Paul Hohnen Sustainability Strategies

This article was published in Ethical Corporation on January 13, 2009.

Non-financial reporting: Denmark ups the ante

Denmark's new legislation for mandatory corporate responsibility reporting is a model of its kind, writes Paul Hohnen.

A recent amendment to the Danish Financial Statements Act, which came into force on January 1, 2009, raises a profound and timely question: if corporate responsibility is a voluntary matter, can it be mandated?

In a pioneering piece of legislation, the Danish Parliament has answered the question in the affirmative. The legislation — amending the Danish Financial Statements Act — and its accompanying explanatory notes reflect state-of-the-art thinking about the role and responsibility of the state in encouraging more responsible business practices.

Under the new ‘Social Responsibility for Large Businesses’ law, an estimated 1,100 of the largest Danish companies, both listed and state owned, will be required to include information on their corporate responsibility policies and practices in their annual financial reports.

The legislation is aimed at encouraging large businesses "to work actively on ways they can contribute to solving social challenges". Under it, large businesses are required to "supplement their management's review with a report on social responsibility".

For the purpose of the act, corporate responsibility means that businesses "voluntarily include considerations for human rights, societal, environmental and climate conditions as well as combating corruption in their business strategy and corporate activities".

Affected companies must report publicly on three aspects.

• Their current social responsibility policies, including any "standards, guidelines or principles for social responsibility";
• How the policies are being implemented, including any "systems and procedures" in this respect; and
• The "achievements" resulting from the work, and any related future implications for the business.

If the company has no corporate responsibility policies, it is obliged nonetheless to report on this fact in its management review.

Cutting costs

To minimise costs and workload, businesses are given a high degree of flexibility on how the reports are made. Reports can be part of a management review, an annual report, or on the company's website. The key issue is that they are accessible to the public.

In a nod towards the widening practice of corporate responsibility or sustainability reporting using widely recognised international initiatives, businesses that have acceded to the UN Global Compact, for example, and which publish reports in this context, are exempted from the law. They are, however, required to identify where their reports can be found.

The supporting explanatory material also references the OECD Guidelines for Multinational Enterprises and the Global Reporting Initiative(GRI), as well as a number of international principles relevant to business-driven social responsibility, and to which businesses can refer in developing their corporate responsibility policies.

The legislation also notes that corporate responsibility reports will be subject to check by an auditor.

What's the point?

Since a majority of Danish companies already have corporate responsibility policies, the question might be asked as to why the legislation was considered necessary.

Two explanations come to mind.

In the short term, Denmark will host a couple of high profile corporate responsibility meetings in the next year. These include the Copenhagen Climate Summit (December 2009) and the final ISO Social Responsibility Working Group negotiations. These will provide high profile opportunities to showcase Danish leadership.

In turn, this links to a longer term strategy, outlined in the May 2008 Danish government Action Plan on corporate responsibility. This stated the government's intention "to promote social responsibility and help Danish businesses reap more benefits from being at the global vanguard of corporate social responsibility", and to be "internationally renowned for responsible growth".

As a relatively small country highly dependent on foreign markets, Denmark recognises the potential of corporate responsibility policies to drive innovation and sector leadership (e.g. wind turbines) and to differentiate Danish businesses on the grounds of responsiveness to global social challenges.

What about voluntary actions?

So has the legislation crossed the line by mandating what is by definition voluntary?

The legislation is at pains to make clear that corporate responsibility remains fully voluntary. While every encouragement is given to companies to have a corporate responsibility policy, there is no obligation to have one. Nor is there any requirement to work or report on corporate responsibility. In a sense, what the legislation does is to recognise an existing trend and to encourage greater consistency.

While some will contend that many aspects of corporate activity, such as carbon dioxide emissions reporting, should be mandatory — or are de facto becoming so under carbon trading arrangements — the reality is that regulated corporate responsibility reporting is easier said than done.

However the Danish legislation is one more sign of a creative Scandinavian appetite for pushing the corporate responsibility agenda to the fore.

Following Sweden's 2007 decision to mandate sustainability reporting by state-owned companies, the Danish law reflects the region's support for high ethical standards and its belief that domestic industries are well positioned to be strong competitors in emerging markets for sustainable development products and services.

Amsterdam-based, Paul Hohnen consults, speaks and writes on sustainability and CSR issues. Hohnen is a member of Ethical Corporation's Advisory Board.www.hohnen.net.