Law 11/2018 of 28 December amending the Commercial Code, the Consolidated Text of the Capital Companies Act, and the Audit Act regarding non-financial information and diversity

I. GENERAL PROVISIONS
HEAD OF STATE
17989 Law 11/2018, of December 28, amending the Commercial Code, the Consolidated Text of the Capital Companies Act approved by Royal Legislative Decree 1/2010, of July 2, and Law 22/2015, of July 20, on the Audit of Accounts, regarding non-financial information and diversity.

FELIPE VI
KING OF SPAIN

To all who see and understand this.
Know: That the General Courts have approved and I come to sanction the following law:

PREAMBLE
I

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 certain groups, aims to identify risks to improve sustainability and increase the confidence of investors, consumers and society in general, and for this purpose increases the disclosure of non-financial information, such as social and environmental factors.

On the other hand, Directive 2014/95/EU expands the content required in the annual corporate governance report that listed companies must publish, in order to improve transparency by facilitating the understanding of the business organization and of the business of the company in question. The new obligation for these companies consists of the disclosure of the "policies on diversity of skills and viewpoints" that they apply to their administrative body regarding issues such as age, sex, disability, or education and professional experience. In the event that the company does not apply a diversity policy, there is no obligation to establish one, although the corporate governance statement must clearly explain the reason why it is not applied.

The disclosure of non-financial information or information related to corporate social responsibility contributes to measuring, monitoring and managing the performance of companies and their impact on society. At the same time, its announcement is essential for the management of the transition towards a sustainable global economy that combines long-term profitability with social justice and environmental protection [Recital (3) of Directive 2014/95/EU]. Greater non-financial information by companies constitutes an important factor in ensuring a more long-term approach, which must be encouraged and taken into account. In this context, in order to improve the coherence and comparability of the non-financial information disclosed, some companies must prepare a non-financial information statement containing information relating, at least, to environmental and social issues, as well as to personnel, respect for human rights and the fight against corruption and bribery. In accordance with Directive 2014/95/EU, that statement must include a description of the policies and results and risks linked to those issues and must be incorporated into the management report of the obliged company or, where appropriate, in a separate report for the same financial year that includes the same content and meets the requirements imposed.

That statement must include, with regard to environmental issues, detailed information on the current and foreseeable effects of the company's activities on the environment, and, where appropriate, health and safety, the use of renewable and/or non-renewable energy, greenhouse gas emissions, water consumption and air pollution.

With regard to social and personnel issues, the information provided in the statement may refer to measures adopted to ensure gender equality, the application of fundamental conventions of the International Labour Organization, working conditions, social dialogue, respect for the right of workers to be informed and consulted, respect for trade union rights, health and safety in the workplace and dialogue with local communities and measures adopted to ensure the protection and development of those communities.

With regard to human rights, the non-financial information statement could include information on the prevention of human rights violations and, where appropriate, on measures to mitigate, manage and repair possible abuses committed.

Likewise, with regard to the fight against corruption and bribery, the non-financial information statement could include information on existing instruments to fight against them.

The non-financial information statement, in accordance with the aforementioned Directive, must include information on the due diligence procedures applied by the company and, where relevant and proportionate, in relation to its supply chains and subcontracting, in order to detect, prevent and mitigate existing and potential adverse effects. For these purposes, due diligence procedures are understood as actions carried out to identify and assess risks, as well as for their verification and control, including the adoption of measures.

Obliged companies must provide adequate information on the aspects regarding which there is a higher probability that the main risks of serious effects will materialize, together with the aspects regarding which those risks have already materialized. Adverse effect risks may arise from the company's own activities or may be linked to its activities. This should not entail unnecessary additional administrative burdens for small and medium-sized enterprises, within the terms defined in Law 22/2015, of July 20, on the Audit of Accounts.

In providing this information, obliged companies must rely on national frameworks, European Union frameworks, the Environmental Management and Audit System (EMAS) adapted to our legal system through Royal Decree 239/2013, of April 5, may be used, or on international frameworks such as the United Nations Global Compact, the United Nations Sustainable Development Goals, the Paris Agreement on climate change, the Guiding Principles on Business and Human Rights implementing the United Nations framework to "protect, respect and remedy", the OECD Guidelines for Multinational Enterprises, the ISO 26000 standard of the International Organization for Standardization, the SA 8000 standard of International Social Responsibility, the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy of the International Labour Organization, the Global Reporting Initiative Sustainability Reporting Standards (GRI), or other recognized international frameworks.

In the case of organizations that have obtained EMAS registration, the information contained in the environmental statement validated by the accredited verifier will be considered valid and sufficient to comply with the section of the report dedicated to environmental information, to the extent that this certificate not only operates by workplace and covers the entirety of the company's activity. Nevertheless, EMAS accreditation in no case can exempt the entity from reporting on environmental activity in the non-financial report, with the objective that all non-financial information required by the Directive appears in a single document. Companies that have more detailed studies of carbon footprint, policies for adapting to the impacts of climate change or other environmental areas may provide this information as a complement to the rest of the required environmental information.

