13 September 2013

Responses to Commission's proposal on disclosure of non-financial and diversity information: EuropeanIssuers, Insurance Europe

Responses to the EC's proposal to amend the Fourth and Seventh Accounting Directives regarding disclosures of non-financial and diversity information by certain large companies and groups.

EuropeanIssuers

EuropeanIssuers stress the importance of ensuring a level playing field for European companies in the international markets. EuropeanIssuers fear that some aspects of the proposal on non-financial and diversity reporting would not contribute to the overall objective of growth, but create an additional unnecessary burden for companies, especially smaller ones, and put them at a competitive disadvantage in comparison with companies incorporated outside the EU.

At the same time EuropeanIssuers would like to welcome that the Commission proposal does not promote in legislation any national, EU based or international frameworks but rather suggests that companies may rely on them.

EuropeanIssuers’ key concerns are:

Disclosure of Information Relating to Environmental, Social and Employee Matters, Respect for Human Rights, Anti-Corruption and Bribery Matters: EuropeanIssuers suggest companies should be allowed to publish the information required by Article 46 par.1 b) in a separate report published either together with the annual report or by means of a reference in the annual report stating when and where such document will be publicly available on the company’s website, consistent with article 5(1) of the Shareholder Rights Directive (2007/36/EC);

Disclosure of the Company's Diversity Policy: While believing that a good mix in board composition could contribute to the effectiveness of the board and agreeing with the general premise of transparency on the application of the diversity policy, EuropeanIssuers suggest:

• deleting article 46a (g) and insert its content in an EU recommendation;
• the information on diversity should solely concern: (i) the adoption of a policy on diversity; (ii) how it has been implemented and (iii) the result of this policy. No explanation should be required to be published in case of non-adoption of a policy.

Country by Country Reporting: While EuropeanIssuers favour transparency towards the public authorities and introduction of measures to combat corruption and tax evasion at international level, EuropeanIssuers are opposed to the public disclose of detailed sensitive information, which could clearly place companies at a competitive disadvantage to third-country companies. EuropeanIssuers therefore believe that tax issues should continue to be dealt within the framework of the EU, the OECD or other international organisations;

Transition Periods: EuropeanIssuers believe that small and mid-cap companies will need longer transition periods, bearing in mind that the whole subject of non-financial reporting is still being adjusted to the needs of companies and investors. Such companies typically have only slim financial reporting units and so will need time to adjust to any regulatory changes, in order to build up reporting lines, train personnel and recruit additional staff if necessary;

Integrated Reporting: While transparency and comparability of information provided to investors and other stakeholders is very important, in the current situation, increased integration of financial and non-financial information should be avoided in EU legislation. Such integration should be left to best practice to avoid confusion. 

Press release

Position paper

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Insurance Europe

Insurance Europe is concerned that an addition to the existing requirements for the management report could significantly increase its size and complexity and therefore risks jeopardising its main aim. Insurance Europe strongly believes that the annual report is not the appropriate location for all non-financial disclosures; instead extra disclosures should be provided in a voluntary separate report, and they should not be subject to audit.

Non-financial information is not in line with the primary objective of financial reporting: The management report should not be changed by adding ‘non-financial statements’ about risks that do not relate to the company’s financial position and performance (Article 46 paragraph 1 (b) (iii)). Insurance Europe believes the information in the management report should remain focused on its purpose and Insurance Europe therefore considers that any extra non-financial information should be provided in a voluntary separate report. In addition, Insurance Europe believes this type of information should not be mandatorily subject to audit.

Although Insurance Europe understands the objective of the Commission’s proposal, it does consider that the disclosures of non-financial and diversity information are, in general, not compatible with the primary objective of financial reporting, which is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Adding further non-financial and diversity information requirements to the annual report might lead to information overload and therefore decrease the effectiveness of the financial reporting.

Additional disclosure requirements should provide clear benefits for users: Insurance Europe considers that disclosures should be based on a positive cost-benefit assessment. Information overload and unnecessary disclosures that are operationally challenging to provide should be avoided.

Proportionality is needed: The aim of the proposal is to amend the Fourth and Seventh Accounting Directives, which are based on a principle of proportionality. Insurance Europe believes that this is the right approach, and that a proportionality principle should be applied to any amendments to the Directives. Hence, Insurance Europe is in favour of reducing the scope of the proposed disclosure requirements so that they apply to large capital-market oriented entities only. The administrative burden and cost involved in extending the reporting requirement to all companies would be disproportionate to the benefit for small and medium-sized firms.

Proportionality should also be applied in relation to the sector of the entity. As mentioned above, the objective of the additional disclosures should be to provide relevant and meaningful information to the stakeholders of an entity whose interests depend on the business of that entity.

Position Paper

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EC’s proposal (16 April 2013 COM (2013) 207 final)