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EU NON-FINANCIAL DISCLOSURE RELATED REGULATION OVERVIEW

Last updated: March 19, 2015

Disclaimer: this document is intended to capture the most recent EU legislative developments relating to ESG disclosure. Eurosif endeavours to make its best effort to up-date the information on a regular basis, but it is not claimed to be exhaustive. Eurosif has compiled the information very carefully, and the information in this document is offered in good faith. This information is perceived as correct. Nevertheless, Eurosif makes no representations or warranties as to the completeness or accuracy of any of this information. Eurosif will in no event be responsible for damages of any nature whatsoever resulting from the use of or reliance on the information contained in this document.

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Capital Markets Union Green Paper & Consultation (In progress, deadline May 13, 2015) EU links: Green Paper (2/15) Consultation (2/15) Eurosif links:

CMU landing page here

SRI Policy Manifesto

DG FISMA (Rubin de Cervin, M. Kosmidis) + Juncker’s Cabinet (Paulina Dejmek-Hack, Economic Advisor to Cabinet)

The concept introduced by EC President Juncker, when presenting his vision and policy guidelines for the new European Commission (July 2014)

Green Paper published February 2015 + consultation

Growth = key objective: o Improve access to financing for

all business o Increase and diversify sources

of funding o Make markets work more

effectively, nationally and cross-border

Long Term Investment Funds and EU Venture Capital Inv. Funds covered

Broad concept, opportunity to push for “Sustainable Capital Markets Union” incl. corporate disclosure agenda. Eurosif is working in this direction. Eurosif work in progress can be found on its website in the dedicated CMU section. Eurosif’s key demands include:

Incorporate a strong and comprehensive corporate disclosure package.

Ensure that environmental, social and governance considerations transcend all investment practices and asset classes.

Align incentives to reward practices reinforcing the long-term dimension of capital markets.

Scale-up financial innovation and instruments serving sustainable growth.

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Note: Eurosif has set-up a working group in March 2015 to help inform its position. Work in progress.

Disclosure on non-financial and diversity Directive (September 2014) EU Links:

Directive 2014 (OJ 11/14)

Eurosif links: here

DG FISMA, Unit Accounting and financial reporting

Requires "public interest entities"1 with more than 500 employees (on a consolidated basis in case the company is parent undertaking of a large group) to provide an annual non-financial statement regarding information relating to at least human rights, environmental and social matters2. This information shall allow for an understanding of the undertaking’s development, performance and position and of the impact of its activity on society.

The information provided must include a description of the entity's policies in relation to these matters, including any due diligence procedures that it implements to identify, prevent and mitigate its existing and potential impacts, and the outcomes of those policies. It must also include a description of the principal risks3 of the entity's

Important milestone, but, Eurosif will continue to press for:

Scope extension to large non-listed entities (level playing field)

Comparability of information (KPIs)

Timeliness of information (simultaneous to financial information)

Assurance mechanisms

<IR>(integrated reporting) Note: Commission working on transposition of Directive by Member States (Spring 2015) & connects with G7 Presidency (Germany); next steps is work around guidance for companies (date unclear, stakeholders incl. Eurosif to be involved)

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business in relation to each of these matters and how it manages those risks.

Reporting is mandatory, yet flexibility is given to companies by the “comply or explain” approach. If a company does not pursue policies in any of the areas, it must provide a clear and reasoned explanation for not doing so. Thus, this does not free a company from the obligation to identify and disclose principal risks.

The Directive references various standards that companies can rely on in their reporting, including the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises4. Yet any national, EU or international framework can be used. The Directive does not prescribe the use of common, specific indicators which would have ensured a minimal level of comparability as regards, above all, of measurable environmental impacts.

Member States may allow the company to provide a separate report, rather than integrating the

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non-financial statement in the management report, as long as the separate report is either published together with the management report or is made public on the undertaking’s website within 6 months of the balance-sheet date – 2 months later than the management report.

The Commission has been mandated to publish within two years non-binding guidelines on methodology, including general and sectorial non-financial key performance indicators – covering at least land use, water use, greenhouse gas emissions and use of materials. Guidance on CO2 emissions not included.

