Non-financial reporting with a sense for
proportion
Updated: October 2019
PROPOSED SOLUTIONS AND ACTIONS
Companies, including the financial sector, are acknowledging the benefits that an improved non-financial
reporting can have in order to improve the competitiveness of the company, CEO engagement in Environmental,
social and governance (ESG) matters, accountability; the integration of externalities risk assessments, financial
assessments, as well as to mitigate negative impacts on the climate while building trust with stakeholders.
Non-financial reporting has become a more and more important issue. It can improve the competitiveness of
a company, the involvement of management and build trust with stakeholders. Reporting and disclosure
obligations have to be effective, delivering the data really needed but in a lean and manageable way.
Unnecessary administrative burden for citizens and companies should be avoided. Finally, while supportive of
the implementation of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD),
savings and retail banks nonetheless draw attention to the issue of data availability in relation to the proposed
indicators.
From a financial perspective, non-financial disclosures from corporates enhance data availability on the market
and hence set the path towards reallocation of capital flows to more sustainable economic sectors,
while avoiding greenwashing. Indeed, the issue of
data availability for banks is recurrent when
it comes to disclose non-financial performance of
their balance sheet. Another difficulty arises from
the implementation of those disclosure
requirements: to the diversity of business activities
adds the ongoing improvement of assessment
methodologies that will require time to develop,
test and validate before being effective. For these
reasons, non-financial reporting should remain
reliable and as flexible as possible and companies
should be able to choose the reporting strategy
and guidelines that fits better their strategies and
position, considering information related to the
four main topics – environmental, social and
employee matters, respect for human rights, and
anti-corruption and bribery matters – and the
principle of materiality.
IDENTIFIED CONCERNS
Non-financial reporting has to change – it is not
broken; but it will be unless it changes. It has
gotten better at showing what is valuable for
companies. Reporting is important for better
business, better society, better information, better
transparency and better capital markets.
WHY POLICYMAKERS SHOULD ACT
The European institutions have identified the need
to become active. In June 2017 the European
Commission published non-binding guidelines to
complement the non-financial disclosure Directive
and help companies disclose environmental and
social information. These guidelines are not
binding and companies may decide to use
international, European or national guidelines
according to their own characteristics or business
environment. They do not extend the scope of
current rules in any way. Nor do they add undue
administrative burden. Additionally, in March 2018
the European Commission launched a fitness
check on public reporting by companies, which
aims to assess whether the EU reporting
framework (financial and non-financial reporting)
is still fit for purpose. Amongst others, this
initiative assesses whether the EU public reporting
framework is fit for new challenges (sustainability,
digitalisation).
It is important that the policymakers pursue these
activities with foresight. Organisations should be
more involved in reporting. The question is not if
it should be regulated, but rather when. Initiatives
like the European Lab can also bring valuable
insight to policymakers: it can give examples of
corporate reporting being misused and should
help to find best practices.
BACKGROUND
Directive 2014/95/EU, which elaborates on the disclosure of non-financial and diversity information by certain
large undertakings and groups, which amends the Accounting Directive, applies to all public interest companies
in the EU (banks and insurance companies are thus included), and to those companies who have more than
500 employees. The Directive is high level and is principles-based. It identifies four main topics: Environmental,
Social and employee matters, respect for Human Rights, and anti-corruption and bribery matters.
The European Commission Action Plan Financing Sustainable Growth requested the European Financial
Reporting Advisory Group (EFRAG) in 2018 to establish a European Corporate Reporting Lab (European Lab).
The objective of the European Lab is to stimulate innovations in the field of corporate reporting in Europe by
identifying and sharing good practices. The European Lab deliverables are not intended to and do not have
any authoritative or normative status. The European Lab will initially focus on non-financial reporting, including
sustainability reporting. Preliminary projects may include climate-related disclosures in line with the
recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.
Other topics may be environmental accounting and, in the medium term, integrated reporting, digitalisation
and innovations in various other aspects of corporate reporting. The work of the European Lab is kept separate
from EFRAG’s primary role related to International Financial Reporting Standards (IFRS). EFRAG not only has
a close relationship with the European Commission, but the work that EFRAG is producing reaches
the Parliament and European Supervisory Authorities (ESAs) as well (e.g. European Parliament resolution
of 3 October 2018 on International Financial Reporting Standards: IFRS 17 Insurance Contracts, letter to the
ESAs on the indorsement process of IFRS 17).
In June 2019, the Commission also updated the non-binding guidelines on non-financial disclosure that
accompany the Non-Financial Reporting Directive (Directive 2014/95/EU) in order to take into account the
recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).