European companies support non-financial reporting rule changes
4 August: The European Commission is in the process of reviewing non-financial reporting rules, in place for larger entities since 2018. Feedback from stakeholders across Europe and beyond suggests strong support for some changes.
EU legislation currently requires large entities to include a non-financial statement as part of their annual public reporting obligations, focused around four key issues: environment, social and employee issues, human rights, bribery and corruption.
With growing demands for enhanced non-financial information from investors as well as civil society, the Commission is due to revise the Non-Financial Reporting Directive (NFRD) early next year. European moves come amidst growing global attention to non-financial reporting.
A recently published summary of the 588 responses submitted during the recent European consultation provides insights into stakeholder sentiment on the key issues.
Users and preparers agree on the need for change
Most respondents concur that there are problems with the comparability, reliability and relevance of non-financial information. The sentiment is particularly high amongst users, with more than 80% finding that limited comparability is a significant issue. Two-thirds of preparers also note that additional requests for non-financial information – for instance from credit rating agencies or NGOs – cause difficulties. Overall, a large majority also indicate that there is a need to streamline the sustainability reporting provisions currently spread across several different EU laws.
Expanding the scope
Views are more mixed on whether to extend the scope of non-financial information to be disclosed. Preparers express concern about broadening disclosure requirements to new topics – stressing, instead, the need to harmonise existing provisions. Others would like to see a tighter link to the recent EU Taxonomy Regulation as well as to broader governance, supply chains, climate change and tax matters.
The NFRD requires companies to disclose sustainability issues with respect to their business model, policies, outcomes, risks and KPIs. Respondents have put forward a further 240 potential categories, including targets, climate scenario analysis and forward-looking information. Views on whether companies should provide further information on intangible assets are split down the middle: preparers are more favourable, users more reluctant.
There is strong support for bringing more companies into the scope of the legislation, with more than 70% agreeing that large non-listed companies, large companies listed in EU regulated markets but established elsewhere and large companies established in the EU but listed outside should be included.
The standardisation debate
The NFRD does not mandate use of a non-financial reporting standard or framework. There is strong support for this to change, with 82% agreeing that mandating use of a common standard would address key shortcomings. A similar number also favour the inclusion of sector-specific elements in a reporting standard.
Given the multiplicity of existing standards and frameworks globally, the EU has been moving towards playing a more active role in this space. Consultation responses suggest that public authorities, large companies and environmental organisations are supportive of an EU role in pushing for a set of international non-financial reporting standards while moving ahead with common European standards. Many stress the importance of building on existing standards such as GRI and TCFD while remaining open to global cooperation.
Special treatment needed for SMEs
SMEs are currently excluded from the NFRD, although those in the supply chain of larger companies may already be dealing with demands for more non-financial information. Such SMEs would likely feel the impact of future changes to the scope of legislation.
Views diverge on whether some SMEs – particularly listed SMEs – should be covered more directly by the NFRD. Some fear this would discourage listing while others argue that listed SMEs should be required to report non-financial information too. And while three quarters of respondents consider that simplified standards should be developed for SMEs, there are divergent views on whether they should be mandatory or not. While 46% of all respondents support mandating use of such standards, 64% of SME respondents or representatives disagree.
More assurance needed
Two-thirds of respondents believe that it is time for stronger assurance requirements for non-financial information, based on a common assurance standard preferably developed by the IAASB. Respondents are evenly divided as to whether the EU should mandate limited assurance or reasonable assurance. Users indicate a preference for reasonable assurance. Preparers, expressing concerns over costs, favour limited assurance. Most – but not all – consider that auditors are best placed to provide such assurance.
Other issues
The NFRD consultation raised a number of other important questions, including in relation to materiality assessments, digitalisation and the location of reported information.
According to the Commission’s summary, more than 70% believe that companies should be required to disclose their materiality assessment process, although some call for further clarity on the concept of double-materiality.
Two-thirds also think that digitalisation of non-financial information would be useful but that tagging could only be possible if done against reporting standards. There is agreement that making all reports available through a single access point would enhance searchability, readability and comparability.
Finally, there are split views on the location of non-financial information. Some feel that this is a secondary issue. Others think it more convenient to have both financial and non-financial information disclosed in the management report, considering it would provide a better understanding of overall performance and strategy.