Non-financial reporting must be part of management reporting to satisfy the needs of investors and to also ensure that the Directive on Non-Financial Reporting is fit for purpose to achieve Europe’s ambitious sustainable finance goals.
The EU Green Deal outlined that the European Commission will review the Non-Financial Reporting Directive (NFRD). The European Commission revised the Non-Financial Reporting Directive, which ran until 27 February 2020. An Inception Impact Assessment on the updated directive is open for comments.
The introduction of the NFRD was a significant milestone for corporate accountability and transparency in Europe, but in its current form it has failed to meet its objectives. As a result, the Climate Disclosure Standards Board (CDSB) welcomed the European Commission’s announcement to review the Directive.
Furthermore, the CSDB published its draft position on the key changes that should be taken into account by the Directive including red lines and tracked changes to the current Directive.
The red lines are as follows...
- Make management reporting mandatory by removing exemptions that allow non-financial statements to be reported outside the management report.
- Increase scope by changing business size to ‘more than 250 employees’, rather than ‘more than 500’ as defined by PIEs Accounting Directive.
- Explicitly state the word climate in the Directive;
- Apply the TCFD’s recommendations to disclosure of ESG information in the management report;
- Elevate materiality as a useful construct for making decision-useful disclosures that are based on guidance to the Directive; adopt IASB’s new definition of materiality – materiality from the accounting world in the Accounting Directive;
- Recognise investors as the primary audience, whilst also recognising that the information may satisfy other stakeholder needs;
- Strengthen the link between non-financial and financial information, in line with recommendations from the TCFD.
- Strengthen governance disclosures by incorporating TCFD recommended disclosures a) and b) on governance into the ‘corporate governance statement’ in Article 20 and in the non-financial statement in 19a) and 29a) of the Accounting Directive.
The purpose of the Directive is to help investors as they evaluate the non-financial performance of large companies. It encourages these companies to develop a responsible approach to business. To achieve these objectives, the current Directive needs to be made stronger. The CDSB believes that their red lines and tracked changes and proposals can bolster the linkage between financial and non-financial information whilst effectively conveying material issues to a reader.