Companies confused on their green (reporting) responsibilities

UK companies are thoroughly confused on the environmental responsibilities generally, and within that, their corporate reporting obligations.

Two news items this week have focussed on the ‘green’ element of an IRO’s task.

Firstly, the IOD has released a survey which highlighted uncertainty over the Government’s introduction of new environmental legislation in the UK in recent years. This has meant that some new rules have gone largely unacknowledged by the business community. Miles Templeman, Director General of the IoD, introducing the research conducted among medium and smaller companies, said:

“The Government have a tendency to leave it too late when advising business on what is required of new environmental rules coming from Brussels. Recent examples have included the twice-delayed Waste Electrical and Electronic Equipment Directive and the uncertainty about the Energy Performance of Buildings Directive.”

A further example is highlighted in the second news item this week, in the release of Defra’s Environmental Reporting Guidelines. These involve the publication in a company's Annual Report and/or self-standing reports of general environmental policy statements, usually including details of environmental performance such as greenhouse gas emissions, waste, water use and other relevant impacts giving quantified data and improvement targets.

The guidelines published by Defra will help companies measure, manage and report their environmental impacts. They outline how businesses can use Key Performance Indicators (KPIs) to manage and report their environmental performance. They also set out which environmental impacts (i.e. which KPIs) are most significant for which business sectors.

The challenge comes in where this fits with the ending of the OFR. According to the FT, Elliot Morley, environment minister, said that many companies thought that without the OFR they had no obligation to report on their green impact. "(This is) simply not the case," he said. "All quoted and large private companies preparing the new business review will need to report significant environmental issues."

Mr Morley's comments underline a growing realisation among companies that the scrapping of the OFR is creating as many complications as it has removed. Many executives are struggling to understand their reporting obligations. Defra’s (voluntary) guidelines are a further part of the mosaic that issuers will wish to bear in mind.

Slowly but surely, XBRL in Europe is coming of age.

The idea behind XBRL, eXtensible Business Reporting Language, is simple. Instead of treating financial information as a block of text - as in a standard internet page or a printed document - it provides an identifying tag for each individual item of data. This is computer readable. For example, company net profit has its own unique tag.

This impacts companies in a number of ways.

Firstly, there is a growing number of regulators across Europe who are mandating the use of xbrl for financial reporting. These include tax authorities, banking supervisors & banks, securities regulators, stock exchanges and statistical agencies.

Examples of these projects in Europe include the Dutch taxonomy project, where all companies – and not just listed companies – are now required to file accounts, tax returns and financial statistics in xbrl. Meanwhile across the border in Belgium, the Central Bank is looking to 270,000 registered companies to file accounts in xbrl by April 2007. And in Italy, the NIS system – equivalent to Disclose or RNS – is being redesigned to transpose information submitted to an xbrl format for distribution to the listed company’s website, Information vendors, the media and regulators.

So companies need to develop systems, processes and teams capable of responding to rapidly evolving regulatory and market demands. They also need to ensure that deadlines can be met without reliance on quick manual intervention outside of the normal control environment. The regulatory focus on these controls is intensifying.

Clearly this is a challenge that cannot be met overnight. The good news is that many of the necessary adjustments can be made incrementally, over an appropriate planning horizon. For example, IFRS can be embedded in existing management systems through the use of XBRL which can streamline reporting and minimise the need for manual intervention.

Perhaps inevitably, xbrl is further advanced in the US, where Christopher Cox, the new chairman of the SEC, is on a mission to improve financial reporting. "We really are on the threshold of a revolution in corporate reporting," he has said. During his tenure, he intends to "bring our system of corporate disclosure and financial reporting into the 21st century."

He presented his vision for interactive data to the 12th XBRL International Conference, "Interactive data could make it possible for issuers to reduce the cost of substantiating the numbers that appear in their financial statements. It would assist regulators in maintaining the integrity of the markets. It will also make disclosures more useful to investors, and to every market participant," said Cox.

In the early stages of any new technology, there are early adopters, who tend to be technologically aware. Others are satisfied to use existing technology until the new technology is more widely accepted and better tools are developed. SEC Chairman Cox seems optimistic and not concerned with the slow pace of adoption. "The reason that everyone is not doing their financial reporting using interactive data is simple: it's a new concept. People will use it when they discover how much time and money it can save them, by automating and speeding up the process." Indeed, he says the SEC wants it because it will make financial reports much more useful to investors.

"Companies will want interactive data for the same reason. The truth is, it's inevitable - and if the 21st century has shown us anything thus far, it's that technological change occurs extremely quickly."

Cox continues: "It's not surprising that we're hearing from both filing agents and accounting firms that their clients are suddenly showing greater interest in interactive data. Given its enormous potential, there's no doubt this increased interest in interactive data will soon translate into widespread adoption."

Consult: “To seek advice or information of” – your chance to influence future regulation

As we roll into 2006, there are a significant number of consultations from regulators, which will have an equally significant influence on the laws surrounding Investor Relations. In my experience of serving on panels such as CESR, regulators genuinely want input from the coalface. The IRS among others will be responding (see their website for details) but the more direct corporate input the better.

First among these consultations is inevitably OFR and life after the Gordon Brown pronouncement. Policy-watchers believe there is great confusion as to the way forward. Will OFR survive in an almost identical form? (probably yes). Will it become part of the Combined Code and become best practice? (probably not). Meantime investors and advisors are concerned.

Mark Goyder of Tomorrow’s Company for example wrote to the FT concluding …“over the next five years forward-looking statements will become universal around the world. We need rigour in measuring and reporting on the values and behaviours that are essential to the creation of enduring shareholder value. Investors need to have their finger on the pulse of relationships with customers, employees and suppliers. The OFR standard offers a clear, understandable framework for moving into this new generation of reporting. Companies that have already put in the work have told us that the OFR is strengthening their focus on strategy and their selection of the right performance indicators.” Watch this space.

Meanwhile the Transparency Directive is working its way into law. The European Securities Committee is consulting on its proposed language, requiring implementation in member states. This impacts especially the means of dissemination of inside information, and the major shareholdings disclosures (see below). And the FSA is likely to consult on its UK implementation in March.

The Takeover Panel has currently three open consultations including on the implementation of the Takeovers Directive.

One area where issuers may find it useful to respond is in the definition of shareholder interests. This defines what disclosures shareholders – including widespread holders of Contracts for Difference – make. Under 3 different current consultations (Takeovers, Transparency and Company Law Review), there appears to be contention. The Takeover Panel is proposing to include synthetics such CFDs in their disclosure obligations, whereas the FSA and DTI, with their respective implementations of the Company Law Review – replacing 212’s and 198’s – will EX-clude CFD’s. Unless you tell them otherwise.

And finally, consultations are not limited to Europe. An SEC Comment Period has been opened on changes to US regulation, which will liberalise the de-registration process for many foreign private issuers. If passed it would allow foreign issuers to end their reporting obligations under the Exchange Act and remove them from the burdens of the Sarbanes-Oxley Act.
Happy New Year – and Happy Responding to these consultations.