ reportThe auditor must state in his report on the company’s annual accounts whetherin his opinion the information given in the directors’ report for the financial yearfor which the accounts are prepared is consistent with those accounts.Under the OFR, the auditor was required to carry out an audit of nonfinancialreporting that had regard to the consistency of non-financialinformation with (a) the annual accounts, and (b) any other matters thathad come to the auditor’s attention in the performance of the audit. Under
100 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 101the Companies Act 2006, the auditor need only have regard to the annualaccounts.The cost to business of implementing the higher mandatory audit standardof the OFR was the basis on which the OFR’s removal was recommended, 280and was the UK government’s primary public justification for the OFR’sremoval.The current audit requirement of the Companies Act 2006 cannot providean adequate standard of scrutiny in relation to reporting on environmentalor social issues, which are not usually verifiable in relation solely tobackward-looking financial information (see Chapter 1.2.1 for furtherdiscussion). However, in light of the UK government’s concerns relatingto the cost and regulatory burden for business, along with the broadunsuitability of the current audit profession in providing effective scrutinyto the reporting of environmental and social issues, ClientEarth considersthat the most efficient and effective scrutiny for this type of reporting canbe provided through an increased role for the FRRP, and the improvementof the role of AGMs in the reporting process, as proposed by ClientEarth.These processes, as reformed in the ways proposed, can provide moreeffective scrutiny than a mandatory audit, while operating at a much lowercost to business and imposing a much lower regulatory burden, only interferingwith companies which are not reporting accurately or adequately.Annex 3:EU law on company accounting and reportingon environmental and social impactsA.3.1 Fourth Council Directive: on the annual accounts of certain 102types of companies (Directive 78/660/EEC)A.3.2 The Accounts Modernisation Directive (Directive 2003/51/EC) 103A.3.3 Commission Recommendation on the recognition, 103measurement and disclosure of environmental issues in theannual accounts and annual reports of companies(Recommendation 2001/453/EC)A.3.4 The Transparency Directive (Directive 2004/109/EC) 106Many legal reporting requirements at UK domestic level are derived fromEU legal requirements. These provide common minimum standards acrossthe EU. While the EU Directives do not apply directly to companies, 281they impose obligations on the Member States to implement their requirements.In this way, EU requirements underpin UK law.EU law sets in place explicit requirements for reporting on environmentalmatters, but explicit requirements to report on social matters are as yetundeveloped.The Fourth Council Directive on the annual accounts of certain types ofcompanies, 282 as amended by the Accounts Modernisation Directive, 283provides the explicit EU law relating to environmental accounting andreporting. The Transparency Directive, 284 which covers stock exchangesin the EU, also incorporates these requirements along with a number ofother disclosure obligations.The Accounts Modernisation Directive was the legislation that broughtenvironmental reporting into EU law. The introduction of environmentalreporting requirements at EU level was driven by a CommissionRecommendation of 2001, 285 which set out in detail how companies needto incorporate environmental matters into accounting practices, andrecommended that Member States take appropriate measures to promotesuch incorporation. The Recommendation demonstrates how companies
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ClientEarthBen Bundock | Tim Malloc
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