1 Introduction. 1.1 The Importance of CSR and CSR Reporting The Increasing Focus on CSR or Sustainability

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1 The topic of this book is the corporate social responsibility (hereinafter CSR) reporting obligation of listed companies in the EU. This chapter provides an introduction to this topic. The chapter begins with an introduction to the importance of the area of CSR and the relevance of CSR reporting from a legal perspective (see Section 1.1). This is followed by a discussion of the difficulties of defining CSR and CSR information (see Section 1.2). Then the research questions and the structure of the book are presented (see Sections 1.3 and 1.4). The chapter concludes with the presentation of the limitations of the research and the research methodology (see Sections 1.5 and 1.6). 1.1 The Importance of CSR and CSR Reporting The Increasing Focus on CSR or Sustainability The relationship between business and society is a complex and long-debated issue. Different theories arose in previous centuries, trying to accurately capture this relationship, with varying levels of success. The followers of the classical economic school of Adam Smith s tradition claim in a nutshell that the sole purpose of a business, hence its sole social responsibility, is to make profit. 1 As compelling and elegant as this theory is, the world has changed greatly since the time of Adam Smith: globalization has increased the interconnection of national economies beyond measure, many companies have outgrown their original national frameworks, and the scarcity of social and environmental resources has become increasingly apparent. Therefore, other wide-ranging theories emerged questioning the classical view of the relationship between business and society or, at least, viewing this relationship from a different angle, especially from the second half of the twentieth century onwards. 2 The common core of these theories is that they emphasize that businesses, for various reasons, are responsible for more than just making profit: their very existence implies certain social responsibilities. 3 These other responsibilities can be referred to as 1 M. Friedman, The Social Responsibility of Business Is to Increase Its Profits, The New York Times Magazine, 13 September 1970, pp , A.B. Carroll, A History of Corporate Social Responsibility: Concepts and Practices, in A. Crane, A. McWilliams, D. Matten, J. Moon, and D.S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility, Oxford, Oxford University Press, 2008, p D. Melé, Corporate Social Responsibility Theories, in A. Crane, A. McWilliams, D. Matten, J. Moon, and D.S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility, Oxford, Oxford University Press, 2008, pp

2 Mandatory Corporate Social Responsibility Reporting in the EU corporate social responsibility (CSR). However, academics were not the only group focusing increasingly on the aforementioned relationship between business and society, and on CSR. Since its inception in the 1950s, 4 CSR has attracted increasing attention from policymakers, NGOs and also general society. 5 In the light of the circumstances just discussed, the question almost poses itself: what has driven academics, policymakers and other parties to start rethinking the relationship between business and society, and what has caused the increasing focus on CSR? As is often the case in relation to complex issues, the answer is not unequivocal, but one may identify certain factors contributing to the aforementioned trend. First and foremost, by the early 1970s there was growing awareness of the increasing level of environmental degradation, depletion of natural resources, and growing poverty and social disruption, 6 for which companies and their activities were held partially responsible. The convocation of the UN World Commission on Environment and Development in 1983, issuing the well-known Brundtland Report, drew attention to the need for not only economic but also social and environmental sustainability by introducing the term sustainable development into the public discourse. 7 Thereafter, it was not long before this term was connected to the conduct of businesses under the umbrella notion of CSR, as businesses are the drivers of development and can greatly contribute to putting global development on a sustainable path. Additionally, the second half of the twentieth century was also witness to unprecedented economic integration between countries: a globalization of markets and trade. 8 This, in turn, meant increased opportunities and also increased competition for businesses. Such circumstances were the catalyst for the significant growth of many companies and waves of mergers between companies, resulting in large multinational corporations (MNCs). 9 Some of these multinational business entities have become comparable to countries in their size as well as in their political and economic bargaining power, 10 meaning that they have become capable of influencing local economies and politics, and hence the fate of large groups of people, without having democratic oversight. It is no wonder, therefore, that the relationship between business and society has come under scrutiny. 4 See H.R. Bowen, Social Responsibilities of the Businessman, New York, Harper, Carroll 2008, pp C. Voigt, Sustainable Development as a Principle of International Law: Resolving Conflicts between Climate Measures and WTO Law, Leiden, Martinus Nijhoff Publishers/Brill Academic, 2009, p UN, Report of the World Commission on Environment and Development: Our Common Future, 1983, < (accessed 10 April 2016), Para J.E. Stiglitz, Globalization and Its Discontents, New York, W. W. Norton & Company, 2003, pp H. Schenk, Mergers and Concentration Policies, in P. Bianchi and S. Labory (eds.), International Handbook on Industrial Policy, Cheltenham, Edward Elgar Publishing, 2008, pp T.E. Lambooy, Corporate Social Responsibility: Legal and Semi Legal Frameworks Supporting CSR, Deventer, Kluwer Law International, 2010, p. 3. 2

