Environmental and social transparency under the ... - ClientEarth

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102 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 103might incorporate environmental matters into accounting and reportingpractices.A.3.2The Accounts Modernisation Directive (Directive2003/51/EC)A.3.1Fourth Council Directive: on the annual accounts ofcertain types of companies (Directive 78/660/EEC) 286The Fourth Council Directive was an early step in the creation of commonstandards of company reporting across the European single market. Itsets out a range of requirements that limited liability companies have tofulfil in their annual accounting and reporting, and prescribes a range ofsubstantive elements that must be included. This directive remains thebasis of annual reporting legal standards at EU level.Article 46, as amended by the Accounts Modernisation Directive, is thebasis of environmental and social reporting requirements at EU level.DIRECTIVE 2003/51/EC OF THE EUROPEAN PARLIAMENT AND OF THECOUNCIL of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types ofcompanies, banks and other financial institutions and insurance undertakingsArticle 1Directive 78/660/EEC is hereby amended as follows:14. Article 46 shall be amended as follows:(a) paragraph 1 shall be replaced by the following:‘1. (a) The annual report shall include at least a fair review of the developmentand performance of the company’s business and of its position, togetherwith a description of the principal risks and uncertainties that it faces. Thereview shall be a balanced and comprehensive analysis of the developmentand performance of the company’s business and of its position, consistentwith the size and complexity of the business;(b)(b) To the extent necessary for an understanding of the company’s development,performance or position, the analysis shall include both financialand, where appropriate, non-financial key performance indicators relevantto the particular business, including information relating to environmentaland employee matters;(c) In providing its analysis, the annual report shall, where appropriate,include references to and additional explanations of amounts reported inthe annual accounts.’the following paragraph shall be added:‘4. Member States may choose to exempt companies covered by Article 27from the obligation in paragraph1(b) above in so far as it relates to nonfinancialinformation.’In 2003, the Fourth Council Directive was amended and updated bythe Accounts Modernisation Directive (see above for details of theprovisions).This is the legal standard that underlies UK legal standards, as expressedby the business review requirement of Companies Act 2006.It was with the Accounts Modernisation Directive that the need forreporting on environmental impacts was incorporated into the EU legalframework. This need was originally highlighted by the European Commission,as expressed in its Recommendation of 2001 on company reportingof environmental issues.A.3.3Commission Recommendation on the recognition,measurement and disclosure of environmentalissues in the annual accounts and annual reports ofcompanies (Recommendation 2001/453/EC)Commission recommendation 2001/453/EC, of 30 May 2001, set out inconsiderable detail what the European Commission considered to constituteappropriate company disclosure in relation to environmental issues.It examined the way that environmental information should be providedin annual business accounts and reports, not dealing with ‘special purposereporting’ (i.e. ‘public interest reporting’ – separate environmental or sustainabilityreports).As a Recommendation, it has no legal force. It merely ‘recommends’ thatthe Member States ‘take the appropriate measures to promote the applicationof this recommendation’, and ‘notify the Commission of the measurestaken’.However, as well as leading to the development of the Accounts ModernisationDirective and thus providing contextual insight as to what theAMD’s obligations might entail, its content is interesting as an example ofhow more detailed reporting standards might be formulated in relationto environmental reporting. It is also highly relevant in that it relates to
104 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 105environmental reporting as part of business reporting. The Recommendation’skey substance is outlined below.Key definitionsHaving delineated its scope, the Recommendation outlines a number ofkey definitions. It defines ‘environmental expenditure’, as including thecosts of steps taken by a company to prevent reduce or repair damage tothe environment resulting from company activities, including, amongstothers: the disposal and avoidance of waste; the protection of soil and ofsurface water and groundwater; the protection of clean air and climate;noise reduction; and the protection of biodiversity and landscape. Itexcludes costs whose primary purpose is to respond to other needs (thanto prevent, reduce or repair environmental damage), such as to increaseprofitability, health and safety at the workplace or production efficiency.It also excludes costs resulting from fines or penalties for noncompliancewith environmental regulation or compensation for past environmentalpollution, which it holds should be accounted separately.Recognition and measurementThe Recommendation then sets out a detailed set of guidelines for the waythat various issues should be recognised and measured in accounting andreporting: recognition of environmental liabilities (including contingentand offset); recognition of environmental expenditure (including guidanceon capitalisation and asset impairment); measurement of environmentalexpenditure (including guidance on site restoration / dismantling costs,and discounting of long-term liabilities).DisclosuresFinally, the Recommendation sets out the environmental issues thatshould be disclosed in various places in the reports:- Annual and consolidated accounts – Policies and programmes adoptedin respect of environmental protection; improvements in key areasof environmental protection; relationship of policies or measures toenvironmental legislation; (where appropriate for size of company)information on environmental performance on energy use, materialsuse, water use, emissions, waste disposals (recommending consistentand comparable quantitative eco-efficiency indicators); references toany separate company environmental report.- Balance sheet – Environmental liabilities.- Notes to annual and consolidated accounts – Valuation methodsapplied; extraordinary environmental expenditures charged to theprofit and loss account; contingent environmental liabilities; descriptionsof each environmental liability (nature, indication of the timingand terms of settlement, explanation of the damage and laws or regulationswhich require its remediation, and restoring or preventive stepsbeing taken / proposed); undiscounted liability and discount rate used;accounting policy regrading long-term restoration / decommissioning/ dismantling costs; amount of environmental expenditure charged toprofit and loss account; amount of environmental expenditure capitalised;costs incurred as result of fines and penalties for non-compliancewith environmental regulations and compensation paid to thirdparties; government incentives related to environmental protectionreceived or entitled to by the company.N.B.In the Recommendation recitals, 287 the Commission stated that:“(4) The lack of explicit rules has contributed to a situation where different stakeholders,including regulatory authorities, investors, financial analysts and the publicin general may consider the environmental information disclosed by companiesto be either inadequate or unreliable. Investors need to know how companiesdeal with environmental issues. Regulatory authorities have an interest in monitoringthe application of environmental regulations and the associated costs.Nonetheless, voluntary disclosure of environmental data in the annual accountsand annual reports of companies is still running at low levels, even though it isoften perceived that enterprises face increasing environmental costs for pollutionprevention and clean-up equipment and for waste clean-up and monitoringsystems, in particular those enterprises operating in sectors that have significantimpacts on the environment.(6) The costs of collecting and reporting environmental data and the sensitivenessor confidentiality that might be associated, in certain cases, with such informationare frequently regarded as deterrent factors for disclosure of environmentalinformation in the financial statements of companies. Nevertheless, these argumentsdo not eliminate the need to stimulate the provision of environmentalinformation. Users of financial statements need information about the impactof environmental risks and liabilities on the financial position of the company,
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ClientEarthBen Bundock | Tim Malloc
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