1st October, 2007

Highlights:

• Directors’ general duties have been revised.  As of 1 October 2007, a director must have regard to the environmental impact of the company.
• Additional environmental reporting requirements for quoted companies came into force on 1 October 2007.
• If companies choose not to report on environmental matters they must make a positive statement to that effect.

Background
The Companies Act 2006 is an extensive reform of UK company law which received Royal Assent on 8 November 2006.  The Act’s requirements come into force during 2007 and 2008.  The Act extends directors’ duties and changes the way in which companies must report on environmental matters.

Directors’ Duties

On 1 October 2007, directors’ duties were extended to include consideration of company environmental impacts.

The Act states:

‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have (amongst other matters) regard to –

1. the likely consequence of any decision in the long term,
2. the interests of the company’s employees,
3. the need to foster the company’s business relationships with suppliers, customers and others’
4. the impact of the company’s operations on the community and the environment’

The Act also sets out directors’ liabilities with regard to ensuring that the directors’ report complies with the requirements of the Act.

The Department for Business, Enterprise and Regulatory Reform has issued the following guidance with regard to directors’ duties.

‘Clause 158 [now Clause 173]: Duty to promote the success of the company

308.     This list is not exhaustive, but highlights areas of particular importance which reflect wider expectations of responsible business behaviour, such as the interests of the company's employees and the impact of the company's operations on the community and the environment.

309.     The decision as to what will promote the success of the company, and what constitutes such success, is
one for the director's good faith judgment. This ensures that business decisions on, for example, strategy and
tactics are for the directors, and not subject to decision by the courts, subject to good faith.

310.     In having regard to the factors listed, the duty to exercise reasonable care, skill and diligence (clause 174) will apply. It will not be sufficient to pay lip service to the factors, and, in many cases the directors will need to take action to comply with this aspect of the duty. At the same time, the duty does not require a director to do more than act in good faith, and it would not be possible for a director acting in good faith to be held liable for a process failure which would not have affected his decision as to which course of action would best promote the success of the company.

Environmental Reporting

Also on 1 October 2007, reporting requirements were expanded on to build on the obligation for large companies to produce a Business Review that includes environmental matters, where appropriate.  This requirement is part of the EU Accounts Modernisation Directive which already affects all companies reporting from 1 April 2005.

‘The review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include -
(a) analysis using financial key performance indicators, and
(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.’

Medium-sized companies, while not required to include analysis using non-financial KPIs, are strongly encouraged to report on these issues voluntarily in recognition of the benefits such disclosure brings to the operation of the business.

Quoted companies must ensure that their Business Review,

‘to the extent necessary for an understanding of the development, performance or position of the company’s business, includes:

• the main trends and factors likely to affect the future development, performance and position of the company’s business; and
• information about –
1. environmental matters (including the impact of the company’s business on the environment),
2. the company’s employees, and
3. social and community issues,

including information about any company policies related to those matters and the effectiveness of those policies; and

• subject to subsection (11), information about persons with whom the company has contractual or other arrangements which are essential to the business of the company.

On 1 October 2007, the additional requirement was introduced that, if the Review does not contain information of each kind mentioned in paragraph (b) (i) (ii) or (iii) and (c) above, it must state which of those kinds of information it does not contain.’
This applies to directors' reports for financial years beginning on or after 1 October 2007

Companies that do not report on environmental matters will have to state this clearly.  The implication is that environmental matters are not a significant issue for their businesses.

The Regulations do not say how many KPIs should be included, nor mandate any particular KPIs for companies to report on. The selection and number of KPIs included in the Business Review is for directors to decide.

However, Department for Business, Enterprise & Regulatory Reform (BERR) guidance states that ‘The use of KPIs will help companies manage and communicate the links between environmental and financial performance.’

It recommends that companies refer to the UK Government’s guidance: Environmental Key Performance Indicators: Reporting Guidelines for UK Business.
http://www.trucost.com/defrakpi.html

Supply Chain

Clause (c) could have reporting implications for companies with significant environmental impacts in their supply chains.

The Government guidelines mentioned above provide advice on reporting supply chain environmental impacts and, in particular, distinguishing the boundary between a company’s direct and indirect environmental impacts.  This boundary is based on the polluter pays principle.  For instance, the greenhouse gases (GHGs) created by gas used to heat a building would be the direct responsibility of a company, but the GHGs created by the electricity it purchased would be the responsibility of the electricity company supplying it.

Environmental Reporting in Other EU Directives linked to the EU Accounts Modernisation Directive

The Transparency Directive and the Prospective Directives, with the EU Accounts Modernisation Directive, are part of the drive for a single European market. 