3 Finally, owing to the ability of MNCs to operate in virtually any country in the world and change venue relatively easily, 11 these businesses have the ability to escape the legal consequences of their actions by transferring parts or even all of their activities outside those jurisdictions that have more stringent legal requirements. This makes the conduct of such businesses extremely difficult for legislators of individual countries to regulate, as their monitoring and enforcement powers and capabilities are limited beyond the confines of their jurisdictions. 12 It is often argued that the increased focus on CSR has also been attributable to the fact that CSR might complement legal requirements, for example in the event that national law falls short of fulfilling its purpose in respect of MNCs. 13 As a result of the aforementioned circumstances and such current events as the global financial crisis, CSR and generally the relationship between business and society are hot topics and increasingly important areas of research. Despite the long history of the CSR discourse, CSR has only recently come within the purview of legal research. This is mainly because CSR is generally defined as a purely voluntary effort on the part of the companies, which rendered it an extra-legal topic for a long time and, by definition, excluded it from the area of legal research. 14 However, this perception of CSR being strictly voluntary appears to be changing, and as a result, both academics and policymakers appear to acknowledge to an increasing extent that CSR is not inherently extra-legal but that the law does play a role in respect of CSR. 15 These features of CSR and the changes in the perception of it make it important to research CSR from a legal perspective as well CSR Reporting as an Increasingly Important Area from a Legal Perspective Regardless of whether CSR is perceived as a purely voluntary (and hence extra-legal) effort on the part of the companies or not, mandatory hard-law regulation may still be of 11 Id. 12 D.J. McBarnet, Corporate Social Responsibility: Beyond Law, through Law, for Law: The New Corporate Accountability, in D. McBarnet, A. Voiculescu, and T. Campbell (eds.), The New Corporate Accountability: Corporate Social Responsibility and the Law, Cambridge, Cambridge University Press, 2007, pp Id., pp B. Sjåfjell, If Not Now, Then When?: European Company Law in a Sustainability Development Perspective, European Company Law, Vol. 7, No. 5, 2010, [abbreviated as Sjåfjell 2010A ], p See McBarnet 2007, pp ; B. Sjåfjell, Why Law Matters: Corporate Social Irresponsibility and the Futility of Voluntary Climate Change Mitigation, European Company Law, Vol. 8, No. 2/3, 2011, p. 56; K. Buhmann, Corporate Social Responsibility: What Role for Law? Some Aspects of Law and CSR, Corporate Governance, Vol. 6, No. 2, 2006, p. 197; R. Steurer, The Role of Governments in Corporate Social Responsibility Characterising Public Policies on CSR in Europe, Policy Sciences, Vol. 43, No. 1, 2010, pp ; and Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions A renewed EU strategy for Corporate Social Responsibility, COM(2011) 681 final, pp

4 Mandatory Corporate Social Responsibility Reporting in the EU importance with respect to CSR reporting. 16 This is particularly the case if CSR is perceived as a concept that includes legal compliance, but even if it is understood as compliance with purely voluntary requirements, monitoring and enforcement is of the utmost importance in ensuring transparency in CSR matters. Since countries are generally reluctant to incorporate mandatory provisions on CSR in their substantive company laws, 17 a more widely accepted approach to fostering CSR appears to be to mandate CSR reporting. 18 Indeed, there appears to be increasing activity on the part of the legislators in terms of mandating CSR reporting to a varying extent and taking various forms. As an example of recent legislative activity concerning CSR disclosure, some of the recent laws are listed in the following paragraph. The EU has required the disclosure of non-financial key performance indicators, including those relating to environmental and employee matters since It should be noted that this disclosure requirement is currently being amended and further expanded. 20 The Securities and Exchange Commission in the US recently published guidance on the disclosure of environmental CSR information with financial implications. 21 The California Transparency in Supply Chains Act of 2010 requires certain MNCs doing business in California to disclose information on various types of CSR-related information 16 Steurer 2010, pp and It should be noted that several projects investigate the possibility of introducing also substantive mandatory rules applicable to companies facilitating sustainable or socially responsible business conduct. The most notable of these is the Sustainable Companies Project of the University of Oslo, which focuses on the possibility of climate change mitigation through company law. For further information see Sustainable Companies Project (completed), [website], < (accessed 18 April 2016). 18 McBarnet 2007, pp Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings, OJ 2003 L 178, Articles 1(14) and 2(10). 20 While the directive amending the non-financial reporting rules of the consolidated Accounting Directive has already been adopted, the deadline for its transposition to member state laws has not elapsed yet. See Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, OJ 2014 L 330. As a result, not all member states have implemented the provisions of the directive, and the author is unaware of any jurisdictions in which companies already needed to prepare a non-financial statement for 2015 according to the directive s provisions. For example, the UK government only started consultation on the implementation of the directive in 2016, see Department for Business, Innovation & Skills, Closed consultation Non-Financial Reporting Directive: UK implementation, [website], < (accessed 28 April 2016). 21 Commission Guidance Regarding Disclosure Related to Climate Change, 17 CFR PARTS 211, 231 and 241 [Release Nos ; ; FR-82]. 4