II

The scope of application of the non-financial information disclosure requirements extends to public limited companies, limited liability companies and limited partnerships by shares that, simultaneously, have the status of public-interest entities whose average number of employees employed during the financial year is greater than 500 and, additionally, are considered large companies, within the terms defined by Directive 2013/34, that is, whose net amount of turnover, total assets and average number of employees determine their qualification in this sense.

Public-interest companies that prepare consolidated accounts are also included in the scope of application of this rule provided that the group is classified as large, within the terms defined by Directive 2013/34/EU, and the average number of employees employed during the financial year by the set of companies that make up the group is greater than 500.

However, a dependent company belonging to a group will be exempt from the previous obligation if the company and its dependents are included in the consolidated management report of another company. On the other hand, and in any case, small and medium-sized enterprises are exempt from the obligation to include a non-financial statement, as well as from additional requirements linked to that obligation.

Auditors of accounts and audit firms must only verify that the non-financial information statement has been provided.

In this sense, it is necessary to modify the wording of Article 35 of Law 22/2015, of July 20, on the Audit of Accounts, regarding the audit report of annual accounts of entities considered public-interest for the purposes of that Law, to include and specify the action of auditors of accounts, both in relation to non-financial information statements, as well as in relation to diversity information included in the annual corporate governance report of listed companies.

In both cases, in accordance with what is provided in Directive 2014/95/EU, the auditor's action will be limited solely to verifying that the aforementioned information has been provided in the corresponding reports.

With a view to facilitating the disclosure of non-financial information by companies, Article 2 of Directive 2014/95/EU included the mandate to the European Commission to prepare non-binding guidelines on the methodology applicable to the presentation of non-financial information, including some key non-financial performance indicators of a general and sectoral nature, taking into account existing best practices, international evolution and the results of related initiatives in the European Union. In compliance with that mandate, through the Commission Communication (2017/C 215/01), the Guidelines on the presentation of non-financial reports (methodology for the presentation of non-financial reports) were approved in May 2017. In this sense, it should be mentioned that in Spain initiatives on fundamental financial and non-financial indicators have been carried out, such as those proposed in the "Guide for the preparation of the management report of listed entities" of the National Securities Market Commission (CNMV) or in the model on integrated information of the Spanish Association of Accounting and Business Administration (AECA), included in the "Integrated Indicator Table (CII-FESG) and its XBRL taxonomy", referenced, in turn, by the aforementioned CNMV Guide.

The transposition of Directive 2014/95/EU into the Spanish legal system obliges to modify certain provisions relating to the management report in the Commercial Code, approved by Royal Decree of August 22, 1885, and in the Consolidated Text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010, of July 2, in the annual corporate governance report in the latter, and to the action of auditors of accounts regarding these matters in the Audit of Accounts Act. For the reasons stated, the modifications incorporated are adapted to the principles of necessity, effectiveness, proportionality, legal certainty, transparency, and efficiency that govern the exercise of legislative initiative, as required by Article 129 of Law 39/2015, of October 1, on the Common Administrative Procedure of Public Administrations.

Finally, two additional provisions, one transitional provision, one repealing provision and seven final provisions are incorporated, of which the first modifies Law 35/2003, of November 4, on Collective Investment Institutions; the second, Law 16/2009, of November 13, on payment services; the third, Law 14/2013, of September 27, on support for entrepreneurs and their internationalization, for the purpose of reducing administrative burdens in the formation of companies, as Article 62 of the Consolidated Text of the Capital Companies Act is also modified, in the second article of this Law; and the remaining final provisions respectively collect the competence title, an express declaration on the transposition of the Directive, the regulatory authorization and the corresponding provision on entry into force.

Article one. Modification of the Commercial Code, approved by Royal Decree of August 22, 1885.
The Commercial Code, approved by Royal Decree of August 22, 1885, is modified as follows:

One. Paragraphs 1 and 6 of Article 44 are modified, which shall read as follows:

"1. Consolidated annual accounts shall comprise the consolidated balance sheet, consolidated income statement, a statement reflecting changes in equity for the year, a consolidated cash flow statement and the consolidated notes. These documents form a unit. The consolidated management report, which shall include, where appropriate, the non-financial information statement, shall be attached to the consolidated annual accounts."

"6. The consolidated accounts and the consolidated management report, which shall include, where appropriate, the consolidated non-financial information statement, shall be signed by all the administrators of the company obliged to prepare them, who shall be responsible for their veracity. If the signature of any of them is missing, it shall be indicated in the documents where it is missing, with express mention of the cause."

