New EU human rights reporting requirements for companies: One step beyond the current UK rules

Anil Yilmaz (Lecturer in Law, University of Brighton) and Rachel Chambers (PhD candidate, University of Essex)  

Background

Among the core objectives of the EU set out in Article 3(3) of the Treaty on the European Union is the creation of an internal market and sustainable development of Europe “based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.” The Single Market Act 2011 fleshed out the features of a “highly competitive social market economy” and provided that it called for new business models where environmental and social concerns “take precedence over the exclusive objective of financial profit.” In this respect, the Act outlined the allocation of tasks for achieving this goal between itself and the industry. While the European asset management industry was asked to use their leverage to promote socially and environmentally responsible businesses, the EU would take action, inter alia, to ensure a level playing field by introducing new rules on environmental and social reporting. Stemming from the Act was also the adoption of the Commission’s 2011-2014 Corporate Social Responsibility Strategy, which reaffirmed the objective of establishing EU rules on social and environmental reporting.  Although CSR has been on the EU agenda for a decade, the 2011-2014 Strategy put forward a more rigorous definition of CSR and demanded better alignment with global approaches to CSR, including implementation of the UN Guiding Principles (UNGPs).  Within the Strategy, the Commission announced its intention to build on the existing reporting requirements for companies.

Prior to the adoption of the recent amendments to Directive 2013/34/EU on company reporting, EU law made the following requirement on companies, not necessarily including small and medium‐sized enterprises (SMEs): “To the extent necessary for an understanding of the company’s development, performance or position, the analysis [in the annual review] shall include both financial and, where appropriate, nonfinancial key performance indicators relevant to the particular business, including information relating to environmental and employee matters.” In November 2010, the European Commission had launched an online public consultation to gather views on the disclosure of non-financial information by enterprises. The consultation had sought both to expand the subjects of such disclosure and to make the requirements more effective.

In January 2013, following the adoption of the 2011-2014 CSR Strategy, the European Parliament adopted two resolutions reiterating the importance of company transparency on environmental and social matters and calling for specific measures to combat misleading and false information regarding commitments to CSR and relating to the environmental and social impact of products and services.   The resolutions expressly acknowledged the role of the UNGPs in improving standards of corporate practice. The European Commission went one step further in its proposal of 16 April 2013, by suggesting an amendment to existing accounting legislation to improve the transparency of certain large companies on social and environmental issues, in particular with regard to human rights impacts.  The European Parliament and the Council reached an agreement on 26 February 2014; the European Parliament adopted the amendments to Annual Financial Statements Directive 2013/34/EU on 15 April 2014; this was adopted by the Council of the European Union on 29 September 2014.

The Reforms

The amendments introduce compulsory reporting of non-financial information by certain large undertakings. Under the new Article 19a certain large undertakings governed by the law of a member state are required to include a non-financial statement in their annual management report, ‘to the extent necessary for an understanding of the undertaking’s development, performance and position and of the impact of its activity.’ Recital 14 determines the personal scope of the reporting requirement based on the number of employees, balance-sheet total and the net turnover. ‘Certain large undertakings’ within the meaning of Article 19a are public-interest entities which have 500+ employees (in the case of a group of companies with the parent governed by a member state law, number of employees will be calculated on a consolidated basis). Public interest entities are defined in Article 2(1) of the Directive as including listed companies, credit institutions, insurance companies and any other entity designated by member states as a public interest entity due to the nature or size of their business.  The press release announcing the adoption of the Directive by the Council says that some 6,000 public interest entities in the EU will fall under its scope.

 Non-financial information encompasses “as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”.  The statement will contain a brief description of the company’s business model, a description of the company policy in those areas and its outcome, main risks faced by the company, including those arising from its business relationships, and how these are managed and the due diligence processes it employs to identify, prevent and mitigate adverse impact. Companies can avoid reporting on one or more of these issues if they do not pursue policies on those issues and provide a ‘clear and reasoned’ explanation of this choice. There is an additional exemption from reporting in exceptional cases where disclosure of such information would seriously harm the commercial position of the company and non-disclosure does not prevent a fair assessment of company’s impact and risk.

Recitals provide some examples of what should be included in the report for each item and refer to a selection of national and international frameworks for further guidance that companies can rely on. In the meantime, the Commission will prepare general and sectoral non-binding guidelines for non-financial reporting.  Member states will have two years to incorporate the new provisions into domestic law, which will be applicable in 2017.  In terms of enforcement of these obligations, Recital 10 requires member states to establish effective national procedures to ensure compliance with non-financial reporting requirements. Finally, it is up to the member state implementing the directive to require independent verification of the non-financial information contained in the report.

