Estonian lawmakers are balking at a proposed directive coming out of the European Union that would require large companies to disclose non-financial and diversity information.

The directive, put forward as an amendment to accounting rules, calls on large companies with over 500 employees to provide the additional information as a way to provide more transparency and increase trust among investors and stakeholders. That non-financial information would include details about boardroom diversity, anti-bribery and anti-corruption measures and human rights issues. Estimates about the number of companies that would be subject to the new rule hover around 18,000 large businesses.

Michel Barnier, the internal market and services commissioner for the European Commission, said this spring that requiring the disclosure of such information would help businesses take a longer-term view in their decision making and ultimately become more successful.

The Estonian Parliament did not agree.  The lawmakers delivered an opinion last week to the European Parliament and the European Council, arguing the proposal violates the subsidiarity principle. The Estonian lawmakers said the European Union is only allowed to act in such areas when the proposal cannot be adequately achieved at the member state level.  However, the proposal itself mentioned several member states which have already adopted laws requiring the disclosure of non-financial information by large companies.

“It remains incomprehensible why action at Member State level is not sufficient and why there should be a need for intervention at European Union level,” the letter stated.

Estonia also questioned why the European Union lawmakers would seek a directive first rather than a non-binding recommendation.

Company regulations are primarily formed at the member state level, the letter said. Therefore, it should be up to the member states to decide what information needs to be disclosed. The letter argues that capital and liabilities, financial status, profits and loss should be sufficient information. Extending those disclosures to non-financial information is of questionable value, it said.

The Estonian lawmakers questioned the legal basis for the directive, which cited the authority to adopt directives to attain freedom of establishment in particular fields. The letter said it is “incomprehensible” how requiring companies to disclose non-financial information will help attain freedom of establishment, and suggests it will do the opposite. “Above all, disclosure of non-financial information will increase administrative burden for companies,” the letter said.

Speaking to an industry panel last month, Member of Parliament Richard Howitt cited the groundswell of support for increased corporate transparency.  Howitt, the rapporteur for the proposal, referenced “an urgent need for Europe's largest companies to report on their environmental, social and human rights impacts.”

Howitt and other proponents argued the requirement would not represent any further administrative burden on companies. Some business representatives at the roundtable argued corporate social responsibility reporting should be up to individual companies to decide, while others said traditional reporting requirements no longer suffice and uniform standards throughout the European Union would better serve companies.

Proponents also said recommendations, as opposed to binding directives, have their limitations, and noted that roughly 2,500 large European companies already disclose social and environmental information. European Parliament and the European Council are now looking at the proposed law.

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