Corporate social responsibility (“CSR”) may have its roots in voluntary efforts by businesses to address their broader impacts on society, but the trend towards CSR becoming mandatory advanced significantly this week under a deal that will soon require all large European companies to begin issuing annual social and environmental performance reports.
On February 26, the European Council and the European Commission reached an agreement that all but guarantees that the forthcoming European directive on corporate social responsibility will require all publicly traded companies with more than 500 employees to report their performance on a number of non-financial metrics every year.
Specifically, companies will be required to provide “relevant and useful information” concerning their human rights impacts, environmental performance, anti-corruption measures, and diversity programs in their annual reports. Such reports are to be based on recognized CSR frameworks such as the U.N. Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.
The new European Union reporting requirements may not go quite as far as some activists had been hoping, but they nevertheless mark the most significant effort to date to mandate non-financial reporting on companies across all sectors of the economy. Most prior efforts to mandate non-financial reporting have concerned either a particular form of economic activity (such as the Dodd-Frank conflict minerals rule in the United States) or have consisted of purely national efforts (such as Denmark’s 2008 Financial Statements Act).
It is not entirely clear yet whether the new reporting requirements will apply only to large companies listed on EU stock exchanges, or if they will apply to all publicly traded companies with more than 500 European employees. If the latter comes to pass, the new EU rules will require practically all large multinationals to begin issuing social and environmental performance reports on an annual basis.
Either way, the new EU rules are an important development for at least three related reasons:
- First, the reporting requirement will force companies that haven’t already done so to start paying close attention to the social and environmental impacts of their business — if only because they will soon have to quantify and disclose such impacts.
- Second, once companies are aware of their relatively poor performance, the new reporting rules provide a powerful incentive to improve such performance to avoid the negative publicity associated with publicly disclosing such facts.
- Third, the wealth of information provided by the new reports will allow socially responsible investors and activist groups to bring various forms of pressure to bear on companies whose reports show them to be laggards rather than leaders.