Prospectus Directive Consultation in progress (until May 13, 2015) Initial 2010 text here

DG FISMA Contains a set of questions on the content of the Prospectus (section B of consultation) and establishes also connections between the Prospectus Directive and the PRIIPs Directive (see below), and ELTIF / EVCA / EUsEF disclosure regimes;

Limited opportunity to push for non-financial and climate disclosure as the questions go more in the direction of simplification and are not framed in a way it opens the door to comment on detailed content.

Revision of the Directive on Pension Funds (IORP) (update from 2003 Directive,

DG FISMA The revision of IORP (IORP II) is part of a package of measures to reinforce LT investment in Europe.

IORP II is an opportunity to push for a stronger ESG agenda as part of the Directive. For the first time, climate

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adopted March 2014 by EU Commission) EU Links:

Current Directive (2003)

EC Proposal IORP II (03/14)

COREPER Position (12/14)

4th compromise text under IT Presidency (11/14)

Eurosif links: Position on Pension Reform (2010)

Art. 29, risk evaluation for pension funds: “The risk evaluation for pensions shall be performed regularly and without delay following any significant change in the risk profile of the institution or of the pension scheme and shall cover […]a qualitative assessment of new or emerging risks relating to climate change, use of resources and the environment.”

risks are mentioned. This could open the door to other ES(G) disclosure by pension funds. On 10 December 2014, the Permanent Representatives Committee agreed, on behalf of the Council, its negotiating stance on a draft IORP II directive. This agreement enables negotiations with the European Parliament. The ECON Committee is in charge of the file at the EU Parliament and the Rapporteur is Brian Hayes (Irish, EPP). Shadow Rapporteurs at ECON are:

Paul Tang - S&D

Bas Eickhout - Green

Ashley Fox – ECR

Sophie In’t Veld – ALDE

The Rapporteur for the EMPL Committee, Jeroen Lenaers (Dutch, EPP) has just published its report. Identified timeline:

31 March 2015: 1st exchange of views

15/16 July 2015: Consideration of the draft report

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14 September 2015, 12h00: Deadline for amendments

13 October 2015: Consideration of amendments

9/10 November 2015: Vote in ECON committee

Beginning 2016 (under NL Presidency of the Council): Expected trilogues negotiations

Study on Fiduciary Duty EU Link here Eurosif SRI Policy Manifesto

DG ENV In progress As part of the Resource Efficiency Roundtable in 2013, Eurosif pushed for a clarification of the compatibility of fiduciary duty and ESG. DG Environment launched an initiative in 2014 to look into this: “. This study will study existing provisions on fiduciary duty in various Member States and outside the EU, as well as recent work on materiality and legal implications of integrating sustainability issues in fiduciary duty, and explore desirable options for this integration.”

Packaged Retail and Insurance-based Investment Product Directive And Key Information Document (KID) EU Links:

DG FISMA, Unit Asset Management The PRIIPS Directive (incl. KID) addresses transparency in relation to retail pre-sales product disclosure and includes a mandatory disclosure document to be given to retail investors

PRIIPS has been now adopted. ESG is mentioned in Art. 8 (3c). It is now up to Level 2 measures (ie. ESAs1) to prescribe the exact wording, sections, format, of the KID including disclosures of risks and

1 European Supervisory Authorities : ESMA, EIOPA, EBA

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Published in Official Journal on November 26, 2014 and with Corrigendum in December 2014 Eurosif links:

Investor Transparency landing page

Position on KIID

Position on PRIIPS

before investing in retail investments.

It is part of a wider legislative package dedicated to rebuilding consumer trust in financial markets: the reviews of IMD and UCITS, and sits alongside MIFID (quality of fin. advice).

KID is must be a short document (no more than 3 sides of A4), written in a concise manner, using non-technical language that avoids jargon

Art. 8 (3c) : The key information document shall contain the following information […]its objectives and the means for achieving them, in particular whether the objectives are achieved by means of direct or indirect exposure to the underlying investment assets, including a description of the underlying instruments or reference values, including a specification of the markets the PRIIP invests in, including, where applicable, specific environmental or social objectives targeted by the product.

costs for specific types of PRIIPs. The timeline is as follow: By 03/2016: Final Regulatory Technical Standards are to be sent to EU Commission; By Oct/Nov 2016: Regulation in force in Member States (TBC) Sept 2017: EC to adopt delegated acts Sept 2018: EC to review regulation Sept 2019: EC to determine if UCITS in scope Sept 2020 Commission to decide if pensions will fall within PRIIP definition

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European Long Term Investment Funds (ELTIFs) EU Links:

EU Commission Proposal (6/13)

EU Parliament briefing

Council Compromise text (12/14)

Text adopted by Parliament (03/15) Eurosif links: LTI landing page

DG FISMA On 26 June 2013, the European Commission announced a proposal to introduce a new investment fund framework designed for investors who are looking to invest in companies and projects on a long term basis: ELTIFs.

