Corporate Social Responsibility Reporting in the European Union: Towards a More Univocal Framework

18 Colum. J. Eur. L. F. 38 (2011) Ruben Zandvliet[*]

I. Introduction The European policy agenda on corporate social responsibility (CSR) has been both broad and underdeveloped. But although the European Commission (the Commission) has thus far been reluctant to adopt legislation on the issue, it has recently signaled its intention to break with the idea that CSR is inherently voluntary. In December 2010 the University of Edinburgh published a study which identifies opportunities for improvement in various policy areas like trade and investment law, corporate law and private international law.[1] In October 2011, the Commission issued a Communication as the first step towards a renewed EU strategy on CSR.[2] This article explores one of the most feasible options for legal reform: enhanced reporting requirements on social, environmental and governance issues. Many European companies already publish CSR reports.[3] Yet more comprehensive legislation at the supranational level is needed (1) to catch up with progressive domestic laws adopted in several EU Member States, (2) to create more clarity on the legal requirements regarding scope and substance of these reports, and (3) to remove the discretion for the vast majority of companies most notably the non-branded ones to not publish CSR reports at all. II. The current legal framework European companies have no general legal obligation under EU law to adopt CSR policies or to report on them. However, the 2003 Accounts Modernization Directive, which amends the Fourth and Seventh Directives on Company Law and deals with a range of issues on corporate accounting and reporting, contains some language that hints to such an obligation.[4] It is provided that: To the extent necessary for an understanding of the companys development, performance or position, the analysis [in the annual report and the consolidated annual report, RZ] shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters.[5] Due to the requirement of necessity, companies seem to have near total discretion to decide whether, or to what extent, they will report.[6] There are, to my knowledge, no case-law in which the scope of this requirement was contested. Furthermore, it is unclear from the text what encompasses environmental and employee matters. With regard to the former, the Preamble of the Modernization Directive does refer to Commission

Recommendation 2001/453/EC that deals with environmental issues in the annual accounts and annual reports of corporations such as energy use, materials use, water use, emissions and waste disposals.[7] Secondly, it has been argued, primarily based upon CSR-resolutions by the European Parliament, that the term employee matters should be interpreted broadly and should cover a wide range of issues like health and safety, human rights, schooling and education.[8] But arguably it still is narrower than the reference to social aspects in the Preamble and it does not seem to warrant non-financial indicators on broader social issues like labor rights in a companys supply chain, or social concerns outside the own workforce. Lastly, Member States may, when implementing the Directive, waive the obligations on non-financial reporting for small and medium size enterprises (SMEs).[9] A bright spot, on the other hand, is that the fact that the Directive deals with consolidated annual reports, which means that companies will have to report on their worldwide operations.[10] But in sum the CSR-reporting requirements under the Modernization Directive are at best ambiguous, and at worst completely undemanding. It still strongly aligns with the traditional definitions of CSR that refer, either implicitly or explicitly, to the voluntary nature of CSR and thus by definition exclude regulatory interference.[11] Eur J Int Law (2004) 15 (3): 457-521. III. DIVERGING PRACTICE IN EU MEMBER STATES Most EU Member States have implemented the Directive including the provision on nonfinancial reporting,[12] yet several of them have adopted more detailed legislation. Pursuant to the article in the Dutch Civil Code implementing the Modernization Directives provision, the Netherlands Council for Annual Reporting (Raad voor de Jaarverslaggeving) has adopted an explanatory guideline on the application of the article. The guideline is reviewed regularly, and now includes inter alia recommendations on supply chain disclosure and due diligence.[13] Its application is furthermore extended to pension funds, while small and medium size enterprises are exempted. Listed companies in the Netherlands are subjected to a more boldly formulated provision in the Dutch corporate governance code (Code Tabaksblat), whereby the management board shall report in the annual report on corporate social responsibility issues but, again, only insofar on the particular issues that the company deems relevant.[14] Thirdly, Dutch companies that participate in trade missions or receive any other forms of government support are required to report specifically on the observance of relevant International Labor Organizations Conventions on child labor and forced labor within their own operations and at the first essential supplier.[15] Other EU Member States that have enacted legislation on CSR-transparency depart from the Directives ambiguous language and curtail the discretion of companies whether or not to report. In France, listed companies are required to report on social and environmental issues in their annual reports. This includes the environmental impact of foreign subsidiaries, the subsidiaries respect for core ILO Conventions and the way in which the normative requirements derived from these Conventions are passed on to arms-length suppliers in contractual relations.[16] Currently a bill is pending that will extent application to non-listed large companies.[17] In Denmark, large companies that have a CSR-policy in place have to report on the implementation and the results of this policy. When the company does not have a CRS-policy it has to state reasons. There are no requirements on form or substance,