The Transparency Directive

It aims to harmonise the disclosure by EU listed companies of accurate, comprehensive and timely information.  It sets minimum content requirements for annual and for interim reports in order to establish a high standard of reporting. This non-financial reporting requirement is the exactly same as that for the EU Accounts Modernisation given on page 1.  This should enable investors to make informed investment decisions on a pan-European basis.

The Transparency Directive may increase the existing liability of companies and their directors with respect to accuracy of reporting.

Directors will therefore want to be confident that they have processes and procedures that ensure accurate reporting in areas such as environmental KPIs.

How can Trucost help?

Reporting on a company’s environmental impacts with the use of appropriate KPIs in an audited document will be new for many directors.

To enable you to meet this challenge, Trucost offers environmental reporting services.

Bloomsbury Publishing: “Trucost were instrumental in helping Bloomsbury Publishing to better understand our direct and indirect environmental impacts.  They showed us where our focus should be - on improving the environmental performance of our supply chain - and helped us develop policy and    strategy in this regard.”

Environmental Reporting Audit provides:

• KPIs specific to your company and its particular business mix. Trucost was commissioned by the UK Government to select the environmental KPIs at a sector level as set out in its Environmental Key Performance Indicators: Reporting Guidelines for UK Business (2006);
• an analysis as to whether your current environmental reporting is in accordance with UK Government Guidelines.  If your reporting is not, Trucost will advise on how to achieve this;
• independent third party assurance that your environmental reporting follows Government Guidelines and covers the material environmental impacts.

The Prospectus Directive

The Prospectus Directive sets out the initial information which must be disclosed by the issuers of securities, where those securities are offered to the public in the EU or are admitted to trading on a regulated market in the EU.  It introduces the concept of a single ‘passport’ for issuers, where a prospectus approved by one competent authority (the Financial Services Authority in the UK) is available for use throughout the EU, without additional approval or significant administrative requirements from competent authorities of other Member States.

The Directive requires issuers to disclose in a prospectus a description of any environmental issues that may affect the issuer’s use of tangible fixed assets. The Financial Services Authority sets out this requirement in the minimum disclosure requirements for the share registration document.

Hermes Pensions Management Ltd: “Trucost’s ability to dig out the data about the environmental consequences of production is absolutely second to none anywhere in the globe.”

• Benchmark Report provides:
• a detailed comparison of your company’s
• environmental reporting versus that of your peers
• environmental performance with that of different companies.

Over the past seven years, Trucost has built the world’s largest database of the environmental impacts and disclosures, assessing the reporting of over 4,000 companies.  Trucost has developed considerable experience and expertise in the area of environmental performance, analysis and reporting, working with leading multinational companies in a range of business sectors including Avis, Bloomsbury Publishing, Burren Energy, Christian Salvesen, Prudential, LogicaCMG and Legal & General.

Prudential Plc “Trucost Plc was commissioned to carry out research into the environmental impacts of our business activities, and to present the findings in financial terms. As a result of this research, we were able to rank our environmental impacts in order of significance and materiality.”

Supply Chain Environmental Assessment

This analysis enables your company to:

• Assess the scale and significance of its environmental impacts arising from its suppliers.  Comparison of this with its direct operational impacts could be relevant to reporting in the Business Review, as part of the EU Accounts Modernisation Directive.
• Engage with suppliers to encourage them to reduce their environmental impact in the areas that are most relevant to their business and sector.  This uses the Government’s Environmental KPI framework, part of the Reporting Guidelines for UK Business, recently co-authored by Trucost.
• Provide key reporting measures for stakeholders, including potential customers and shareholders, to demonstrate that your company is taking steps to reduce the environmental impact of its supply chain.
• Systematically track improvements in supply chain performance.  For instance, a company could track reductions in CO2 emissions of its suppliers over time.

About Trucost Plc

Institutional investors use Trucost’s research to support due diligence and active engagement activities by incorporating environmental performance measurement into their investment decisions.  Clients include Hermes, Henderson Global Investors, FRR, CalPERS, Fortis and Merrill Lynch Investment Managers.  Institutional investors also use the information to assess the environmental footprint of their portfolios, to highlight poor performance and to better understand where environmental risk lies in their portfolios.

Contact: Trucost on +44 (0)20 7321 3833 or E-mail

Rosemary Radcliffe CBE, Chairman, OFR Independent Working Group: "Trucost has a well established and robust process which can help boards of directors decide which of their businesses' environmental impacts should be disclosed."