ELTIFs may be marketed to different types of EU investors on a passported basis subject to certain restrictions: types of eligible long-term assets (including infrastructure, transport and sustainable energy projects), risk spreading requirements and disclosure of information to investors.

ELTIFs must be at least 70% invested in eligible assets. As well as unlisted SMEs and infrastructure projects, ELTIFs can invest in real estate (when the investments are sustainable and long-term), intellectual property and listed SMEs with a market capitalisation of less than EUR 500 million. Direct holdings of over EUR 10 Million in real assets such as energy, transport, communication, education,

Eurosif has advocated for ESG matters to be an eligibility requirements to an ELTIF’s underlying asset (see Eurosif response to the Commission in October 2012). It has also advocated for a strong disclosure regime (without being specific). In the current text, whether in the Council compromise or the recently adopted text by the Parliament in March 2015, there is no mention of ESG per se. However, Art. 2(6) mentions that eligible real asset “means an asset that has value due to its substance and properties and may provide returns, including infrastructure and other assets that give rise to economic or social benefit, such as education, counselling, research and development, and including commercial property or housing only where they are integral to, or an ancillary element of, a long-term investment project that contributes to the Union objective of smart, sustainable and inclusive growth.” The ELTIFs Regulation must now be

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health and so on are eligible provided that they yield a predictable return.

ELTIFs can invest up to 20% in EU Social Entrepreneurship Funds (EUsEFs) (combined with EuVCA).

ELTIFs may be marketed cross border to retail investors who have accumulated a portfolio (composed of cash deposits and financial instruments) of more than EUR 100,000, provided they invest no more than 10% of their portfolio in the new product.

ELTIFs have the particularity of being closed-ended funds – (illiquid nature of most investments in long-term projects would normally prevent such a fund from offering regular redemptions to its investors). However, in order to incentivise retail investors the Manager may decide to offer early redemption rights if certain conditions are met.

An ELTIF that is marketed to retail investors will be deemed to be a Packaged Retail Investment product and will be

officially endorsed by the Council of the EU. The Regulation will enter into force 20 days after its publication in the Official Journal of the EU and should become applicable six months after its entry into force.

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subject to the KIID.

Conflict Minerals EU links:

EU Commission Proposal, 3/2014

EU Commission Communication 3/2014

EU Parliament landing page

Opinion Report MEP Bütikhofer, AFET, EU Parliament, Dec. 2014

Eurosif links : EU Insider, March 2014

DG TRADE The Commission’s draft Regulation would allow importers of the 3Ts and/or gold that are sourced from any conflict-affected or high-risk regions of the globe to self-certify as a “responsible importers” by exercising supply chain due diligence in line with guidance developed by the Organisation for Economic Co-operation and Development (OECD). Self-certification would also require independent audits and public disclosure of all related efforts. The Commission estimates that approximately 400 importers would be eligible to participate in the proposed opt-in scheme. The Commission has also proposed to publish – in co-operation with the OECD - an annual list of EU and global “responsible” smelters and refiners that source (at least partially) from conflict-affected and high-risk areas. Eurosif sent an investor statement on October 22, 2014, co-signed by 23 organisations, to a range of EU policy-makers (MEPs, DG Trade, RePers), criticizing the proposal and

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calling for a regime more closely aligned with the Dodd-Frank provisions. The International Affairs Committee (INTA) is in charge of the dossier at the Parliament. The Rapporteur is Juliu Winckler (EPP, Roumania). Shadow INTA Rapporteurs are: ARENA Maria (S&D), MCCLARKIN Emma (ECR), DE SARNEZ Marielle (ALDE), SCHOLZ Helmut (GUE), KELLER Ska (Green), BEGHIN Tiziana (EFDD). The Foreign Affairs (AFET) Rapporteur is Reinhard Bütokhofer (Green, Germany). On March 9th, AFET voted on Bütikhofer’s Opinion Report. With 12 votes in favour, 12 votes against, and an unprecedented 43 abstentions, the Foreign Affairs Committee failed to adopt an opinion in spite of previous attempts to strike compromise. May 19, 2015 is the indicative date for the plenary vote at the EP.