5 with respect to their supply chains. 22 In 2009, Denmark also introduced extensive CSR reporting requirements for companies above a certain size. 23 South Africa has become the first country in the world to mandate the integrated reporting of financial and sustainability information. 24 Finally, the UK introduced mandatory greenhouse gas (hereinafter GHG) emission disclosure requirements for listed companies. 25 Besides such laws mandating the disclosure of certain types of CSR information directly, numerous international initiatives and instruments also concern CSR and CSR reporting. 26 Although these initiatives and instruments have no mandatory legal effect by default, various legislators promote membership in such international initiatives or the use of one or more of these instruments, with a view to giving these initiatives and instruments a quasi-legal effect. For example, since 2007, Swedish state-owned companies have been required to report on their sustainability using the Global Reporting Initiative s Sustainability Reporting Framework, 27 and the Danish mandatory CSR reporting regime also facilitates membership in the UN Global Compact. 28 Thus, it is obvious that numerous legislators and policymakers all over the world have turned their attention towards CSR. The most common manifestation of this attention is that they promote membership in international initiatives and the use of international instruments that arose to facilitate the disclosure of CSR information, or that they mandate the disclosure of a wide variety of CSR information in various ways. These trends suggest 22 See J. Jaeger, Calif. Passes New Supply Chain Transparency Law, Compliance Week, Vol. 9, No. 98, 2012, p. 24; and A.V. Lupo, S.L. Bruno and E.J. Pulliam, The California Transparency in Supply Chains Act of 2010, Computer and Internet Lawyer, Vol. 29, No. 4, 2012, p K. Buhmann, The Danish CSR Reporting Requirement: Migration of CSR-Related International Norms into Companies Self-Regulation Through Company Law?, European Company Law, Vol. 8, No. 2/3, 2011, pp ; and Danish Financial Statements Act (Act No. 448 of 7 June 2001), Section 99a. 24 R.G. Eccles and D. Saltzman, Achieving Sustainability through Integrated Reporting, Stanford Social Innovation Review, Vol. 9, No. 3, 2011, pp See Department for Environment, Food & Rural Affairs, Measuring and Reporting Environmental Impacts: Guidance for Businesses, [website], < (accessed 16 April 2016). 26 See, for example, the Global Reporting Initiative s Sustainability Reporting Framework, AccountAbility s AA1000 family of standards, Social Accountability International s SA8000 sustainability verification and certification standard, International Organization for Standardization s ISO family of standards on environmental management and its ISO family of standards on CSR, the Carbon Disclosure Project, United Nations Global Compact s Communication on Progress, and Principles of Responsible Investment s Reporting Framework. 27 Regeringkansliet, Guidelines for External Reporting by State-Owned Companies, [Guidance Document], 2007, < (accessed 10 April 2016). 28 See Proposal for an Act amending the Danish Financial Statements Act, [translation of legal text], 2008, < (accessed 10 April 2016), p. 4; and Danish Commerce and Companies Agency, Reporting on Corporate Social Responsibility An Introduction for Supervisory and Executive Boards, [guidance document], 2009, < (accessed 17 April 2016), pp

6 Mandatory Corporate Social Responsibility Reporting in the EU that CSR reporting has indeed become a very important issue on the agenda not only of academics and international organizations, but also of national legislators and companies. However, despite this increased legislative activity, dealing with CSR information in classical disclosure instruments is in the midst of legal uncertainty. Since CSR reporting requirements are often added by amending the existing framework of corporate disclosure, it is rather unclear what the exact reporting requirements with respect to CSR information are and what the legal consequences of not complying with these requirements are. Furthermore, the legal status of voluntarily issued CSR reports is even more ambiguous. These uncertainties, in turn, have resulted in problematic and ambiguous situations involving companies using CSR reporting solely as a marketing tool by exploiting the legal loopholes in the area and misrepresenting their true, non-socially responsible, behaviour. The most well-known legal case is the one involving Nike. In that case, although Nike claimed to be in compliance with labour regulations in its foreign factories in various corporate reports, it was found to be involved in numerous labour violations. 29 Another more recent case concerns the oil industry giant BP. In the wake of the explosion of the Deepwater Horizon and the resulting oil spill, apparent inconsistencies surfaced between BP s portrayal of its own CSR activities and its socially irresponsible behaviour that long preceded the Deepwater Horizon incident. 30 It is clear from the foregoing discussion that CSR has received increasing attention in the past decades from scholars, companies, policymakers and other stakeholders, and that CSR reporting has been at the core of this attention. Therefore, CSR reporting appears to be an important area to research, especially as it appears to be the most prominent link between law and CSR. 1.2 Defining CSR However, before we discuss the legal aspects of CSR disclosure systems for listed companies in the EU, we need to clarify the content of the notions of CSR and CSR information. 29 M. Sutton, Between a Rock and a Judicial Hard Place: Corporate Social Responsibility Reporting and Potential Legal Liability under Kasky v. Nike, UMKC Law Review, Vol. 72, No. 4, 2004, pp M.A. Cherry, and J.F. Sneirson, Beyond Profit: Rethinking Corporate Social Responsibility and Greenwashing after the BP Oil Disaster, Tulane Law Review, Vol. 85, No. 4, 2011, pp. 985,

