Glass Lewis: Spain is first country to mandate shareholder votes on “non-financial” ESG reporting

New law amends the Spanish Commercial Code

On December 28, 2018 the Spanish government approved Law 11/2018, which transposes EU Directive 2014/95/EU on disclosure of non-financial and diversity information into Spanish law. The new law amends the Spanish Commercial Code by specifying and extending regulation regarding non-financial information included into Spanish Companies Law in 2017.

The law requires that large companies provide a report on non-financial information, which must be put to shareholder vote as a separate point in the annual general meeting. Shareholders in Spain will see this new item on the AGM agenda as soon as the upcoming proxy season — the law applies to financial years beginning on January 1, 2018, leaving companies little time to adjust their disclosure to the requirements of the new regulations.

The report on non-financial information must include:

Description of a company’s business model and main factors that may affect its future development.
Description of the policies applied by the company with respect to due diligence procedures and mitigation of risks.
The results of these policies, including key indicators of relevant non-financial results that allow for the monitoring and evaluation of progress and facilitate comparability between companies.

The main short, medium and long-term risks related to the activities of the company, how it manages such risks, explaining the procedures used to detect and evaluate them.
Key non-financial indicators that are relevant to the business, and that meet the criteria of comparability, materiality, relevance and reliability.
The law also sets specific requirements for the information that is to be provided on i) environmental, ii) social and employee, iii) human rights, iv) anti-corruption and v) sustainable development issues.The information on the non-financial key performance indicators must comply with the European Commission guidance and with the standards of the Global Reporting Initiative; and the national, European or international framework selected must be disclosed in the report. The information included in the report must be independently verified, and the company’s auditor verifies that the report has been included in the management report or provided as a separate report.

Glass Lewis acknowledges the demanding time-frame set by the Spanish government for issuers to comply with the specific reporting framework and—for 2019—will generally recommend voting for proposals seeking to approve a company’s report on non-financial information, provided it is made available to shareholders in accordance with the law and that the companies identify a meaningful reporting framework that was used in drafting of the report.

Despite the short timeframe for compliance with the specific requirements, we note that the European Commission guidance on which the law was based was provided in 2017 on the basis of a Directive approved in 2014, meaning that companies should not be entirely surprised by the requirements. Further, given that many Spanish companies have previously adopted robust reporting on ESG issues in line with stakeholder demand, we believe companies following best practice for reporting will have to make minor adjustments to the structure—rather than the underlying substance and content—of reporting on “non-financial” risks in order to comply.

Matti Jaakkola is an analyst covering the Iberian markets.