Country-by-country reporting EU Links:

Commission landing page on CBCR

DG JUST DG FISMA

Article 89 of Directive 2013/36/EU (CRD IV) introduces a new CBC public reporting obligation for banks and investment firms: these

CBCR is mentioned in the new EU Accounting Directive incorporating non-financial and diversity disclosure requirements from 2014.

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CRD IV Directive (June 2013)

New Accounting Directive 2013

institutions will have to report annually, for each country in which they have an establishment, data on: (a) name(s), activities, geographical location; (b) turnover; (c) staff numbers; (d) profit or loss before tax; (e) tax on profit or loss and (f) public subsidies received. It also requires the Commission to conduct a general assessment as regards potential negative economic consequences of the public disclosure of country-by-country data, including the impact on competitiveness, investment and credit availability and the stability of the financial system. In the event that significant negative effects are identified, the Commission shall consider proposing to amend the CBCR obligations, and may decide to defer them. Art. 44 to Art. 50 of the new Accounting Directive, repealing the Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts (78/660/EEC and 83/349/EEC) introduces a new obligation for large extractive and logging companies to report the

Art. 48: ‘The report shall also consider, taking into account developments in the OECD and the results of related European initiatives, the possibility of introducing an obligation requiring large undertakings to produce on an annual basis a country-by-country report for each Member State and third country in which they operate, containing information on, as a minimum, profits made, taxes paid on profits and public subsidies received.’ The information disclosed on payments to governments will be publicly available to all stakeholders either through the stock market information repository or the business registry in the country of incorporation (in the same way as financial statements are made available). The EU mandatory disclosure requirement will complement the EITI efforts by legally requiring companies registered or listed in the EU to disclose payments to governments along the same lines

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payments they make to governments (CBCR) . The Directive introduces a new obligation for listed and large non-listed extractive and logging companies to report all material payments to governments broken down by country and by project, when these payments have been attributed to a specific project. Scope: listed and large2 non-listed companies with activities in the extractive industry and the logging of primary forests. The following types of payments shall be reported: production entitlements, taxes levied on the income, production or profits of companies, royalties, dividends signature, discovery and production bonuses, licence fees, rental fees, entry fees and other considerations for licences and/or concessions, payments for infrastructure improvements.

as EITI. In doing so, the ultimate objective is to contribute to the strengthening of the EITI and to extend its scope to all resource-rich countries. It is also mentioned in amendment 481 (Cecilia Wikström) to the EP Rapporteur Report re. the revision of the Shareholder Rights Directive

EU Tax Transparency Package EU Links: EU Commission’s landing Page

DG Economic and Financial Affairs, Taxation and Customs

A package of measures to boost tax transparency on 18 March 2015

the Commission released a package of tax transparency measures to tackle corporate tax avoidance and harmful tax competition in the EU.

2 A large company as one which exceeds two of the three following criteria: Turnover €40 million; total assets €20 million and employees 250

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Proposal COM(2015) 135 EU Staff Working Document (2015) EU Communication COM(2015)136

A central component of the EU Transparency Package is a legislative proposal requiring Member States to automatically exchange information on their tax rulings (COM(2015) 135). The EU Package also include a Communication (COM(2015) 136 final) containing other tax transparency measures. In particular, “The Commission will assess whether additional public disclosure of certain corporate tax information should be introduced, in a way which goes beyond administrative cooperation and provides public access to a limited set of tax information of multinational companies.” This would expand similar transparency requirements already existing for banks (under CRD IV) and with a focus on payments to governments for large extractive and logging industries (under the 2014 revision of the Accounting Directive), in the form of "country-by-country reporting" (CBCR). Other tax transparency initiatives are also mentioned in the Communication, notably reviewing

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the Code of Conduct on Business Taxation and quantifying the scale of tax evasion and avoidance. Eurosif welcomes these important steps forward to encourage healthier tax practices and tax competition.