Assessing the French experience with mandatory CR reporting

Discussions at the Helsinger Conference held on November 22, 2002, made it clear that the different parties involved in CSR were divided in their approach to the concept. One group, which included companies and business federations, was in favor of a voluntary approach, while others, including trade unions and associations, supported a regulatory approach to CSR. Anna Diamantopoulou, the European Commissioner for Employment and Social Affairs, said: "the law must defend fundamental rights, but we expect companies to do better than the law requires, either in their own interests or with a higher objective in view." She saw environmental and social reporting as crucial in that it enables companies to demonstrate the extent to which they exceed their obligations.

France opted for the legislative approach to reporting. Article 116 of the law on the New Economic Regulations (nouvelles rgulations economiques - NRE) of May 15, 2001, makes it mandatory for all quoted companies to include in their annual report information on how they take into account the social and environmental consequences of their activities. This requirement came into force in 2003, so corporate experience in this area is very recent.

With a view to clarifying this issue, four French ministers asked the Observatoire sur la Responsabilit Socitale des Enterprises (ORSE), Enterprises pour l'Environnement (EpE) and environmental group Ore to prepare a review of the application of the law.

Objectives of the report

The three organizations were asked:

* to analyze the problems encountered by companies in applying the law, the extent to which the published information met the expectations of stakeholders, and the international situation as regards "sustainability reporting";

* "to describe the best practices and to review the links between internal practices and external communications" and to show how this regulatory exercise could be improved to make a real contribution to a company's global approach;

* to analyze a representative sample of the companies concerned;

* to invoke an international dimension in comparison with other public or private regulatory or benchmark schemes.

Companies, business federations, trade unions, NGOs and investors were targeted for the review. A simple questionnaire was sent to 700 companies, and interviews were held with two French business organizations.

The ORSE, EpE and Ore were asked to find out whether the 700 quoted companies operating under French law had incorporated social and environmental information into their annual reports. They considered the first 250 companies (those in the Socit des Bourses Franaises 250 Index, or SBF25O, of companies on the Paris Stock Exchange) and found that all but a few had formally made explicit or implicit reference to article 116 of the law, and had published some form of social and environmental information.

Four initial concerns

Some companies have had problems in reporting on all the fields covered by the NRE Decree. These difficulties may stem from various factors. Firstly, certain social and environmental aspects are complex and sometimes difficult to quantify. For example, the subject of industrial relations is particularly tricky to translate into indicators, since it encompasses several features of the company: how are social relations organized within the firm? What is the outcome of social relations? What is the social climate within the company? Social climate is initially a perception; it is certainly based upon some facts, but it also stems from impressions and feelings, and these are obviously very difficult to quantify.

Secondly, the process of selecting indicators is torn between two contradictory requirements. It is essential not only to develop a set of indicators common to all the companies in order to permit comparisons, notably for investors, but also to suggest indicators that are sufficiently precise in order to reflect the situation of each company. For example, environmental performance varies according to the business sector concerned; one may ask whether the environmental performance of an industrial firm can be compared with that of a service company.

A third problem is that consolidation of data is not always appropriate for a company involved in different activities. In one instance, the directors of a group found that environmental reporting common to the entire group did not satisfactorily cover environmental issues specific to each activity within it. Furthermore, the geographical coverage of reporting is not always fixed; mergers and acquisitions occur frequently in the business world, and they lead to a number of problems arising from the diversity of cultures in the different parts of a group. Key factors in business life such as company management, industrial relations, job security, regulations, the expectation of customers and national culture are seen differently according to whether a business is Japanese, French or American. A further problem results from this: merging information systems.

Another problem relates to the fact that regulations vary according to the host country. Some of the factors mentioned in the NRE Decree are relevant solely within France and sometimes have no meaning on a worldwide basis. The concept of industrial accidents, for example, is defined differently by different countries: statutory reporting times vary from three days to several months, while some countries include accidents occurring as employees travel to work, and others do not. One may ask how meaningful it is to consolidate such disparate data over the period of a year. Similarly, the relevance of an indicator varies from one country to another; information on water consumption, for example, is only crucial in countries where water is a scarce natural resource.

Suppliers and subcontractors

One of the fundamental questions about corporate social responsibility is that of its limitations. It's never easy, outside the letter of the law, to define what a company is responsible for, and to whom. A balance has to be found between a minimal approach - doing no more than the law requires - and the converse procedure that would cause a company to take on responsibilities beyond its terms of reference and its capabilities. Major companies have to ensure that their own behavior does not prevent the development of good practice by their suppliers and subcontractors and that a balance is struck between price pressures and various aspects of corporate social responsibility that involve extra costs.