Two. Paragraph 5 is given a new wording and four new paragraphs 6, 7, 8 and 9 are added to Article 49, which shall read as follows:

"5. Companies that prepare consolidated accounts shall include in the consolidated management report the consolidated non-financial information statement provided for in this paragraph provided that the following requirements are met:
a) That the average number of employees employed by the companies in the group during the financial year is greater than 500. b) That either, they have the status of public-interest entities in accordance with the audit of accounts legislation, or, during two consecutive financial years, at the closing date of each of them, they meet at least two of the following circumstances:

1. That the total of the consolidated asset items is greater than 20,000,000 euros.

2. That the net amount of the consolidated annual turnover exceeds 40,000,000 euros.

3. That the average number of employees employed during the financial year is greater than two hundred and fifty.
   Companies shall cease to be obliged to prepare the non-financial information statement if they cease to meet any of the previously established requirements during two consecutive financial years.
   In the first two financial years from the formation of a group of companies, the parent company shall be obliged to prepare the consolidated non-financial information statement, including all its subsidiaries and for all countries in which it operates, when at the closing of the first financial year at least two of the three circumstances mentioned in letter b) are met, provided that at the closing of the financial year the requirement provided for in letter a) is also met.

4. The consolidated non-financial information statement shall include the information necessary to understand the evolution, results and situation of the group, and the impact of its activity with regard, at least, to environmental and social issues, respect for human rights and the fight against corruption and bribery, as well as to personnel, including the measures that, where appropriate, have been adopted to promote the principle of equal treatment and opportunities between women and men, non-discrimination and inclusion of persons with disabilities and universal accessibility.

This non-financial information statement shall include:
a) A brief description of the group's business model, which shall include its business environment, its organization and structure, the markets in which it operates, its objectives and strategies, and the main factors and trends that may affect its future evolution. b) A description of the policies applied by the group with regard to these issues, which shall include the due diligence procedures applied for the identification, assessment, prevention and mitigation of risks and significant impacts and for verification and control, including what measures have been adopted. c) The results of those policies, which must include key non-financial performance indicators relevant to allow the monitoring and evaluation of progress and which favor comparability between companies and sectors, in accordance with the national, European or international reference frameworks used for each matter. d) The main risks related to those issues linked to the group's activities, including, where relevant and proportionate, its commercial relationships, products or services that may have negative effects in those areas, and how the group manages such risks, explaining the procedures used to detect and assess them in accordance with the national, European or international reference frameworks for each matter. Information on impacts that have been detected must be included, offering a breakdown of them, particularly on the main short, medium and long-term risks. e) Key non-financial performance indicators that are relevant with respect to the specific business activity, and that meet the criteria of comparability, materiality, relevance and reliability. With the aim of facilitating the comparison of information, both over time and between entities, key non-financial performance indicators that can be generally applied and that meet the guidelines of the European Commission in this matter and the standards of the Global Reporting Initiative shall be used especially, and the national, European or international framework used for each matter must be mentioned in the report. Key non-financial performance indicators must be applied to each of the sections of the non-financial information statement. These indicators must be useful, taking into account the specific circumstances and consistent with the parameters used in their internal management and risk assessment procedures. In any case, the information presented must be accurate, comparable and verifiable.

The consolidated non-financial information statement shall include significant information on the following issues:

I. Information on environmental issues:
Detailed information on the current and foreseeable effects of the company's activities on the environment and, where appropriate, health and safety, environmental assessment or certification procedures; resources dedicated to the prevention of environmental risks; application of the precautionary principle, the amount of provisions and guarantees for environmental risks.
– Pollution: measures to prevent, reduce or repair carbon emissions that seriously affect the environment; taking into account any specific form of air pollution of an activity, including noise and light pollution.
– Circular economy and prevention and management of waste: prevention, recycling, reuse, other forms of recovery and disposal of waste measures; actions to combat food waste.
– Sustainable use of resources: water consumption and water supply in accordance with local limitations; consumption of raw materials and measures adopted to improve the efficiency of their use; direct and indirect energy consumption, measures taken to improve energy efficiency and the use of renewable energies.
– Climate change: the important elements of greenhouse gas emissions generated as a result of the company's activities, including the use of the goods and services it produces; measures adopted to adapt to the consequences of climate change; voluntary medium and long-term reduction targets established to reduce greenhouse gas emissions and the means implemented for this purpose.
– Biodiversity protection: measures taken to preserve or restore biodiversity; impacts caused by activities or operations in protected areas.

II. Information on social and personnel issues:
– Employment: total number and distribution of employees by sex, age, country and professional classification; total number and distribution of types of employment contracts, average annual number of permanent contracts, temporary contracts and part-time contracts by sex, age and professional classification, number of dismissals by sex, age and professional classification; average remuneration and its evolution disaggregated by sex, age and professional classification or equal value; pay gap, remuneration for jobs of equal value or average of the company, average remuneration of directors and executives, including variable remuneration, allowances, indemnities, payment to long-term savings pension systems and any other benefit disaggregated by sex, implementation of right-to-disconnect policies, employees with disabilities. – Work organization: organization of working time; number of hours of absenteeism; measures intended to facilitate the enjoyment of work-life balance and promote the exercise of...