The Modern Slavery Act and growing non-financial reporting requirements
The Modern Slavery Act’s introduction of mandatory slavery and human trafficking statements for UK companies has been an initially little heralded addition to non-financial reporting requirements. However, companies need to start thinking about how they address its requirements which will be applicable for financial years ending on or after 31 March 2016.
At the same time there are a number of other non-financial reporting requirements and standards coming in soon including the ILO 2014 Protocol to the Forced Labour Convention and EU Directive on non-financial reporting.
With these continued developments, it is worth companies revisiting their approach to non-financial reporting.
The Modern Slavery Act
The Act will require approximately 12,000 UK companies to publish a Board approved statement setting out what they have done in the year to ensure slavery and human trafficking does not exist in their business or supply chains. The accompanying explanatory notes and guidance provide further information.
Though companies have the option to simply state they have done nothing, they need to consider carefully the reputational implications of doing so and the message this conveys.
A recent report by Finance Against Trafficking provides a useful framework for a best practice approach to dealing with the and trafficking and slavery generally. The report was produced by Stop the Traffik, who are the Financial Times’ seasonal appeal partner for this year so you may have seen some of their work in the paper recently.
How should companies approach non-financial reporting?
To address developing non-financial reporting requirements, companies need to be flexible and, wherever possible, seek to use new regulations to drive performance improvements and create competitive advantage. This sounds well meaning and easy to say in principle, but what does it actually mean in practice?
- Get the governance process right
Non-financial reporting is explicitly the Board’s legal responsibility, so every Board needs to consider how it is addressed. There is no “one size fits all” approach but Boards should consider a range of steps to ensure non-financial issues are regularly discussed at Board level, such as: nominating a Board member with specific responsibility for dealing with non-financial issues; or creating a new Board committee or expanding the remit of an existing committee to include non-financial issues.
ESG investors also increasingly see governance as the starting point for assessing how companies deal with issues as diverse as climate change and slavery. So companies should expect to be quizzed on these matters.
- Focus on the key risks and material issues
Reporting should address those issues which are important to determining the success or failure of your business and the delivery of your strategy. Shareholders will not read a long report listing philanthropic or irrelevant activities. Equally, a short report which misses vital issues adds no value and may actually be viewed negatively. Supply chains have been an area of increased focus for companies, investors and campaigners and the Modern Slavery Act requirements will only increase this.
- Link KPIs and strategy
Linkages between non-financial KPIs strategy and remuneration have improved over recent years. Yet in many cases the connections still appear limited and often it can be hard to assess how deeply they are embedded within an organisation. As the Finance Against Trafficking report identifies, this can be a significant issue if employees are incentivised to act in ways which put high level goals at risk – for example by only selecting suppliers on limited criteria such as price.
- Recognise that this is an evolving area
Many companies are struggling to understand their obligations and develop their sustainability reporting in line with evolving regulations, changing norms and real world developments. Clearly communicating how you are tackling these challenges and articulating a vision for achieving your goals is vital but companies do not need to provide all the answers straight away.
- Engage with investors and analysts
Investors and analysts are increasingly questioning companies about their non-financial risks. Proactive engagement with investors on these matters helps companies to understand investor concerns and refine and develop what they are doing. It also builds relationships and establishes credibility and links which can be invaluable if crises develop.