Contractors are aware that their social and environmental performance may be adversely affected by any irresponsible practices on the part of their partners throughout the production chain. For this reason, in accordance with the NRE Decree, companies should highlight the importance of subcontracting in the social field (observing the fundamental conventions of the International Labor Organization). However, companies appear to experience difficulties in reporting in this area. For example, an international group will encounter problems in checking globally that the sustainability sections of the contracts it has signed with its subcontractors are in fact being applied. Such checks are complicated and very costly. The question is whether companies can force their subcontractors to provide all the information requested, and how credible this information will be if unchecked.

Problems with implementation: time and cost

The review revealed that many companies that come under the decree will face substantial implementation problems, especially in collecting and consolidating data, once this process becomes international.

Firstly, the companies are given little time. The new requirement for non-financial reporting has to be fitted in to the increasingly short times available for reporting financial results. Indeed, the expectation is that all the social and environmental data will have been consolidated, something that cannot be done each year until February at the earliest. Since annual general meetings take place between April and June of each year, the length of time left for drawing up the reports and analyzing the data is restricted to two or three months at the most. Thus companies have had only a short time to meet the requirements of the decree and develop a reporting system for all these data.

A second factor is the cost of the reporting process. A company embarking on a reporting approach faces a variety of costs, notably those arising from feeding information through the system, confirming data and circulating reports.

The ORSE polled its member companies in order to estimate the cost of sustainability reporting. This produced the following average figures:

* Collecting and consolidating non-financial information can require up to 12 members of staff full-time for six months.

* The cost of publication can be up to EUR100,000.

* The cost of external certification depends, for example, on the confidence level declared by the auditors (which may be reasonable, moderate or low) and on the geographical extent of certification.

However, the Canadian government, which has prepared "an information toolkit on the production of sustainability reports" concludes that sustainability reporting is not really a cost but an investment. This approach identifies two types of benefit:

* Internal benefits: attracting, retaining and notifying employees; strengthening data collection and management; improving performance efficiency and effectiveness; providing broader performance information to senior management for stewardship and to the board for oversight and strategy.

* External benefits: contributing to community or national "license to operate"; enhancing corporate reputation; facilitating regulatory approvals; strengthening market access and share.

Responding to diverse stakeholders

Those targeted by the reports are as many and varied as the reasons for starting a reporting approach in the first place. This varied audience raises another difficulty for companies: how to respond to all parties in the same document. It is therefore particularly important, before embarking on the reporting process, to consider who and what will be the report's targets and objectives, so as to envisage at the outset the different forms of the report and its circulation.

There is no doubt that meeting all the expectations of the stakeholders in a single document represents a real difficulty for companies. However, this problem could be tackled by using the internet, whereby information can be sent practically immediately to all stakeholders and, if necessary, to different geographical zones.

An analysis of the reports shows that:

* Using the internet is a particularly attractive way of facilitating the organized and reasoned circulation of CSR information that a company's stakeholders now expect.

* The internet is still widely underused by French companies, including those that have made significant efforts in other directions to establish their sustainability reports for stakeholders.

* The ability of a website to respond in "cascade" fashion to the many questions that interest the different audiences is not being exploited in any way.

* The potential for dialogue or at least interactivity with stakeholders, so easily obtainable through the internet, does not seem to have been recognized by any of the existing sites.

Observations and recommendations

Corporate reporting on sustainability is becoming widespread internationally. International organizations, national governments and a number of financial leaders (investors and pension funds) are now demanding that companies report on the social and environmental impacts of their activities. It appears that French legislation, despite its imperfections, is frequently held up as an example in other countries. For this reason, any amendment to the law that appears as a retrograde step would not be understood by France's partners who have committed themselves to sustainability, or by French companies who have devoted substantial effort to meeting these new requirements.

Article 116 of the NRE law is now accepted by companies and their stakeholders. The review revealed a consensus about the value of legislation that has enabled companies hitherto uncommitted to a sustainability approach to become aware of the issues. In earlier years, companies that published such reports were seen as pioneers and did not exceed 20 in number. Following an initial exercise in applying the law, a very high proportion of the top French companies have tried to meet the requirements of the NRE. Furthermore, companies and professional organizations that were initially extremely critical of the law no longer question its value. A movement has been created whereby the pioneers are drawing in others that had previously been uncommitted.

Not all the companies subject to the law are applying it. Some of the stakeholders interviewed thought that more constraints should be applied to companies, particularly those that are not fully applying the legislation. Analysis of all the reports reveals that as the number of companies covered by the law has increased, the extent to which companies have tried or been able quickly to come into compliance has fallen. This suggests that before seeking to penalize those companies that have not succeeded in reaching compliance, it would be important to discover why this was the case.

The interests of all investors have not yet been satisfied. The review showed that the answers to the key question of who uses the sustainability reports (and the management reports for those companies that have not published a special report) are relatively mixed. The readers of these reports are apparently managers and investors specializing in "socially responsible investment" (SRI); companies competing in a benchmark approach; and non-financial rating agencies that use these reports on behalf of their SRI investor clientele. These are followed by "mainstream" investors and financial analysts.

