Reflections on Transparency: expectations about transparency as an instrument to stimulate corporate social responsibility

26-11-2018 | Publication

Sustainability reporting can be an incentive for companies to improve their corporate social responsibility. EU guidelines on improving the transparency of company sustainability reports have recently been updated. In this publication, PBL explores the expectations about the implementation in the Netherlands of this EU directive, and compares the policy implementation with that in neighbouring EU Member States.

This publication is an English summary of PBL’s policy study Transparantie Verplicht (in Dutch), published in 2018.

Large companies are obliged to report on the sustainability of their operations

From 2017 onwards, as a result of the new EU Directive on non-financial and diversity information, certain companies are obligated to publish non-financial information in their management report. Companies have been reporting their financial results, for some time, and are now also required to report on several topics in their management report. The stricter regulations are prescribed by the EU, in the directive on non-financial and diversity information (2014/95/EU). Under the directive, countries are obligated to implement regulations for companies to be more transparent about results, risks and policies regarding their impacts on the environment, society, employees and human rights, as well as how they address possible incidences of corruption and bribery. The directive applies to so-called large public-interest entities (PIEs) with more than 500 employees and a turnover of more than 40 million euros; in short, it covers listed companies, banks and insurers. In the Netherlands, the reporting obligation applies to 120 companies.

The introduction of the directive is expected to lead to only marginal changes in reporting practices and CSR performance in the Netherlands, if the quality, relevance, accessibility and comparability of information for all stakeholders is not improved

Mandatory transparent reporting on non-financial topics is a way of stimulating companies to bring their activities more in line with societal interests and sustainability objectives. The European Commission expects that the recently tightened transparency regulations that oblige certain companies to report on non-financial topics in their management reports can help to stimulate CSR and green growth. In the Netherlands, a positive effect is expected on the quality of the public information provided, as this can be improved for a large share of the reporting companies. However, the implementation of the NFR Directive in Dutch legislation is expected to lead to only marginal changes in reporting practices and CSR performance, as it has regulated what is already current practice. The group of companies in the Netherlands that are required to report under the directive on non-financial information (2014/95/EU) were already doing so. To see whether the new EU regulation will be effective, it is necessary to monitor and evaluate not only the tool (better transparency) but also the targets (increased CSR).

To ensure proper functioning of the transparency regulations and create the intended effects more attention needs to be paid to the preconditions for effectiveness, such as the availability of standardised and comparable information, proper accessibility for various stakeholders, and mandatory reporting on financially relevant environmental issues, most prominently the business risks of climate change. In order to stimulate corporate social responsibility, further improvement of the transparency obligation is required, as well as supporting policies, such as the setting of sectoral sustainability standards, the issuing of financial incentives and broadening of the binding guidelines to include a larger part of the business community.

Expectations about non-financial reporting

In the exploration of the current Dutch implementation that forms the basis for this policy summary, the policy theory for transparency as an instrument for stimulating corporate social responsibility (CSR) and the associated role of financial institutions was reconstructed on the basis of policy documents and international literature on company reporting. Two cases, on the business risks of climate change and the loss of biodiversity and natural capital, were used to capture experiences with non-financial reporting. From this, preconditions for the effectiveness of transparency for CSR were derived, forming the basis for critically considering the recently improved Dutch policy. This shows that the recently adapted Dutch regulations on transparency are likely to lead to only modest changes in current practice. We have also looked at how a number of other Member States (including France, Germany, the United Kingdom and Denmark) have implemented the directive, compared with implementation in the Netherlands, to provide insight into the degree of variation within this policy realm, and the options for further strengthening and improving transparency regulation within the possibilities that the current directive provides.