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Document 52013SC0128
COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups
COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups
COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups
/* SWD/2013/0128 final */
COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups /* SWD/2013/0128 final */
COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the
European Parliament and of the Council amending Council Directives 78/660/EEC
and 83/349/EEC as regards disclosure of non-financial and diversity information
by certain large companies and groups 1. Introduction Non-financial information is generally
considered as environmental, social and governance (ESG) information. This
includes information concerning diversity, as a board's composition is an
integral element in the corporate governance of a company. Such information can
be disclosed in the form of a statement in the annual reports, a separate
corporate governance statement, a separate report, a website, etc. The formal disclosure of ESG information is
currently addressed in EU legislation by the Accounting Directives[1] (hereinafter AD). However, the
need to improve transparency in this field has been highlighted in the Single
Market Act[2],
and recently reiterated by the CSR Communication[3].
This Impact Assessment considers the case for improving the disclosure of
non-financial information by EU companies as part of a broader set of
initiatives on corporate governance and CSR aimed at creating a highly competitive
social market economy. 2. Problem
definition The Commission services have identified two
main issues concerning (1) the inadequate transparency of non-financial
information and (2) the lack of diversity in the boards. 2.1. Inadequate Transparency of
Non-Financial Information Although a positive
trend can be observed, the majority of large EU companies fail to adequately
meet growing demand from stakeholders (including investors, shareholders,
employees and civil society organisations) for non-financial transparency. Specific
issues have been highlighted with regard to both quantity and quality of
information available. –
Quantity: it is
estimated that only ~ 2500 out of the total ~ 42000 EU large companies formally
disclose non-financial information on a yearly basis –
Quality: the
information disclosed is often lacking in materiality, or not sufficiently
balanced, accurate and timely. Specific information gaps are found with regard
to material aspects concerning policies and risk-management, as well as on
specific topical areas (human rights, corruption). The main drivers of this problem are
identified in both a market and a regulatory failure: Market failure: Market incentives appear insufficient or uneven. Although
companies are increasingly under pressure to become more transparent, the benefits
related to non-financial disclosure are often perceived as long-term and uncertain,
while short-term costs are relatively high and easily measurable. As a
consequence, externalities of potential relevance remain external to
businesses’ reporting Regulatory failure: The majority of stakeholders consulted considered
that the obligation set by the AD lacks of clarity, with prejudice for legal
certainty. Some Member States' legislation already go beyond such obligation[4], however, national requirements
appear significantly diverse, leading to difficulties to benchmark companies
across the Internal Market. 2.2. Problem 2: Insufficient
board diversity Boards with members that have a similar
educational and professional background, nationality, age or gender may be
dominated by a narrow 'group-think'. Lack of diverse views, values and
competences may lead to less debate, ideas and challenge in the boardroom. This
may have a negative impact on the challenge and oversight of the management
decisions by the board. Although the fragmentation of data makes it difficult
to precisely assess the scale of the problem, it appears that the diversity of
European company boards is rather limited. Market Failure: Inadequate levels of board diversity are linked above all with insufficient
market incentives for companies to change the situation. In this respect, inadequate
recruitment practices for board members contribute to perpetuating the
selection of members with similar profiles. Inadequate level of transparency
on board diversity reinforces the problem. Information provided by
companies does not reveal the board's approach on diversity in the selection
process, the objectives envisaged or how they have been reached. Regulatory Failure: The market failures have not been sufficiently corrected by
appropriate regulation. At the EU level there are no rules regarding
specifically board diversity and although some Member States have adopted
certain provisions (i.e. to increase gender diversity), there are considerable
differences between their approaches. Such problems pose further prejudice to
specific stakeholders groups (ie companies, investors, NGOs, public
authorities). They have a negative impact on performance (companies'
non-financial risks and externalities are not adequately taken into account);
on accountability (as companies cannot be held fully accountable for
their impact on society; efficiency of financial markets (as investors
fail to build relevant information into their decision-making processes). 2.3. How will the problems
evolve without action? At the global
level, several initiatives provide non-binding guidance for companies[5]. However, in contrast with financial information, currently there is no
generally accepted standard-setter for non-financial information. Initiatives
on diversity are also fragmented and improvements over time have been limited. Action
is needed as none of the existing initiatives is expected to yield in the short
term significant solutions to the problems identified. 2.4. Subsidiarity Non-financial information is already partly
regulated at EU level. However, the diverging approaches taken by Member States
could determine even greater differences within the Internal Market, and sustainability-related
information appears, by its own nature, as a cross-national matter. As regards
diversity, current initiatives are much fragmented. In the absence of an action
at EU level, in many Member States there will be no or very slow progress in
the coming years. Coordinated action at the EU level is therefore necessary. The
Treaty of the Functioning of the European Union allows action to be taken to
address the identified problems[6].