Analysis

The adoption of this Directive was hard fought for, and can be seen as a major achievement –both in terms of the content of the reforms but also the symbolic step which their adoption represents.   These are a broad set of reporting requirements, wider than comparable UK law as they include anti-bribery and corruption as well as environmental, social and employee matters and human rights.  By requiring reporting “of the impact of [a company’s] activities” and of the “principal risks related to those matters linked to the undertaking's operations” these provisions focus effort on what is important – reporting the actual human rights risks/impacts to/on society of a company’s operations and prioritising the most severe risks.  This compares favourably to UK non-financial reporting which, as explained below, is focused essentially on providing information to shareholders on which they can assess the financial performance of the company.  The requirement for group reporting of these issues in consolidated statements will allow stakeholders to be informed about the impacts of subsidiaries as well as their parent companies. Business partners are also covered but reporting on risks from supply chains and business relationships is only required “if relevant and proportionate”. The inclusion of risk management processes such as due diligence is useful when trying to understand how companies are tackling the issues which they face in this realm.

However, there are a number of shortcomings in the new Directive.  It does not cover many companies: the original Commission proposal was for it to apply to around 18,000 companies – listed and non-listed – that were of a certain financial size and had 500 employees or more.  As stated above, the adopted proposal only covers around 6,000 “public interest” companies.  The failure to include listed SMEs (although member states can choose to include them) is particularly difficult to understand given that these companies already have to file annual reports, and that despite their size, these companies can have significant human rights impacts.  The methods for enforcement of the obligations and independent verification of the reports are left to member state discretion, which can create inconsistencies in the application of these rules, and ultimately a lack of “teeth” if companies fail to comply.

Does it improve existing UK requirements?

 

The new UK requirement to compile a strategic report which must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include, amongst other requirements, information about social, community and human rights issues came into force in October 2013.  The inclusion of a test of materiality in the statutory guidance on the new statutory regime was controversial.  Under the heading of “Materiality” the guidance recommends that companies include human rights-related information “if its omission from or misrepresentation in the strategic report might reasonably be expected to influence the economic decisions shareholders make on the basis of the annual report as a whole” – as noted above the new European requirement takes a different, and from a human rights protection point of view better, stance by looking at impact on society.

Enforcement of the UK law is weak, a situation which will not be changed by the new EU law. In the UK, the Conduct Committee of the Financial Reporting Council is responsible for monitoring the compliance of the strategic report with the Strategic Report Regulations. It may investigate cases where it appears that required information has not been provided, and has the power to apply to the court for a declaration that a strategic report does not comply with the requirements and for an order requiring the directors to prepare a revised strategic report.  The equivalent powers under the previous statutory regime were seldom used.  Since compliance with the new EU non-financial reporting requirements will be overseen by member state regulators, it is crucial that they have qualified staff with the appropriate human rights expertise to draw on when assessing whether the information required has been provided.

 

 

Barnard & Peers: chapter 9, chapter 14

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Assessing the new EU Council Guidelines on Freedom of Expression - online and offline

Professor Lorna Woods, University of Essex; co-author, Steiner and Woods, EU Law 

Yesterday the Council of the European Union adopted guidelines on freedom of expression.  As these guidelines were adopted by the Foreign Affairs Council, it is not surprising that they are aimed at implementation within the Union’s Common Foreign and Security Policy, like the ten previous guidelines on issues such as torture, the death penalty and human rights defenders.  So, while the guidelines are ‘guided’ by the EU Charter, as well as any relevant EU treaty provisions, the principal sources referred to are the provisions in the United Nations’ International Covenant on Civil and Political Rights (ICCPR) as well as the UN Human Rights Committee’s General Comment 34 on Freedom of Expression.  The list of sources contained in the Annex is far wider, however. It is also worthwhile noting that there is some discrepancy between what the EU asks of others – especially would be Member States via the Copenhagen criteria applied to planned accession candidates – and the recent practice of its own Member States (whether that be Hungary or the United Kingdom).

