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Quoted UK companies will have to begin producing Operating and Financial Reviews that take account of their social and environmental performance from next year, according to a draft regulation published today (Wednesday 5 May) by the government.

The long-awaited regulation would require around 1290 British-based companies listed on the London, New York and Nasdaq stock exchanges to produce OFRs for all shareholders for financial years beginning on or after 1 January 2005 ­ or face unlimited fines.

The regulation says the OFRs should be published separately from annual reports and standalone social and environmental reports, at an estimated average cost of around £29,000 (USD 51,000) per company.

It says OFRs should include details of a company's objectives and strategies, and provide information on 'a wide range of factors which may be relevant to an understanding of the business, such as information about employees, environmental matters and community and social issues'.

OFRs will fall within the remit of The Accounting Standards Board, which oversees UK financial reporting standards. The board is to publish draft standards for OFR reporting in the second half of 2004, and will finalize these in 2005.

Although the regulation theoretically gives directors the discretion to decide that social and environmental information is not material to their company's OFR, it is made clear that such information is expected. The regulation specifies that if a company reports nothing on these areas, then it must make an explicit statement to that effect. The draft regulation is now out to consultation until 6 August. Guidance on how companies should decide what is relevant to include in the reviews has also been published.

The government says it will review OFRs after five years with a view to widening the requirement to other companies.

Lucy Candlin and Adrian Henriques of the UK-based assurance provider justassurance comment: "The requirement for publication by quoted companies of a forward-looking review that accounts for both financial and non-financial performance, has the potential to make it easier to analyse the long-term sustainability of a business. This is in the interests of both the company and its investors. An OFR will help to identify social and environmental factors that may affect the company's performance in the long term ­ and those which might be seen as in conflict with the short-term interests of shareholders. But the key question is, will these reviews strengthen engagement and disclosure by companies?

The regulation is potentially a good framework for those companies intending to report on their 'wider impacts', including non-quoted companies, but it also offers a hiding place for those with no such intention. The OFR will be the director's view of the relevant and significant issues that may be of interest to shareholders, and thus falls short of accountability in its broadest sense. The accompanying Practical Guidance is similarly open to broad interpretation.

In our experience, organizations that are not already engaged in the CSR and accountability debate, for example by using a framework for engaging with stakeholders, are likely to require education and support at all levels of the company if they are to review adequately risks and opportunities. This makes the timetable a particular concern: quality engagement with external stakeholders takes time, yet the regulation will be in force from January 2005.

Furthermore, although the process of determining OFR content will be audited, the question arises of the competence of traditional financial auditors to express a positive opinion on the processes required to establish an understanding of the social and environmental issues affecting a company. They are likely to have to incorporate professional CSR expertise within audit teams in order to ensure that the mechanisms underlying the OFR provide appropriate levels of accountability by taking account of the views of all stakeholders."

justassurance is a UK-based social enterprise working to promote and deliver performance reporting and assurance involving stakeholders.