7 1.2.1 What Is CSR? The concept of CSR may include a wide variety of issues and themes, 31 and thus may be understood as a virtually limitless concept. 32 In addition, it is a concept that has been changing significantly over time in response to the changes in societal interests and expectations associated with companies. 33 As a consequence of these characteristics of the CSR concept, the literature on CSR provides no workable definition of the notion, as most scholars emphasize its inherently evolving nature and understand it as an inclusive concept supporting an open field of scholarship. 34 However, in order to be able to conduct legal analysis in relation to CSR reporting, at least a working definition of CSR has to be provided. The first obstacle to attempting such a definition, from a legal perspective, is that, as set out in Section 1.1.1, most sources define CSR as a purely voluntary effort on the part of companies. The European Commission, in its first and most comprehensive policy paper on CSR, defines it as a concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis. 35 At the same time, it should be noted that this voluntary approach is under siege both from various societal groups and from the academia, who urge the enactment of mandatory legal requirements with respect to certain CSR issues. 36 It should be noted that several CSR issues, such as the prohibition of bribery, discrimination between employees and various diversity issues, have already been regulated in numerous jurisdictions. 37 Furthermore, the voluntary CSR or sustainability reports of companies often report not only on voluntary measures undertaken by the company, but also on measures undertaken in compliance with legal provisions regulating company behaviour connected to CSR. In addition, it has been suggested that it is beneficial to analyse CSR in an implicit explicit framework, taking into account the differences, including legal ones, in the national backgrounds. 38 Finally, even the EU legislature has acknowledged in its Renewed CSR Strategy that corporate actions 31 See, e.g., Lambooy 2010, p J.H. van Oosterhout and P.P.M.A.R. Heugens, Much Ado about Nothing: A Conceptual Critique of Corporate Social Responsibility, in A. Crane, A. McWilliams, D. Matten, J. Moon, and D.S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility, Oxford, Oxford University Press, 2008, pp See Carroll 2008, pp A. Crane, D. Matten, A. McWilliams, J. Moon, and D. Siegel, The Corporate Social Responsibility Agenda, in A. Crane, A. McWilliams, D. Matten, J. Moon, and D.S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility, Oxford, Oxford University Press, 2008, pp Green Paper Promoting a European framework for Corporate Social Responsibility, COM(2001) 366 final, p See Sjåfjell 2010A, pp See Lambooy 2010, p D. Matten and J. Moon, Implicit and Explicit CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility, Academy of Management Review, Vol. 33, No. 2, 2010, pp

8 Mandatory Corporate Social Responsibility Reporting in the EU based on mandatory legal requirements can be perceived as part of the company s CSR. 39 In the light of these arguments, it appears outdated and impractical to define CSR as purely voluntary for the purpose of this book, especially considering the legal topic thereof. At the same time, it should be pointed out that it is not the goal of this book to settle the voluntary -versus-mandatory debate in the area of CSR. Similarly to the debate about whether CSR should cover both voluntary and mandatory corporate actions, there is no general consensus on themes and topics that CSR should cover either. As pointed out earlier, CSR is an open and inclusive concept, which means that different people may understand it in various ways without being in contradiction with the basic idea of CSR. 40 However, such a broad and open understanding would be counterproductive and unusable from a legal perspective. Therefore, the most common themes and topics in the CSR definitions have to be summarized. Most scholars and policymakers agree that CSR relates to the activities that companies undertake either voluntarily or in compliance with legal provisions. 41 In addition, they also agree that CSR broadly covers social and environmental concerns. 42 This means that the CSR of a company covers how it integrates social and environmental matters into its corporate decision-making and how it accounts for its impact on the environment and society. In addition, most sources suggest that while the stakeholder approach is not equal to CSR, per se, it provides a strong conceptual basis for CSR. 43 Similarly, while ethics is not part of CSR, it is suggested that ethics provides a normative basis for it, 44 especially in cases where there are neither legal rules nor business incentives fostering certain socially responsible corporate actions. Therefore, the stakeholder approach and ethics also appear to be connected to CSR. These two concepts relating to CSR will be used with particular reference to corporate governance reporting and, therefore, will be further discussed in Section 3.5. Naturally, most scholars and policymakers go further in defining CSR and in detailing the themes and topics CSR covers. 45 For example, CSR themes or topics relating to the environment may be the management of environmental impacts and natural resources, and such global environmental concerns as environmental protection and climate change mitigation, 46 while CSR themes and topics relating to society may be human resource management, health and safety at work, issues concerning local 39 Communication from the Commission, COM(2011) 681 final, pp van Oosterhout and Heugens 2008, pp See, e.g., Green Paper, COM(2001) 366 final, p. 6; Proposal for an Act amending the Danish Financial Statements Act, 2008, p. 4; and McBarnet 2007, p Id. 43 See Green Paper, COM(2001) 366 final, p. 6; and Melé 2008, pp See, e.g., R. McCarty, Business, Ethics and Law, Journal of Business Ethics, Vol. 7, No. 11, 1988, p. 7; and Communication from the Commission, COM(2011) 681 final, p See, e.g., Green Paper, COM(2001) 366 final, p. 6; Proposal for an Act amending the Danish Financial Statements Act, 2008, p. 4; and McBarnet 2007, p Green Paper, COM(2001) 366 final, pp. 10 and 15. 8