but the Danish Government encourages companies to use the Global Reporting Initiative (GRI) format when reporting, and companies that have signed up to the UN Global Compact or the UN Principles for Responsible Investment are exempted. The GRI format is also adhered to in Sweden, where state-owned companies have to report on GRI indicators according to a comply or explain approach. Also Belgium[18] and Germany[19] have adopted broader definitions or more stringent laws on CSR-transparency. In sum, EU Member States have adopted a patchwork of obligations, which is neither intended nor desirable.[20] Although the French and Danish regulations are the more robust on paper, it is difficult to measure the effects in practice, let alone benchmark them. It is also important to note that the United States has recently adopted transparency requirements, adding its model to the list of idiosyncratic laws. The Dodd-Franck Act, the broad financial reform law, contains two provisions that require listed companies to perform due diligence and disclose information on the use of minerals from the Democratic Republic of Congo or an adjoining country, and when applicable to disclose payments made to foreign governments for the purpose of the commercial development of oil, natural gas, or minerals.[21] Dodd-Frank thus adds to the complex menu of CSR transparency requirements. Since many European companies trade securities in the United States, it is not inconceivable that some multinational enterprises have to comply with two or three different models of CSR-transparency. And on top of domestic obligations come requirements imposed by institutions like the European Investment Bank or the International Finance Corporation, all with their own models and templates. Iv. THE COMMISSIONS COMMUNICATION: CHOOSING DIRECTIONS The recent communication first posits a new and less voluntary definition of CSR, which opens the way for a more demanding directive.[22] With regard to disclosure requirements, the Commission announces that it will present a legislative proposal on the transparency of the social and environmental information provided by companies in all sectors.[23] It provides no further details on what should be disclosed to whom. However, with regard to the financial sector, [the] Commission intends [to consider] a requirement on all investment funds and financial institutions to inform all their clients (citizens, enterprises, public authorities etc.) about any ethical or responsible investment criteria they apply or any standards and codes to which they adhere.[24] A new European Directive on non-financial reporting can combine the most ambitious national CSR regulations to set a new European minimum standard. It should therefore contain at least five elements in order to resolve divergence problems and make a notable step forward. First, unnecessary ambiguities as to whether, when and what companies have to report on must be eliminated. Much of the current discretion is based upon the notion that non-financial reporting is relevant insofar the information is necessary to comprehend the financial situation of the company. In his recently published Guiding Principles, UN Special Representative on Business and Human Rights John Ruggie recommends that this issue needs clarification.[25] It would be best, however, to eliminate materiality requirements altogether, as the importance of corporate reporting on social and environmental issues lies beyond financial risks or value creation.[26] This aligns with the idea that CSR-reports are not only intended for shareholders, but aim to inform a

broader group of stakeholder. Secondly, a new European Directive would have to contain certain specific performance indicators that set a minimum standard, above which companies can report on self-selected indicators. Issues that are eligible to serve as minimum performance indicators relate to e.g. labor rights, climate change, corruption and corporate activities in conflict areas. Practice in France and the Netherlands indicates that it is possible to base performance criteria on international (human rights) conventions. The additional indicators, which a company is free to select, may be based on private initiatives like multi-stakeholder programs, ISO 26000, the UN Principles for Responsible Investment or the Global Reporting Initiative. The latter provides a template that is currently used by over 1800 companies worldwide. The EU could make an effort to increase the use of the GRI to standardize the way companies report, but this has to be balanced against potential overreliance on a private organization. Thirdly, the Danish three-prong test of disclosure of (1) policies, (2) implementation and (3) results should form the subject matter of CSR-reports. The reports should be verified by external auditors, similar to the requirements under Dodd-Frank. To strengthen the enforcement even further, it should be clarified that interested parties have a right to bring action when companies report false or misleading information, similar to financial reporting laws. Fourthly, it is important to determine the scope of application. In addition to the activities of foreign subsidiaries, companies should be required to report on supply chain due diligence. It makes sense that small and medium size enterprises were exempted in the old Directive because of the potential regulatory burden. But transparency templates like GRI have now adopted specific models for SMEs that address this problem. Other categories that warrant special consideration are state-owned enterprises, companies that receive any form of government support, financial institutions and pension funds.[27] V. Concluding remarks In the years ahead, countries, businesses and NGOs will have to work on concrete measures to implement the smart mix of policy initiatives as proposed by Special Representative Ruggie. Increased corporate transparency has a pivotal role in this policy mix. A more univocal European framework for CSR-reporting will meet consumer demand, strengthens the market for sustainable investment and confronts companies with (potential) social and environmental risks in their operations and supply chains. The fact that many large companies are already reporting on their CSR-policies will surely make the political task of clarifying and converging the relevant legal requirements less daunting for the European Commission. Endnotes: [*] Ph.D. Fellow and Lecturer at the Grotius Centre for International Legal Studies, Leiden University. The author obtained an LL.M. (cum laude) from Leiden University and an LL.M. (James Kent Scholar) from Columbia University. He previously worked as a policy officer for a Member of Parliament in the Netherlands on corporate social responsibility issues. The author is grateful to Professor Peter Rosenblum for his helpful comments. Remaining errors are, as always, the sole responsibility of the author.

