28th November 2005 - OFR Environmental Reporting requirements set to continue under EU Accounts Modernisation Directive

Following today's announcement by Gordon Brown at the CBI's annual conference that the Government will scrap the requirement for listed companies to produce an Operating and Financial Review (OFR), Trucost, the UK based environmental research organisation which

has been helping companies meet environmental reporting requirements, is concerned that those companies may now believe that the requirement for environmental reporting does not apply.This is not the case as companies of a certain size in the UK and throughout the EU, will still need to meet broadly similar requirements under the EU Accounts Modernisation Directive (AMD), a fact that few companies in the UK are aware of.

The AMD requires a mandatory addition to the directors' report - an Enhanced Directors' Report (EDR). The EDR requires large [1] companies to provide a review of the business which must "to the extent necessary for an understanding of the development, performance or position of the business of the company" consider environmental and employee matters using Key Performance Indicators (KPIs). The main difference is that the OFR required a discussion of future prospects and encouraged the inclusion of broad social and community issues. The absence of the forward looking element puts the EDR firmly in the area of reporting rather than forecasting, which will be a relief to many directors who were concerned about the absence of "safe harbour" provisions within the OFR regulations. The focus on environment and employee issues lends itself better to quantitative reporting based on KPIs.

Simon Thomas, chief executive of Trucost, says: "I hope that the removal of the requirement to make forward looking statements without safe harbour provisions will make it easier for more companies to report openly and transparently on material environmental issues in line with the existing Accounts Modernisation Directive requirements."

Large and medium companies must produce an enhanced directors report with a "fair review" of the business of the company. While both groups are encouraged to include non-financial matters (explicitly environment and employee matters) only large companies must do so "to the extent necessary for an understanding of the development, performance or position of the business of the company".

Another interesting difference is that the OFR was to be explicitly written for the benefit and understanding of shareholders, whereas the AMD does not limit the audience to shareholders which may have implications for directors' responsibilities and liabilities.

Indeed the Company Law Reform Bill, which for the first time codifies directors' duties and explicitly includes consideration of broader matters, such as environmental issues, now makes more sense in light of the changes announced today.

The Chancellor's call for a "risk based" approach to legislation seems sensible. In fact Trucost has been working with the Department for Environment, Food and Rural Affairs (Defra) to produce risk-based guidance for companies on what environmental matters they should report.

Press Enquiries: To interview Simon Thomas, chief executive of Trucost, call Philippa Thomson on +44 (0)20 7321 3731.

[1] A large company is defined as one where 2 out of the 3 tests apply for the year to be reported:

a) Turnover greater than £22.8m b) Balance Sheet greater than £11.4m c) Number of employees more than 250 (For further details see the Trucost briefing here)