EU Non-Financial Reporting Directive: 'A positive step towards a sustainable economy'
With the deadline for Member States to implement the European Union Non-Financial Reporting Directive (EU NFRD) passing earlier this week, edie has spoken to an array of industry experts to find out exactly how the legislation will affect the future of sustainability reporting and green business in the UK.
In April 2014, the European Union (EU) agreed upon a Directive to harmonise non-financial reporting regulations across Member States. The Directive requires Public Interest entities (PIE) - including all listed companies, credit-issuing and insurance undertakings, and firms with greater than 500 employees - to disclose certain social and environmental information.
The EU NFRD reporting mechanism was created to ensure that the impacts of sustainability are considered more broadly throughout the whole business.
As WWF-UK head of corporate stewardship-finance Sue Charman explained: "It is essential that organisations review and manage material impacts accordingly and consider their wider environmental, social and governance risks."
The reporting of non-financial information is seen as a crucial tool to identify key sustainability risks and provide investors and other stakeholders with a more comprehensive view of a company’s performance.
For this reason, it’s worth treating EU NFRD compliance as a "dry-run" for meeting further reporting requirements. So says Ben Tuxworth, director of sustainability consultancy Anthesis Group. "And if you are new to reporting, working out how the process can bring sustainability and CSR into the heart of your organisation," Tuxworth added.
"Experience suggests that is where the value lies, and it’s better to be on the front foot proving the benefit, than playing expensive catch up later on.”
Despite the shock result of the EU referendum on the UK’s membership of the EU, UK Government policy will continue to implement the EU NFRD in accordance with EU law until we formally leave the EU. Therefore, businesses across the country will need to collect and manage data from January 2017 onwards.
The recommended disclosures of the non-financial statement include content on the environmental, social and employee concerns, respect for human rights, anti-corruption and bribery matters.
The report should include the following information: -
- A brief description of the business model.
- A description of the policies pursued by the businesses in relation to the matters outlined above, including due diligence processes implemented.
- The outcome of those policies.
- The principal risks related to the matters listed and their linkage to the business’ operations including, where relevant, its business relationships, products or services which are likely to cause adverse impacts, and how these risks are managed.
- Non-financial KPIs relevant to the particular business.
Additionally, businesses will need to disclose diversity policies in relation to administrative, management and supervisory bodies, including information on the age, gender and educational and professional backgrounds of their members.
What if a company does not have policies in relation to some of the above concerns? The NFRD will provide flexibility, allowing companies to provide a clear and reasoned explanation for not doing so. "The pitfalls will be around determining what matters are material for the audience of the Annual Report," said Rachel Price, senior consultant at corporate communications and creative agency Addison Group. "Information which is not material should be signposted to, but not included."
While the NFRD sets out a number of aspects that must simply be copied into law, it helpfully provides some flexibility in implementation to Member States.
In the UK, the Government is currently preparing its implementation of the Directive, which will be additional to the Strategic Reporting requirement from Companies Act 2006. Any previous requirements on mandatory greenhouse gas (GHG) reporting under the Companies Act 2006 were focused at companies listed on the main market of the LSE with a few other niceties. This expansion to all PIEs with more than 500 employees is likely to see more companies being required to report.
The UK response to a European Commission (EC) consultation on the EU NFRD was published in November. After receiving feedback from companies, investors and academics, the Department for Business, Energy and Industrial Strategy (BEIS) proposed a shift towards including the Directive requirements in a company’s annual report and not mandating third-party verification of non-financial information. The UK legislation will allow those at the boundaries to voluntarily comply with the requirements of the directive to avoid moving between frameworks.
'Take the opportunity'
A couple of areas will be new to the UK’s mandatory reporting requirements, most notably around anti-bribery and anti-corruption, as well as requiring the disclosure of any ‘due diligence processes’. But largely, it will be business-as-usual for the majority of British companies, according to Addison Group's Price, who acknowledges that many components of the NFRD are already covered by the requirements of the Strategic Report of the Annual Report.
Price said: "The way it has been drafted also means that upon leaving the EU, it could be easily removed from UK legislation, if required. For sustainability reporting more broadly, we think it will help to ensure that there is greater consistency between the Annual Report and Sustainability Report."
Anthesis Group's Tuxworth added: “Many organisations have no choice but to prepare for the EU NFRD, and should take the opportunity to think about how it will affect their reporting strategies in the longer term. How can they go beyond compliance to use this as an opportunity? The backdrop is a trend around the world to formalize sustainability reporting requirements, with a growing number of governments and stock exchanges mandating sustainability disclosure."
But ClientEarth lawyer David Cooke believes the Government has "missed a trick" by applying the reporting requirements to the fewest companies possible. “The Government’s focus on minimising the reporting burden for companies works to the detriment of investors," Cooke said.
"This restricts the information available to investors who could otherwise incorporate this information into their investment decisions, making other government aspirations around a low carbon economy more difficult to reach.”
The Directive is, however, generally viewed as a progressive move for sustainability reporting.
Ricardo Energy & Environment energy and carbon management business manager Christine St John Cox said: "Clearly the NFRD is a positive step towards a more sustainable economy, and will bring additional transparency to consumers, employees and investors on companies’ awareness of and response to ESG issues. It may not be that different to what many of the companies already report. Many of those affected by the NFRD are already accustomed to including ESG elements in their annual reports, but there will certainly be companies that haven’t thought about these issues before.
"The other key point is to ensure that a company starts to think about what is material and relevant to their business, else it offers little value or substance to any readers. Again the Directive asks that these areas are covered but it is for the individual Member States to determine what the subject matter might be, to what level of detail it needs to be reported, and if potentially assurance is required.
"So again, for a green business wanting to comply, the challenge arises when, having established which countries they need to comply in, they need to make sure that they meet the differing requirements for all countries. This could mean that the level of detail and format will vary from country to country. Again making it a potential headache for a business."
With all of these questions now answered, how will the EU NFRD link with other sustainability reporting guidelines - such as the Global Reporting Initiative (GRI), which helps businesses disclose information on the environmental, social and economic areas of their operations?
Seamlessly, says GRI corporate & stakeholder relations director Nikki Wood, who believes the GRI reporting framework is "perfectly-suited" for use as a means of complying with the Directive.
“The EU Directive on Non-financial reporting will undoubtedly increase the number of organisations in Europe that disclose sustainability information and we hope it will also increase the quality of the reporting done in Europe and around the world," Wood said.
“In some countries, such as Denmark, companies that report using GRI will automatically be in compliance with the Directive. In other countries, such as Austria, GRI is not specifically mentioned in the legislative texts related to the Directive, but we are strongly referenced in the explanatory texts.
"This is an acknowledgement that GRI is helpful guidance for companies, in those jurisdictions, that need to report as a result of the Directive. Finally, some national legislatures have transposed the Directive into law, word-for-word. In these jurisdictions, companies can reference any national, international or EU framework on non-financial disclosure, and GRI is the most widely used standard of this kind in the world, with 326 of the Fortune 500 using it."