9 communities, business partners, suppliers and consumers, and human rights. 47 However, these themes and topics will only be used as guidance since it should be kept in mind that this book is concerned with a general CSR disclosure framework in the EU for listed companies. A stricter definition of the content of CSR, at this point, would not be helpful because different policy documents in the EU and its member states provide for different themes and topics to be covered by the concept of CSR. It can be concluded that, for the purpose of this book, the CSR of a company means how it integrates social and environmental matters into its corporate decision-making and how it addresses its impact on the environment and society. In addition, stakeholder and ethical issues will also be understood as being connected to the CSR concept What Is CSR Information? Having noted how CSR is understood for the purpose of this book, a brief discussion is in order to highlight what CSR information is and what kind of characteristics such information may have. It follows from the aforementioned working definition of CSR that CSR information will be understood as information on a company s impact on the environment and society, on how the company addresses these impacts and how it integrates social and environmental matters into its decision-making. In contrast to financial information, which is mostly objectively measurable and verifiable quantitative information, CSR information is rather diverse. While it is true that some CSR information, such as information on the company s GHG emissions, is objectively measurable and verifiable quantitative information, 48 much CSR information is nonquantifiable qualitative information disclosed in a narrative form. 49 However, even the CSR information that is objectively measurable is not as consistent as financial information, owing to the lack of generally accepted metrics on various aspects of CSR. 50 In addition, companies are generally reluctant to compare such data on CSR with that of their peers 51 ; thus, companies often prefer to disclose objectively quantifiable CSR information also in a narrative form. The form of CSR information also appears to differ depending on which reporting instrument it is disclosed in. Furthermore, CSR disclosures have often been criticized for not providing historical facts, but rather anecdotes and narratives connected 47 Id., pp. 8-9 and R. Sullivan, Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information?, Sheffield, Greenleaf Publishing, 2011, pp M.E. Porter and M.R. Kramer, Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review, Vol. 84, No. 12, 2006, p C. Villiers and B. Rider, Corporate Reporting and Company Law, Cambridge, Cambridge University Press, 2006, pp See, e.g., Sullivan 2011, p

10 Mandatory Corporate Social Responsibility Reporting in the EU with the future perspectives of a company, 52 while financial reporting relies heavily on solid and verifiable historical information. 53 Since companies generally avoid disclosing future CSR goals in a quantitative form, such information is also more likely to be disclosed as narrative information. 54 In summary, CSR information will be understood as information about a company s impact on the environment and society, about the way it addresses these impacts, and about integration of social and environmental matters into its decision-making. In line with the foregoing discussion, the form of the information will not be an excluding factor, in view of the diversity of CSR information and its mode of representation. In addition, these characteristics of CSR information have obvious effects on the way in which CSR information disclosure can and should be mandated. This discussion will be picked up in Chapter Research Questions This book deals with the following three interconnected research questions: The first research question is whether listed companies in the EU have to report on CSR information mandatorily within the existing framework of ongoing corporate disclosure for listed companies or through new vessels of ongoing corporate disclosure created specifically for the disclosure of CSR information. Furthermore, this question also includes a more nuanced investigation of what kind of CSR information these listed companies have to report on mandatorily and how great the extent of the disclosure obligation is. As indicated earlier, it generally appears to be uncertain whether listed companies need to disclose CSR information on an ongoing basis, as the requirements are rather vague and ambiguous. Further, it is even less certain what kind of CSR information companies have to disclose and to what extent. Therefore, this research question is aimed at investigating and analysing the existing ongoing mandatory CSR disclosure requirements in the EU. The second research question concerns accountability for disclosure breaches in respect of CSR information that is mandatory to disclose on an ongoing basis. Disclosure requirements in themselves are limited in effectiveness, unless they are backed up by legal consequences for breaches of the disclosure obligation. Therefore, it is important to investigate and analyse whether the listed companies may incur legal consequences for breaching their ongoing CSR disclosure obligation. Hence, this research question asks what kind of legal accountability listed companies may incur for misstatements and omissions in reports containing CSR information and for non-timely disclosure of CSR 52 See, e.g., Porter and Kramer 2006, p See, e.g., Villiers and Rider 2006, p See, e.g., Porter and Kramer 2006, p