3. Objectives The overall policy objective of the
proposal is to contribute to the Single Market's potential to create
sustainable growth and employment. More transparency is considered key for
companies to deliver better results and is expected to enhance the trust
citizens have in business and in markets and enable a more efficient allocation
of capital. In operational terms, the objectives of the proposal would be to (1)
increase the quantity of information (i.e.
number of companies reporting) (2)
increase the quality of the information
disclosed, and (3)
enhance diversity in the boardroom. 4. Policy Options 4.1. Transparency of
Non-Financial Information In order to meet the objectives set out
above the Commission Services have considered a number of policy options, based
in particular on the form, content and reference of the disclosure and on the
nature of the requirement, including: (0)
No policy change (1)
Require a non-financial statement in the Annual
Report: this option would strengthen the existing provision by introducing
minimum requirements on the content[7]
of the disclosure. (2)
Detailed reporting: this option would require
companies to provide information in the form of a stand-alone report in
accordance with International Frameworks. Given the potential administrative
burden, different kind of requirements have been considered: (a)
mandatory (b)
report or explain (c)
voluntary. This option would exempt companies
choosing to provide a detailed report from other disclosure obligations,
provided that such report complies with specific conditions[8]. (3)
Set up a mandatory EU reporting standard. The table below provides an overview of the
analysis of the policy options Table 1 – Assessment of the Policy Options || Effectiveness || Efficiency (compliance cost) || Competitiveness || Coherence with EU legislation Quantity || Quality 0. No change || 0 || 0 || 0 || 0 || 0 1. Require a disclosure in the Annual Report || + || + || + || + || + 2.Detailed reporting || a) Mandatory || + || ++ || -- || +/? || + b) Report or Explain || +/? || + || - || +/? || + c) Voluntary || ? || + || + || + || + 3. Set up a mandatory EU standard || ++ || + || -- || ? || + Magnitude of impact as compared with the baseline scenario (baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable (Commission Services Analysis). 4.2. Enhancing boards diversity The Commission's services considered a
number of policy options, including: (0)
No policy change (1)
Require companies to disclose their board
diversity policy with regard to various aspects, including age, gender,
nationality and educational and professional background in the corporate
governance statement to be included in the annual report. (2)
Mandate companies to take into account diversity
as one of the criteria for the selection of a board candidate. (3)
Put on companies a binding obligation to
establish a policy concerning diversity for boards[9]. It should also be noted that the option of
introducing quotas has been discarded, as it is subject of a separate
Commission initiative. Table 4 – Assessment of the Policy Options || Effectiveness || Efficiency (Compliance Cost) || Competitiveness || Coherence with EU legislation || Estimated costs per company 0. No policy change || 0 || 0 || 0 || 0 || 0 1. Disclosure of internal policy on diversity in the annual report || + || + || + || ++ || €600/1000 2 Diversity must be one of the criteria of Board composition || +/? || -/? || +/? || +/? || ? possible costs linked to remuneration of HR specialists 3. Requirement to establish a policy with regard to diversity || + || - || - || -/? || ? linked to remuneration of HR specialists and possible increase of board members Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 4.3. Preferred Policy options As regards transparency of non-financial
information, having compared the broad policy options, the best alternative
appears as a combination of Options 1 and 2c. Companies would be required to
disclose material information in the form of a statement in their Annual Report.
Companies willing to prepare a detailed non-financial
report on a voluntary basis would be exempted from such obligation, provided that
the report meets specific conditions. Only large listed and non-listed companies
having more than 500 employees would be subject to new requirement. It is
estimated that this would cover ~18000 companies. Subsidiaries within a group would
be exempted to the extent that their relevant information is integrated in the
consolidated report of the parent company. Such policy is expected to determine
a satisfactory increase in transparency, while keeping the administrative
burden low. As regards diversity, Option 1 is
the preferred option. Companies would have to provide in their corporate
governance statement information on their diversity policy, including aspects
concerning age, gender, nationality and educational and professional
background. The statement would present the objectives of this policy, its
implementation and the results obtained. Companies not having a diversity
policy would only be obliged to explain why this is the case. By enhancing transparency,
this option would encourage companies to reflect more on the issue and take
better account of the need for greater diversity in their boards while offering
a great deal of flexibility. In order to maintain coherence with
existing requirements regarding the corporate governance statement, while
avoiding to put additional burden on SMEs, only large listed companies would
be required to provide information on board diversity policy. 5. Analysis
of main impacts of the preferred policy options 5.1. Increased transparency In general terms, the preferred options
would lead to an increase in the quantity of information available compared to
the baseline scenario. As regards non-financial disclosure, the reliance on
international frameworks, should determine a limited improvement in the quality
and comparability of the information disclosed. Should companies also decide to
voluntarily provide a non-financial report, the level of detail of information
disclosed would necessarily increase. As regards diversity, the provision would
