​​​Non-financial reporting with a sense for proportion

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).