ECONOMY FINANCE&BANKING OPINION POINTS OF VIEW

Point of view: European Commission to initiate the revision of the Non-Financial Reporting Directive

By  Laura Ciobanu, Manager, Climate Change and Sustainability, EY Romania

The European Commission committed to review the Non-Financial Reporting Directive in 2020, as part of the approach to strengthen the strategy for sustainable investment. On 20 February 2020, in line with its commitment, the Commission launched a public consultation  concerning the review of that directive. Stakeholders may submit their views about the current contents and potential revisions by filling in an online survey no later than 14 May 2020.

In the context of the fight against climate change and environmental degradation, the European Commission (EC) is asking the companies to uphold the Sustainable Development Goals and the principles of the Paris Agreement on climate change. To that end, the Non-Financial Reporting Directive, the Circular Economy Package, the Action Plan on Sustainable Finance and European Green Deal are ambitious tools aimed at driving and facilitating such endeavours.

 

What is the Non-Financial Reporting Directive and how important is it to actually present this kind of information?

 

The goal of this directive is to lay the foundation for a new model of corporate reporting that complements financial transparency with other information needed to understand a company’s development, performance and position, as well as the impact of its business on society. Basically, the companies are being encouraged to embed sustainability as a key element in their business strategy.

The need for non-financial information is growing significantly, particularly in the investors’ community. Due to this type of reporting, investors can consider the risks or opportunities presented by future investments in terms of sustainability, social impact, environmental impact, thus enabling them to make informed investment decisions. At the same time, consumers or other stakeholder groups can easily recognize the companies committed to care for the environment, to uphold human rights, to fight corruption and more.

In Romania, the requirement to report non-financial information initially applied only to public entities employing at least 500 people. The law was subsequently updated to also cover private companies.

Therefore, starting this year, all public or private companies which employ at least 500 people must report non-financial information for financial year 2019. As a minimum, non-financial information must include environmental, social and personnel, human rights, anti-corruption and anti-bribery matters.

This information may be presented:

  1. In the form of a non-financial statement attached to the directors’ report, within 150 days after the financial year’s end;
  2. In the form of a standalone report (“Sustainability Report”) made available to the general public within 6 months after the balance sheet date, on that entity’s website. The report shall also be mentioned in the directors’ report.

The Directive does not include any strict requirements as to the reporting model at this time, providing only certain non-mandatory recommendations. Companies may choose to employ various reporting frameworks (national, EU or international), provided that they specify the framework used.

 

Why does the European Commission wish to review the Directive?

 

Based on the latest assessments and research, the Commission concluded that the reported information does not provide accurate or sufficient details on the impact of non-financial matters on companies, nor on the impact companies have on society and the environment. Furthermore, the reporting requirements under the directive are not detailed enough, are difficult to apply and do not apply to companies from which users need information.

With this initiative, the EC aims at addressing issues such as:

             Lack of comparability and reliability of the reported non-financial information;

             Incapacity to meet the needs of stakeholders, e.g. avoiding cases where companies report information that is irrelevant to users, yet fail to consider useful information;

             The complexity of the requirements for reporting non-financial information, as well as the high cost incurred by the companies, etc.

 

In order to address these issues, the EC is considering taking one of three approaches:

  1. Maintain the current approach of non-mandatory recommendations. However, the Commission might revise and issue additional recommendations on selected topics;
  2. Use of standards. For example, the Commission might recommend an already existing or future standard on non-financial reporting.
  3. Review and strengthen the current requirements specified in the Directive, which may involve changes such as: clarifying and aligning requirements, changing the scope, requiring the use of a non-financial reporting standard, etc.

 

What are the prospects of developing an EU standard for non-financial reporting?

 

According to the remarks of Executive Vice-President Valdis Dombrovskis at the Conference on Implementing the European Green Deal in Brussels , the European Commission will support a process to develop European non-financial reporting standards and will soon invite the European Financial Reporting Advisory Group (EFRAG) to begin preparatory work for these standards as quickly as possible.

The Commission plans to use as starting point “the best elements” of the existing international reporting standards (such as GRI, SASB, TCFD, etc.), incorporating them in an European Union-wide standard.

 

 

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