[1] Daniel Augenstein, Study of the Legal Framework on Human Rights and the Environment Applicable to European Enterprises Operating Outside the European Union, University of Edinburg (2010), available at http://ec.europa.eu/enterprise/policies/sustainablebusiness/files/csr/documents/stakeholder_forum/plenary2010/101025_ec_study_final_report-exec_summary_en.pdf. [2] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee on the Regions, 25.10.2011, COM(2011) 681, available at http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010. [3] European Commission, supra note 2, 4.5. The depository website www.corporateregister.com estimates that 2,500 out of 42,000 large European Companies publish CSR or sustainability reports. [4] Parliament and Council Directive L 178/16, Amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings, 2003 O.J. (L 178) 16 (EC), available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:178:0016:0022:en:PDF. [5] Id. Article 1.14 of the Directive deals with the annual report and Article 2.10 with the consolidated annual report. The wording of both articles differs only marginally. [6] Although not directly analogous to the U.S. Securities and Exchange Commissions understanding of materiality, it seems that the Directive only requires companies to disclose non-financial information when this is material for an understanding of the companys overall financial position. [7] Commission Recommendation 453/2001, On the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies, 2001 O.J. (L 156) 33 (EC), available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2001:156:0033:0042:EN:PDF. [8] Tineke Lambooy & Nicole van Vliet, Transparency on corporate social responsibility in annual reports, 5 European Company Law 127, 128 (2008), available at http://www.kluwerlawonline.com/toc.php?area=Journals&mode=bypub&level=6&values =Journals~~European+Company+Law~Volume+5+(2008)~Issue+3. [9] Parliament and Council Directive, supra note 4 1.14(b)(4). [10] Lambooy & van Vliet, supra note 8, 2.3. [11] Until 2011, the Commission defined CSR as: A concept whereby companies integrate social and environmental concerns in their business operations and in their

interaction with their stakeholders on a voluntary basis. Commission of the European Communities, Green paper Promoting a European Framework for Corporate Social Responsibility (COM(2001) 366 final, 18.7.2001) 20, available at http://eurlex.europa.eu/LexUriServ/site/en/com/2001/com2001_0366en01.pdf [12] Lambooy & van Vliet, supra note 8, 3.2. [13] Raad voor de Jaarverslaggeving, Herziene Richtlijn 400 Jaarverslag en Handreiking voor Maatschappelijke verslaggeving (2009), available at http://www.rjnet.nl/readfile.aspx?ContentID=60375&ObjectID=606669&Type=1&File= 0000026826_RJ_Uiting_2009_8_Herziene_Richtlijn_400_Jaarverslag_en_Handreiking.p df. [14] Principle II.1.2. Dutch corporate governance code, available at http://commissiecorporategovernance.nl/page/downloads/DEC_2008_UK_Code_DEF__ uk_.pdf. [15] Department of State and Department of Economic Affairs, Mensenrechtenstrategie voor het buitenlands beleid nr. 37: uitvoering van de motie Voordewind (31 263 nr. 16) en de motie Ortega Martijn (31 700 nr. 38), 2009-2010, Tweede Kamer der Staten Generaal, at. 3-4, available at https://zoek.officielebekendmakingen.nl/dossier/31263/kst31263-37.html. [16] Augenstein, supra note 1, 204. The four core labour standards are (1) the freedom of association and the effective recognition of the right to collective bargaining, (2) the elimination of all forms of forced or compulsory labor, (3) the effective abolition of child labor, and (4) the elimination of discrimination in respect of employment and occupation. These rights are substantiated by eight, widely ratified, ILO Conventions. [17] U.N. Human Rights Council, Report of the Special Representative of the SecretaryGeneral on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, U.N. Doc. A/HRC/14/27 (9 April 2010), 37, available at http://198.170.85.29/Ruggie-report-2010.pdf. [18] European Coalition for Corporate Justice, Principles & Pathways: Legal opportunities to improve Europes corporate accountability framework (29 November 2010), at 12, available at http://www.corporatejustice.org/IMG/pdf/eccj_principles_pathways_webuseblack.pdf. [19] Augenstein, supra note 1, 204. [20] European Commission, supra note 2, 4.5: There is a possibility that different national requirements could create additional costs for enterprises operating in more than one Member State.

[21] Securities and Exchange Act of 1934, 15 U.S.C. 78m (2010), available at http://www.sec.gov/about/laws/sea34.pdf. [22] European Commission, supra note 2, 3.1. CSR is now understood as: The responsibility of enterprises for their impacts on society. [23] European Commission, supra note 2, 4.5. [24] European Commission, supra note 2, 4.4.3. [25] U.N. Human Rights Council, Report of the Special Representative of the SecretaryGeneral on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, U.N. Doc. A/HRC/17/31 (21 March 2011), at 9, available at http://www.business-humanrights.org/media/documents/ruggie/ruggie-guidingprinciples-21-mar-2011.pdf. [26] Id. [27] See also, Id. at 9-10.