Two steps forward, one back on corporate reporting

Time will tell how much environmental content will find its way into the statutory operating and financial reviews (OFRs) that all quoted companies will soon be required to prepare (see pp 23-25 ). If accountancy bodies' worst fears come true, and the regime leaves directors with "ample opportunity" to decide not to report comprehensively, the whole process might end up creating just the kind of bureaucratic tick-box procedures that Ministers have been so keen to avoid.

As with the transition from environmental reporting to sustainability and CSR reporting, there are also serious risks that environmental matters might find themselves drowned out in a deep sea of non-financial issues. Many OFR auditors - likely to be drawn from the accountancy world - are unlikely to hold or have access to the kind of environmental expertise needed to test whether directors have undertaken "due and careful" enquiry on these matters. Accountancy firms will take some years to build up the necessary capacity.

In the short term, therefore, we can brace ourselves for some embarrassing examples of environmental tokenism lurking within glossy OFR pages. But if the Accountancy Standards Board drafts its guidance with care, the regime has potential to achieve a much-needed boost in corporate environmental disclosure over the next few years.

After all, some 1,300 companies will have to produce an OFR, a ten-fold increase on the number of FTSE companies that currently produce stand-alone environmental or sustainability reports. Some of these virgin reporters might be persuaded to go on to produce more comprehensive stand-alone environmental reports of their own - and, more importantly, set up environmental management programmes.

As the latest report from the Carbon Disclosure Project confirms (see pp 3-4 ), investment institutions are becoming increasingly outspoken in their efforts to secure information from large firms. The CDP is now backed by institutions representing assets of over $10 trillion.

But it would be a mistake to conclude that environmental disclosure is purely for the benefit of investors. Other important audiences are to be found - among customers, supply chains, NGOs, employees and the public. Indeed, such points were carefully articulated in 2001 in the DTI's company law review, and they appeared to have been accepted in the subsequent White Paper.

The DTI's draft Bill on company law - published in 2002 (ENDS Report 330, pp 40-41 ) - included clauses making it clear that directors must consider both the short- and long-term consequences of their actions, and take into account, where relevant, matters such as:

  • Their relationships with employees and customers.
  • The impact on the community and on the environment.
  • The need to maintain a reputation for high standards of business conduct.

    In this light, it is disappointing that Ministers have decided to back away from their plans to bring large private companies under the OFR regime, as well as quoted companies. The DTI's argument that "increased transparency is likely to be more helpful" to shareholders of public companies overlooks the point that companies also have responsibilities to their wider stakeholders. It sends the unfortunate signal that the environment only matters where directors believe shareholders' interests are at stake. Ironically, it is often failure to engage with wider stakeholders - and keep ahead of the debate - which can lead to some of the most serious risks to brand, reputation and prospects.

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