11 information in the EU. Legal accountability, for the purpose of this book, covers the possibility of both public and private enforcement against the company. To a limited extent, the possible accountability of corporate officers will also be discussed. On the basis of the analyses of the two preceding research questions, the third research question asks whether the current ongoing reporting system mandating the disclosure of CSR information in the EU should be changed or amended, and how it could be amended in order to enhance transparency in CSR matters. Thus, this research question, based on the findings of the preceding research, tries to answer the question of whether a better mandatory CSR disclosure system is needed at the EU level, and what obstacles have to be tackled and what opportunities can be utilized in order to create a better mandatory CSR reporting system for listed companies in the EU. 1.4 The Structure of This Book This book is divided into five chapters. The introduction to the research in Chapter 1 is followed by a presentation of the theoretical background of corporate reporting in Chapter 2, which presents the theoretical basis for mandatory corporate disclosure in company and financial markets law. The analysis includes an investigation of the role and technique of disclosure regulation within company and financial markets law, the users of corporate reports, and the rationale for regulating disclosure. These analyses are complemented by a discussion of how CSR relates to the theoretical background of corporate disclosure on the capital markets and whether they are compatible with one another. Chapter 3 contains the analyses of the first and second research questions. The chapter is divided into subsections according to various ongoing disclosure vessels in which companies may have to disclose CSR information and incur accountability for any breaches. The chapter covers periodic financial disclosures, ad hoc disclosure, disclosure in the management report, corporate governance reporting, specialized mandatory CSR disclosure regimes (especially the Danish mandatory CSR disclosure regime), and international reporting initiatives and instruments that may become mandatory under certain circumstances, in separate subsections. The reason for separating periodic financial disclosure, disclosure in the management report and corporate governance disclosure is explained in detail in Section 3.1. In each section, it is analysed whether the disclosure of CSR information is mandated through the relevant disclosure vessel and whether companies may incur accountability for any mandatory CSR disclosure breach. On the basis of the analysis of the current state of mandating CSR disclosure in the EU, Chapter 4 analyses the future perspectives of the area of mandatory CSR reporting. First, it is discussed whether CSR reporting should be regulated at the EU level. This discussion includes an investigation of whether mandating CSR reporting has conceptual 11

12 Mandatory Corporate Social Responsibility Reporting in the EU obstacles, whether there is a need to mandate the disclosure of CSR information at all, and whether mandatory CSR reporting could be supplemented by other methods of increasing transparency in CSR matters. This is followed by an investigation of how CSR reporting could be mandated at the EU level. The chapter goes on to discuss what CSR information should be mandatorily disclosed, which disclosure vessel and regulatory technique should be used and what sort of accountability mechanism should be established to deal with any disclosure breach. The book ends with some concluding remarks in Chapter Limitations It is apparent from the foregoing discussion of the peculiarities of the CSR scholarship and the research questions that owing to the research design and the confines of the PhD programme there are certain limitations to this research. In addition, further limitations are needed for the feasibility of this PhD research. First and foremost, this book is mostly limited to investigating and analysing legal requirements at the EU level. Although the legal set-up in three selected member states is also reviewed, this analysis is much less thorough than that of EU law and primarily serves illustrative purposes. This limitation also stems from the focus of the book on listed companies, since the rules applicable to listed companies are the most harmonized within the EU in the wake of the Financial Services Action Plan. Even where differences between the member states are investigated, obviously not all twenty-seven member states 55 can be analysed in detail. Therefore, this limitation may mean a slightly distorted picture of the CSR reporting rules and practices in the EU. To offset this distortion, where appropriate, rules from other member states are also discussed to a limited extent. A notable exception to this limitation is the investigation of the EU corporate governance reporting regime in Section 3.5. Further, where appropriate, the focus is widened to other non-eu jurisdictions in order to provide a basis for comparison and to provide possible examples for EU-level rules. Another limitation stems from the fact that the research not only investigates EU law, but also reviews the national laws of several member states. This limitation pertains to the linguistic diversity of the member states and the consequent language barrier. For the research, primarily English language sources have been used. With regard to the three selected member states, the original language sources are also widely used in the event English language sources are not available; however, access to such original language sources is limited. With regard to Danish law, original language sources are used to a very 55 It should be noted that as of 1 July 2013 (with the accession of Croatia), the EU has twenty-eight member states. However, the vast majority of this research was conducted before this date. 12

