May 28, 2004
UK Prepares To Mandate Environmental and Social Reporting
by William Baue
Proposed guidelines for Operating and Financial Review reports require British company directors to
discuss the effects of social and environmental issues on business.
Mandatory corporate reporting on social and environmental issues is stalled in limbo in the US, but
it is proceeding forward in the UK. While the US Securities and Exchange (SEC) fails to enforce existing regulations, UK Secretary for Trade
and Industry Patricia Hewitt released a consultative draft of regulations for Operating and
Financial Review (OFR)
reports earlier this month. The document calls for mandatory reporting on environmental and social
issues beginning in fiscal year 2005 for all 1290 quoted companies in the UK, a requirement
supported by socially responsible investment (SRI) advocates.
exercise effective control only if they have clear and meaningful information about the main
drivers of a company's past and future performance," the document states. "The OFR is designed to
arm shareholders with that information."
"Through a narrative report, it will enable them
to make a proper assessment not only of past performance but also of the directors' view on the
company's future prospects and its approach to managing all those factors--environmental
performance, employee issues, relations with suppliers, customers and local communities--which are
crucial to the company's future success and reputation," the document continues.
proposed OFR guidelines stop short of requiring companies to act on social and environmental
issues, they do require directors to explain why they are not acting on them.
"Interestingly, the government is proposing that companies should be required to state formally
that they have considered specific issues, even if they conclude there is nothing significant
enough to report on--in other words, the directors would have to say 'We have considered
environmental issues and concluded that we do not need to report on them,'" said Rob Lake, head of
SRI engagement and corporate governance for Henderson Global Investors. Mr. Lake served on the OFR
working group, the independent committee that drafted the guidelines.
often effects action on the matter at hand, as the admission of inaction could prove awkward if not
The draft explicates its reasoning for mandating environmental and social
"A poor record on environmental or health and safety matters, for example, could
adversely affect a company's standing and business prospects," the document states. "For regulated
sectors, non-compliance could lead to the loss of license to operate, and in some cases,
imprisonment for directors."
Issues that must be addressed include risk management for
toxic substance use and impacts on biodiversity, and plans for mitigating climate risk and dealing
with natural resource scarcity by companies that depend on them. The proliferation of such
information encourages factoring it into investment decisions.
"The main benefit of the
OFR is that it is properly focused on one specific, relevant, audience--the financial community,"
said Mallen Baker, development director for London-based corporate social responsibility (CSR)
advocate Business in the Community (BITC). "Financial analysts are accustomed to taking
data provided by the company in the form of reports, comparing it to what they know of the company,
its leadership and industry sector, and then making a judgment."
"If the same judgment
can be brought to the process of non-financial reporting, it will make a huge difference," Mr.
Baker told SocialFunds.com.
OFR reports will not necessarily supplant existing
non-financial reporting mechanisms, but rather will complement them.
"There will still be
important audiences for separate sustainability or corporate responsibility reporting--including
socially responsible investors and many other stakeholder groups that will expect both more
detailed data on issues that are covered in the OFR, and information on other issues," Mr. Lake
At an average estimated cost of $51,000 (£29,000) per OFR
report, companies may balk at the expense.
"There are rising concerns within business
about the costs of compliance, and the OFR reports will need to show their value pretty quickly if
they are to survive," said Mr. Baker. "Companies that use the process of reporting as a discipline
that helps them to manage the business generally find it is well worth the investment."
"Companies that go through the motions just because the OFR tells them to will probably only
see cost," Mr. Baker added.
The OFR document invites public comments through August 6,