Finally, it should be noted - and this was one of the surprising results of the interviews - that the associations and trade unions showed very little interest in these initial reports.

The decree

The companies - often the largest - that are committed to a sustainability approach are for the moment definitely satisfied with the law and the decree of application, despite its imperfections. The decree has attracted considerable criticism, however, with reference to the following main points:

* it proposes indicators based on the 1977 law on the social audit, which are unsuitable to companies that have become worldwide in the meantime;

* the major topics in sustainability are poorly chosen, with the result that besides very precise indicators such as hours of overtime, reference is made to labor relations or to the importance of subcontracting without further details;

* certain topics such as the campaign against corruption, or the observance of human rights, are completely absent;

* there is uncertainty about the scope of application.

Smaller companies that hesitate to embark on the process are often frightened by an initial reading of the decree which seems to them to be remote from their daily concerns. It would appear necessary to reassure these companies so that a reporting approach is not seen as an imposed publication exercise that takes up time and money for a variety of undetermined users.

With this in mind, new guidance on the way in which the decree should be read should allow many companies to embark on the approach without fear of making mistakes. It would be worth recalling that sustainability forms part of a process of progress and learning.

Over the next few years, to enable companies to make progress in their sustainability reporting, a government message to companies should stress the following five points:

1. The law is aimed at investors, a situation that should encourage companies to report to a greater extent on the issues, risks and opportunities involved in their sector of activity.

2. The geographical scope of corporate reporting, although formally and legally limited to that of the holding company, should be the most appropriate in regard to the issues defined above.

3. As far as possible, this geographical scope should resemble the consolidation boundary and, also, indicate the way in which the company applies the operational control of its subsidiaries and subcontractors. This reporting boundary may vary according to the topics to be reported, once the company can explain the choices it has made.

4. The company should determine which are the relevant issues, and hence the indicators that will give relevance to its answers, notably by taking into account the expectations of its stakeholders.

5. The company should adhere to an international reporting framework; some reliable frames of reference include the European Commission's Green Book on CSR, July 2001; the OECD Guidelines for Multinational Enterprises, 2000; the Tripartite Declaration of the ILO, 1977; and the world agreement of the UN, 2000.

The company perspective

The corporate view is that the NRE Decree has remained exclusively French in its inspiration, although there is a strong case for the law to take a European, cross-border approach. Companies believe that commitment on the part of directors is essential, but see themselves as facing two essential problems. First is the frequency of report publication. Although it is a relatively simple matter to update NRE data every two years, actually publishing a sustainability report turns out to be more complicated, because on each occasion it is necessary to rethink strategy, objectives, and the process of discussion and consultation with stakeholders. The second concern is the cost of reporting, particularly if the information feeding through is not relevant to the company.

Most companies believe that it is up to them to choose their own relevant indicators, but they do put forward certain conditions:

* they must be able to explain their approach and justify their choice of indicators;

* they must describe their method on a formal basis by publishing results, objectives and the ways and means applied; and

* they must explain their risks, with appropriate interpretation and ranking.

Some companies are in favor of a sectoral approach in the social and environmental fields, while others have reservations about this. The most attractive aspect for companies is the ability to make use of the information for drawing up operational reports. One question is that of how to formalize the involvement of stakeholders: in other words how to get all the stakeholders together to discuss the choice of indicators and non-financial data in the reports.

Opinions differ as to the choice of medium for both the NRE obligations and the sustainability approach: the management report, the annual report or the sustainability report. Of course, if a company opts for a single report (for example, the annual report or a standalone document), this is certified by the auditors and invokes the liability of the management.

The French legislation is imprecise as to the reporting boundary (holding company, France or the group) and where the NRE data should be located. Most of the companies interviewed would prefer the boundaries to remain flexible, on condition that the company can declare the progress it has made and justify the choice of limits it has adopted. Some companies consider that there is some ambiguity about the way in which subcontracting is defined: one example is the question of how a truly external subcontracting company is to be distinguished from one that is a subsidiary. It is a fact that the topic of subcontracting is delicate for anyone dealing with CSR; typical questions are how to find data on the phenomenon, how to report the true facts about subcontracting, and so on.

Discussion is in progress about certification, and there is a degree of consensus about method and process, but less agreement about the results. As far as companies are concerned, there is also the question of whether it is appropriate for auditors to verify environmental, social and societal questions.

Despite problems with implementation, particularly around the defining of indicators, the French legislation seems to have been received largely positively by businesses. How this will translate to the UK and elsewhere, as mandatory corporate responsibility reporting becomes more commonplace, remains to be seen.

Contact

Marieke Chouchana-Riesmeijer

Observatoire sur la Responsabilit Socitale des Entreprises

chouchana@orse.org

This article is adapted from the document "Critical Review of How Companies are Applyig French Legislation on Social and Environmental Reporting" by the URSE, EpE and Ore.