The Guidelines follow what might be termed a standard human rights approach to freedom of expression: that is, that freedom of expression should be interpreted broadly and exceptions narrowly (referring to the list of possible exceptions set out in Article 19(3) ICCPR as well as Article 20(2) ICCPR, on hate speech) and subject to the tests of legality, necessity and proportionality.  In explaining the significance of freedom of speech, the Guidelines refer to the significance of that freedom (especially that of the media) in democracy, but they also refer to the human element: that speech is important for self-fulfilment and autonomy, including the development of one’s identity in society, and not just instrumentally in the search for ‘truth’ or the ‘right’ political answer – important though that may be. Having said that, much of the specific points relate to the role of journalism and the media, with the underpinning assumptions about the role of the media as watchdog of those in power. 

The guidelines also note the horizontal nature of freedom of expression – especially relevant in the context of the Internet and social media, when expression is not just about public institutions and the media speaking to a passive audience (which was the model for much of the previous case law) but also the right of individuals to speak to one another and to receive each others’ views. This point has been given a higher profile in the approach of the Inter-American Court of Human Rights than traditionally has been the case in relation to Article 10 ECHR and Article 19 ICCPR. Despite this emphasis, there is recognition of the both the relationship between privacy and freedom of expression and the tension between them. Interestingly, in this document the former aspect – through consideration of the impact of surveillance on speech - may have a higher profile than the latter.

The guidelines identify some areas of priority action, and in some respects these areas of action are no surprise, starting with the need to end the impunity of those who take action against individuals for exercising their right of freedom of expression – notably journalists and media workers. In addition to condemning such actions, the EU will apparently call on the relevant state actors to take action against such threats of violence as well as violence itself.  If the EU does take action, it may provide incentives for some governments to take note of the UN General Assembly resolution on the subject, as well as the Action Plan to end impunity. In the tools section, the guidelines provide:

Abusive restrictions on freedom of expression and violence against journalists and other media actors should be taken into account by the EU when deciding on possible suspension of cooperation, notably as regards financial assistance.

This is a proposal that some involved in the campaign against impunity have been suggesting for some time.  How it works in practice remains to be seen.

The Guidelines identify the need to ensure that laws are not used to suppress freedom of expression, and that media regulation is appropriate to ensuring freedom of expression. Note that some of the points in this section go further than the regulatory position required of the Member States of the EU, specifically as regard the independence of regulatory bodies. While the EU’s communications package and the data protection regime expect that there be independent regulatory bodies, there is no such provision in the Audiovisual Media Services Directive, and there is little transparency of media ownership – both to be encouraged according to these guidelines.

The Guidelines also note the importance of freedom of expression in cyberspace, and in particular focus on the need to ensure non –discriminatory access to the Internet – though there is less detail on what this actually means beyond support for the multistakeholder model of Internet Governance – as set out by EU strategies, rather than those identified in the Internet Governance Forum or Netmundial, although engagement with these is envisaged in the tools for action. The Guidelines do note the role of private companies, and set out best practice guidelines reflecting back the UN Guiding Principles on Business and Human Rights, as understood through the EU guidance note for ICT companies on business and human rights.

The first action point, however, is ‘action at the international level to develop best practices and respect for human rights with regard to the export of technologies that could be used for surveillance or censorship by authoritarian regimes’.  The position as regards the United States is not addressed. The significance of the need to protect against excessive surveillance is, however, repeated and its adverse effect of freedom of expression noted.  Thus the guidelines specify that EU action will include the promotion of ‘the exchange of good practices to ensure that the legislation and procedures of States regarding the surveillance of communications and the interception and collection of personal data are based on the rule of law, subject to independent, effective and domestic oversight mechanisms and uphold obligations under international human rights law, including the principles of proportionality and necessity’, something which some Member States may need to think about.  The call to comply with Council Common Position 2008/944/CFSP on exports of specified military technology does not add much, but the statement that ‘the EU will ensure a structured and consistent approach to export controls of certain sensitive information and ICT items’ is potentially far reaching, though what is envisaged by this statement is unclear. Is there a concern about mobile technology that has had back doors engineered into it (at the request of certain Western governments) for example? The next sentence refers however to specific surveillance/censorship technology, suggesting a far narrower field of concern.

Finally, the Guidelines contain plans for evaluation, specifically envisaging a report in three years’ time. While some aspects may show signs of fitting in with global concerns – such as the concerns about the violence against journalists now high on the UN’s agenda or the global revulsion at mass surveillance, it remains hard for the EU successfully to preach certain behaviours when its own Member States have at best a patchy record in these areas.


Barnard & Peers: chapter 9, chapter 24

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