The review of the Non-Financial Reporting Directive

by | 22 Feb 2020 | Sustainable Finance

The Commission has launched a few days ago a public consultation on the review of the Non-Financial Reporting Directive (NFRD). The main focus of this consultation is to collect views from across the EU on different possible reforms or improvements that could be made to the Directive.

The feedback from the public consultation will feed into the Commission’s impact assessment on the review of the Directive.

As usually, respondents are encouraged to provide as much evidence as possible (see here).

The consultation will remain open until May 14, 2020.

Background information

The Non-Financial Reporting Directive (NFRD), an amendment to the Accounting Directive, requires certain large companies to include a non-financial statement as part of their annual public reporting obligations.

It applies to large Public Interest Entities with more than 500 employees. In practice it includes large listed companies, and large banks and insurance companies (whether listed or not) – all providing they have more than 500 employees. This covers approximately 6,000 large companies and groups across the EU.

The NFRD identifies four sustainability issues (environment, social and employee issues, human rights, and bribery and corruption) and with respect to those issues it requires companies to disclose information about their business model, policies (including implemented due diligence processes), outcomes, risks and risk management, and KPIs relevant to the business.

In 2017, as required by the Directive, the Commission published non-binding guidelines for companies on how to report non-financial information. The work at a more global level of the “Task Force on Climate related Financial Disclosure” (TCFD) was monitored closely and taken into account, as far as possible, in these guidelines. But the TCFD was perhaps more focused on the impact of the climate on business models, while the NFRD was more focused on the impact of the company’s activities on its environment, beyond the climate.

In 2019, as part of the Sustainable Finance Action Plan, this framework was significantly amended due to:

This taxonomy regulation will require companies under the scope of the NFRD to disclose certain indicators of the proportion of their activities that are classified as sustainable according to the taxonomy

In parallel to these legislative developments, the Commission, in its March 2018 Action Plan, asked Financial Reporting Advisory Group (EFRAG) to establish a European Corporate Reporting Lab (so called “the European Lab”). The report on climate-related disclosures issued at the beginning of this month is the first major (and very useful actually) result of the European Lab. 

Last but not least, in its Communication on the European Green Deal, the Commission committed to review the Non-Financial Reporting Directive in 2020 as part of the effort to scale up sustainable finance by improving transparency.

Fitness check

In parallel, different Institutions of the Union strongly suggested the Commission to amend the NFRD provisions :

A fitness check that is currently being finalized by the Commission services, confirms that the non-financial information currently disclosed by companies does not adequately meet the needs of the intended users. The European Financial Reporting Advisory Group (EFRAG) plays also a rôle there.

The following problems have been identified:

  • There is inadequate publicly available information about how non-financial issues, and sustainability issues in particular, impact companies, and about how companies themselves impact society and the environment. In particular :
    1. Reported non-financial information is not sufficiently comparable or reliable.
    2. Companies do not report all non-financial information that users think is necessary, and many companies report information that users do not think is relevant.
    3. Some companies from which investors and other users want non-financial information do not report such information.
    4. It is hard for investors and other users to find non-financial information even when it is reported.
  • Companies incur unnecessary and avoidable costs related to reporting non-financial information. Companies face uncertainty and complexity when deciding what non-financial information to report, and how and where to report such information. In the case of some financial sector companies, this complexity may also arise from different disclosure requirements contained in different pieces of EU legislation. Companies are under pressure to respond to additional demands for non-financial information from sustainability rating agencies, data providers and civil society, irrespective of the information that they publish as a result of the NFRD.

This public consultation builds on a number of recent consultation activities, including:

Links with other consultations

The services of the European Commission have published an inception impact assessment on the Review of the Non- Financial Reporting Directive, which summarizes the problem definition, possible policy options and likely impacts of this initiative.

The principal focus here is on the possible options for revisions to the provisions of the NFRD.

This consultation is one element of a broader consultation strategy in the context of the review of the NFRD. In addition to this open consultation, there will also be targeted surveys addressed to SMEs, and to companies currently under the scope of the NFRD. The targeted surveys will collect more detailed opinions and data from companies on certain issues, including costs related to non-financial reporting.

In addition, the services of the Commission will soon launch an open public consultation on a Renewed Sustainable Finance Strategy, seeking for stakeholders’ views in other Sustainable Finance related issues, including questions related to sustainable corporate governance.

Iconography : The Portrait of Luca Pacioli, attributed to Jacopo de Barbari, circa 1495-1500, oil on wood, 99 × 120 cm © Museo di Capodimonte, Naples, Italy.