13 limited extent. Finally, the original language sources in other languages are not used because of the language barrier. In some cases, the lack of access to original language sources and the language barrier may decrease the accuracy and value of the presented analyses. Another apparent limitation of the research is that it focuses solely on listed companies. This is because listed companies and the financial markets have long been perceived as the key for economic growth and development 56 ; thus, steering these companies towards a more sustainable and socially responsible path could be the key to achieving sustainable development. In addition, although there are many listed companies worldwide, their numbers are dwarfed by that of all limited companies. Coupled with their disproportionately large impact on the environment and society, this makes these companies easier to monitor and regulate. Furthermore, listed companies are dependent on investments from a wider section of society; hence, investigating their social responsibility reporting requirements appears to be an obvious choice. Finally, listed companies have always been at the forefront with regard to corporate disclosure requirements and, as has already been pointed out, disclosure regulation in financial markets law is one of the most harmonized in the EU, and this research focuses mainly on EU-level regulation. It can also be construed as a limitation that the research does not cover the prospectus disclosure obligation of listed companies. This is because CSR activities primarily affect the long-term operation of companies. In addition, the effects of socially responsible or irresponsible behaviour are often uncertain, and thus it is questionable whether useful disclosure could be made in respect of CSR in the prospectus. Therefore, it appears more prudent to analyse the ongoing disclosure requirements applicable to listed companies. Owing to the limited time available for the research and because the focus of this book is on disclosure regulation in company and financial markets law, certain core company law issues will not be considered. Examples of such core company law issues are the broader duties of directors and the directors liability under national company law. These issues are usually greatly dependent on company law traditions and the national company law of the individual member state; therefore, a thorough analysis thereof would go beyond the scope of this book. As this book is concerned with the general CSR disclosure framework, it does not include all possible areas and issues covered by the notion of CSR on the basis of the applicable literature. In order to be able to handle the concept of CSR within a legal framework, the definition of CSR has been limited to environmental and social issues. Further, owing to the focus on a general CSR disclosure framework, disclosures in compli- 56 E. Ferran, Building an EU Securities Market, Cambridge, Cambridge University Press, 2004, pp

14 Mandatory Corporate Social Responsibility Reporting in the EU ance with special environmental and social disclosure requirements in certain sectors or in connection with certain activities 57 are also not covered by this book. The final limitation concerns the term accountability. Accountability, for the purpose of this book, means solely legal accountability and refers to accountability towards public authorities or civil liability. It should be pointed out that there may be other social and economic consequences for reporting on CSR, and for misstatements or omissions in CSR reports, but these are not part of this research. However, reference to these extra-legal consequences may be made in this book, where appropriate. 1.6 Methodology The Choice of Investigated Jurisdictions As indicated earlier, the main focus of this research is on the EU-level rules on CSR reporting for listed companies. However, in order to give a more comprehensive picture of the actual working of EU law in this area, the national laws of three member states will also be examined, although to a lesser extent and primarily for illustrative purposes. The three member states are the UK, Germany and Hungary. The UK has been selected as a member state representing the Anglo-Saxon (common-law) countries. In addition, within the EU it is one of the countries with the most mature capital markets and financial markets law. Germany has been selected to represent civil law countries, since it is the largest civil law jurisdiction in the EU. Hungary has been selected as representing the ex-eastern Bloc countries with smaller, developing capital markets and financial markets law regimes. The examination and comparison of these three countries should give an overview of the actual working of the EU rules relating to CSR reporting for listed companies. It should be pointed out that with respect to corporate governance reporting, a broader pool of the EU member states corporate governance codes are analysed. This section is an exception from the aforementioned set-up. The reasons for this extraordinary set-up are discussed further in Section 3.5. In addition, the CSR reporting requirements for listed companies under US financial markets law will be examined and compared with the EU system in certain parts of this book, but not in the entire book. Comparing the EU system with that of the US is an obvious choice, since the US, by virtue of its mature regulatory system and market size, is 57 See, e.g., the special environmental disclosure requirements under Regulation (EC) No 166/2006 of the European Parliament and of the Council of 18 January 2006 concerning the establishment of a European Pollutant Release and Transfer Register and amending Council Directives 91/689/EEC and 96/61/EC, OJ 2006 L 33/1. 14