make available, often for the first time, information about a comprehensive set
of diversity indicators. 5.2. Better companies'
performance Due to the nature of the proposal, benefits
are in most cases difficult to quantify. Nevertheless, enhancing transparency
at a limited cost, the proposal would have an overall positive impact on
companies' performance, as non-financial risks and opportunities would be
better measured and managed. Better non-financial performance is then related
with lower cost of capital; better resources (including human capital) management;
consumer loyalty and better management. Furthermore, transparency would foster more
diversity in the boardroom which is expected to lead to better oversight of the
management by the board and to overall better decision-making processes. 5.3. Increased accountability Material non-financial information would be
made publicly available on a regular basis and could be used by civil society
organisations and local communities to assess the impact and risks related to
the operations of a company. More transparent reporting practices could also act
as a catalyst for companies to increase and improve their CSR performance, or give
them incentives to set up CSR policies for the first time, thus positively
affecting the way companies are perceived by society. The
potential increase in consumers' trust may also have a
positive effect on the demand side. 5.4. Enhanced efficiency of
capital markets In the short term the proposed policy would
respond to growing market-driven demand for more comparable and accurate information,
allowing investors to develop more comprehensive valuation models. In the long
term, it could consequently drive investors to take better account of sustainability
considerations and overall performance. In relation to diversity, the proposed
policy would enable investors to take better-informed decisions as to the
governance practices of the company. 5.5. Increased
administrative burden The new disclosure requirement would be
more costly than the business as usual scenario. Additional costs may relate to
drafting, publication, specific staff training or data collection. The cost of the
proposed disclosure is estimated to be between €600 and €4300 per year per company,
thus generating a total cost between 10.5 and 75.25 million euros. Companies
choosing to provide a detailed report on a voluntary basis might have to
sustain higher costs but they would be exempted from the disclosure obligation[10]. The cost of disclosure of the diversity
policy is estimated to be between €600 and 1000, generating a total cost
between 3.6 and 6 million euros. As the preferred option would not apply to
listed SMEs, its impact should be limited. The proposed policy would not introduce new
verification requirements. The increase in audit costs due to the proposal is expected
to be a negligible. 5.6. Other impacts 5.6.1. Social Impacts The measure could encourage boards to take higher
account of social matters in their business strategies. Increased transparency
could also support better employment relations, and contribute to reducing
risks and costs associated with labour conflicts. More transparency on
diversity at the highest decision-making level of the company could promote more
diversity at all organisational levels. A more diverse board could better
reflect stakeholders' diversity. 5.6.2. Environmental Impacts The requirement to disclose material issues
related to environmental policies and risk-management aspects is likely to
trigger better resources' management and internal sustainability awareness. 5.6.3. Impact on Fundamental
Rights It is estimated that the preferred options
would have beneficial impact on fundamental rights as they would encourage EU
companies to review regularly their policies and internal procedures in various
aspects, due in particular to a larger public scrutiny. 5.6.4. Other Economic Impacts The measure will not have meaningful
budgetary consequences for public authorities, nor implications for the EU
budget. 5.6.5. Third countries and
international aspects The proposed
policy would put the EU in a leading position at global level. It would be
consistent with other third-countries initiatives, and potentially trigger
their further development. No significant effects on trade flows with third
countries were identified nor signalled. 6. Monitoring
and Evaluation The Commission
will monitor the implementation of the revised Directives in cooperation with
the Member States throughout the implementation period. In compliance with the
principle of subsidiarity, the relevant information should be gathered
primarily by Member States through relevant agencies or Securities Markets'
Regulators. The evaluation of effects of the preferred policy shall be carried
out to see to what extent the anticipated impacts materialise. [1] Directives 78/660 and 83/349 [2] "Twelve levers to boost growth and strengthen
confidence", COM(2011) 206 [3] "A renewed EU strategy 2011-14 for Corporate
Social Responsibility", COM(2011) 681 [4] Including the UK, Sweden, Spain, Denmark and France [5] Such as the UN Global Compact, the OECD Guidelines
for MNEs, the ILO Tri-partite declaration of Principles on MNEs, the ISO 26000,
the UN Guiding Principles on Business and Human Rights, the Global Reporting
Initiative [6] See Articles 8, 10 and 11 TFEU [7] Social, human rights and anti-corruption matters
would be added to current reference (environment and employees). Within
these areas, the disclosure would cover (i) policies, (ii) performance, and
(iii) risk-management, and should rely on existing international frameworks. Companies
that do not have a specific policy would be at least required to explain why
this is the case [8] (i) It covers required content (ii) makes reference
to international frameworks and (iii) is annexed to the Annual Report. [9] Companies would have to determine the content of this
policy, establish targets and assess their achievement. [10] Such cost is estimated in a range between €33000 and 604000,
mainly depending on the size and complexity of the company and its operations