"Homogenised" new EU non-financial reporting requirements will create hefty burdens for mid-tier businesses, says expert

Out-Law News | 17 Apr 2014 | 12:00 pm | 2 min. read

New rules requiring EU companies with over 500 employees to report on measures including environmental impact, workforce diversity and anti-bribery and corruption controls will "widen the gulf" between large-scale multinational businesses and their mid-tier competitors, an expert has said.

Paris-based corporate law expert Frédéric Ichay of Pinsent Masons, the law firm behind Out-Law.com, said that it would be harder for smaller businesses hoping to bid for public contracts to meet the proposed new requirements. EU member states are expected to adopt the proposals shortly, following this week's approval by the European Parliament.

"It is a homogenising process which has potential to polarise the European business community," Ichay said. "Big businesses in developed economies will excel as they are generally used to sophisticated non-financial reporting and have the resources to absorb the costs, but for smaller and mid-sized businesses this creates an additional burden. They will be expected to meet minimum reporting requirements in order to win public contracts, and while a move towards greater transparency is to be welcomed, the concern will be that efforts among some member states to broaden the pool of businesses involved in bidding for those contracts will be undermined."

"Some are relieved that the proposed system is not more onerous but concerns remain about the time and resources required to comply. If you are a young business, or one which is historically domestically focused, but have international ambitions, there is an argument that this will make life harder for you," he said.

The new rules will only apply to companies with more than 500 employers, as the costs for requiring small and medium-sized enterprises (SMEs) to apply them would likely outweigh the benefits, according to the European Commission. However, approximately 6,000 large companies and groups across the EU are expected to be caught by the changes.

The changes are designed to enable EU businesses to contribute effectively to long-term economic growth and employment by increasing their transparency and performance on environmental and social issues. They require affected companies to disclose "relevant and material" information on environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors, as part of their annual management reports.

Companies will be given "significant flexibility to disclose relevant information in the way that they consider most useful, or in a separate report", according to the European Commission. They may use international, European or national guidelines according to their own circumstances, characteristics or business environment; and the European Commission is expected to develop guidance on this. Disclosures can also be provided at group level in order to comply with the rules, rather than by each individual affiliate within a group.

"There is confusion around what exactly is required," said Ichay. "The Commission has said it wants to take a 'non-prescriptive mindset', but that desire for flexibility also creates significant ambiguity."

"A period of transition will give member states and organisations time to adjust. This period will be instrumental in the success of the legislation. It will also be interesting to see which national agencies are tasked with enforcement and what shape those organisations take," he said.

The draft approved by the European Parliament also includes a clause requesting the Commission to report back by July 2018 on the possibility of introducing an obligation requiring large companies to produce a country-by-country report on tax matters on an annual basis. The envisaged report would include information on profits made, taxes paid on profits and public subsidies received by companies, listed by each country in which they operate.