15 regarded as a role model for financial markets regulation in the EU. 58 Further, the US regulatory requirements have already been powerful catalysts for regulatory and institutional remodelling of the financial markets regime of the EU and its member states. 59 Therefore, US financial markets law will be used as a basis for comparison in Sections 3.2 and 3.3. The reasons why it is not used as a basis for comparison with respect to the EU disclosure obligation in the management report will be discussed in Section 3.4. In addition to EU law and the national laws of the member states just listed, Danish law will also be considered to a limited extent. Denmark has recently introduced a mandatory CSR reporting regime that is the most comprehensive mandatory CSR reporting regime in the EU to date. Therefore, analysing the requirements and results of the Danish mandatory CSR disclosure regime may provide valuable insights into the actual working of a mandatory CSR disclosure regime Research Methodologies Since this book contains a fundamentally legal research, it utilizes primarily legal research methodologies. The book utilizes, for the most part, conventional qualitative positivistic or doctrinal legal research methodology. 60 Positivistic or doctrinal legal research methodology is designed to uncover de lege lata (the law as it stands) through the analysis of various legal sources and, in some cases, extra-legal sources. 61 Within this broader approach, the research methodology relies on the theoretical foundations laid down by the legal realist school. 62 In accordance with the approach of this school of legal research, and owing to the vagueness of the explicit requirements relating to CSR disclosure in the EU, not only secondary EU legal sources, but also official guidelines and interpretations and policy statements have to be taken into account in order to give a realistic picture of the regulatory framework. 63 In addition, because in some cases not even these sources provide an adequately realistic picture of the applicable rules, unofficial guidance documents, surveys and the scholarly literature are also considered. As the structure and functioning of corporate reporting regimes for listed companies are based not only on legal arguments and principles, but also on arguments and principles 58 Ferran 2004, pp , Id., pp I. Dobinson and F. Johns, Qualitative Legal Research, in M. McConville and W.H. Chui (eds.), Research Methods for Law, Edinburgh, Edinburgh University Press, 2007, pp ; and R. Cryer, T. Hervey, B. Sokhi-Bulley, and A. Bohm, Research Methodologies in EU and International Law, Oxford, Hart, 2011, pp Dobinson and Johns 2007, pp H.P. Olsen and S. Toddington, The Scandinavian Roots of a New Approach to Legal Knowledge, Retfærd, Vol. 35, No. 139, 2012, pp Id. 15

16 Mandatory Corporate Social Responsibility Reporting in the EU from the disciplines of economics and finance, interdisciplinary research methodology has to be utilized. To avoid the pitfalls of doing such research, such as the challenge of understanding another discipline and the risk of misunderstanding it, 64 wherever possible, the economic and financial arguments and analyses already incorporated into legal textbooks and research articles will be used. Economic and financial literature will be used only to a limited extent, where it is necessary to give a realistic picture of the underlying rationale and background of the legal frameworks in this area, to test the internal and external effectiveness of disclosure regulation and where the need for more thorough analysis validates it. 65 In addition, this research also concerns CSR and therefore needs to rely on the literature of the CSR scholarship. At the same time, the legal literature exploring the possible connections between CSR and law is also relied on wherever possible. For a more accurate picture of and a better understanding of the actual working of the disclosure requirements in EU law applicable to listed companies, the national laws of some member states also need to be investigated and compared with one another. Therefore, the comparative legal research method has to be used as well. 66 Within comparative law, the book relies on the basic functional comparative law strand of legal research. 67 The advantage of this approach is that it focuses on the function of the rules, not their form or place in the given national legal system, 68 and has proved useful in this book, since the three selected member states legal systems vary greatly and legal provisions and instruments serving the same purpose may form part of different areas of law. In addition, the functional comparative law approach is also rather useful for evaluating the functioning of various legal rules, 69 and forms the basis of the discussion in Chapter 4. In view of the structure of the EU corporate governance disclosure system, a more simplistic comparative method is used for its analysis. The EU corporate governance disclosure system is based on best-practice codes; thus, to analyse this disclosure system, the content of the codes has to be compared. This comparison is based on the exploratory quantitative method used to identify CSR elements in the corporate governance codes, W. Schrama, How to Carry out Interdisciplinary Legal Research Some Experiences with an Interdisciplinary Research Method, Utrecht Law Review, Vol. 7, 2011, pp Id., p See G. Wilson, Comparative Legal Scholarship, in M. McConville and W.H. Chui (eds.), Research Methods for Law, Edinburgh, Edinburgh University Press, 2007, pp ; P.G. Monateri (ed.), Methods of Comparative Law, Cheltenham, Edward Elgar Publishing, 2012; K. Zweigert, H. Kötz (authors), and T. Weir (transl.), An Introduction to Comparative Law, 3rd revised edition, Oxford, Clarendon Press, 1998; and J. De Coninck, The Functional Method of Comparative Law: Quo Vadis?, Rabels Zeitschrift für auslaendisches und internationales Privatrecht, Vol. 74, No. 2, 2010, pp See J. Gordley, The Functional Method, in P.G. Monateri (ed.), Methods of Comparative Law, Cheltenham, Edward Elgar Publishing, 2012, pp ; and Zweigert, Kötz, and Weir 1998, pp Gordley 2012, pp Id., p W.H. Chui, Quantitative Legal Research, in M. McConville and W.H. Chui (eds.), Research Methods for Law, Edinburgh, Edinburgh University Press, 2007, pp