implementing the non-financial reporting directive
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The European Commission (EC) has recently adopted non-binding guidelines on the Non- Financial Reporting Directive (NFRD). At the same time, the Financial Reporting Council (FRC) is updating its 'Guidance on the Strategic Report' to reflect changes arising from the UK implementation of the NFRD and to strengthen links between Directors' responsibilities towards wider stakeholders and the purpose of the strategic report. A draft of this guidance is expected in the autumn, but in the meantime, here's a quick summary of what it all means.
Implementing the Non-financial Reporting Directive
THE NON-FINANCIAL REPORTING DIRECTIVE continued
What is the background to the Non-Financial Reporting Directive?The purpose of the NFRD is to harmonise reporting practices across the EU in order to raise standards and increase the transparency of companies' non-financial reporting, an important tool in recognising key sustainability risks and for providing an in-depth view of company performance. The ethos behind the NFRD is the same as the UK Strategic Report (introduced in 2013) with the objective of both being to encourage companies to integrate sustainability into key business structures and processes and to report what they are doing to tackle key sustainability risks.
Here are some of the main points that companies should consider How does it relate to current requirements?
The NFRD has been transposed into UK law and will be coming into force for many large listed companies during the 2017 reporting season. The regulations introduce requirements in relation to environmental, social and employee matters, respect for human rights, anti-bribery and anti-corruption. For many companies, reporting on non-financial information will not be completely new as the UK is at the forefront of reporting practice, but these requirements do widen the scope of reporting on non-financial information.
What additional things do you need to think about with the NFRD?
In the Strategic Report - what is different?Companies will have to outline the outcomes of their policies in relation to the non-financial matters identified in the regulations, whereas currently they only need to discuss the effectiveness of their non-financial policies.
Companies will have to provide a 'clear and reasoned' explanation if they have no policy in relation to any of the non-financial matters listed in the requirements.
Companies will need to report on principal risks relating to the stated non-financial matters including - 'where relevant and proportionate' - a description of the company's business relationships, products and services which are likely to cause adverse impacts in those areas of risk, as well as a description of how it manages the principal risks.
In the Strategic Report - what is new?There is a new requirement for companies to discuss anti-bribery and anti-corruption matters.
Companies are required to go beyond explanations of policies to explain how due diligence processes relating to non-financial matters have been implemented.
The company's Strategic Report should contain a new Non-Financial Information Statement (NFIS), which will provide a picture of the company's performance and impact.
For further information please contact [email protected] or your account management team.
We will continue to provide updates on the Non-financial Reporting Directive and the upcoming changes to corporate governance as companies prepare themselves for a new round of regulatory change.
Anne Kirkeby Lead Corporate Reporting Consultant [email protected]
Companies should begin to engage with internal stakeholders in order to collect the relevant new information
THE NON-FINANCIAL REPORTING DIRECTIVE continued
What other reporting is required by the NFRD?In the corporate governance statement, companies will be required under the new rules to disclose information on the diversity policy for their administrative, management and supervisory bodies with regards to a range of aspects such as age, gender, educational and professional background. This discussion will need to cover the objectives of the policy, how it has been implemented during the year and the policy's outcomes.
When will the regulations come into force? The new requirements will apply for years beginning on or after 1 January 2017. This means that the 2017 December year-end companies will be the first to report against the new requirements.
Who do the new regulations apply to? Up until now, only quoted companies have had to disclose information on areas related to environmental, social and employee matters. However, the NFRD applies to all Public Interest Entities (PIE) (including traded companies, banking companies, authorised insurance companies and companies carrying on insurance market activities) with over 500 employees. The changes relating to diversity will apply to all traded companies with a few exceptions.
What should you do now?Companies should begin to engage with internal stakeholders in order to access and collect the relevant new information and should begin to consider how these issues might impact their reporting in 2017. As many of these issues don't sit with any one department, a good place to start to ensure a holistic picture of a company's non-financials and key sustainability risks is by forming a cross-functional team.
What do you need to think differently about in terms of process?Currently, companies must disclose the non-financial information outlined in the Strategic Report Regulations 'to the extent necessary for an understanding of the company’s development, performance and position. However, the NFRD includes the phrase '…and the impact of its activity', which is an addition to the existing wording used in the Strategic Report Regulations. The EU guidelines continue to explain that the impacts may be positive or adverse and companies should cover both in a clear and balanced way. This signals that companies should ensure that they are measuring the right things - the key drivers of real performance - and not just things that are easy to measure.
What next?The FRC's Guidance on the Strategic Report has been named as a framework companies can use when applying the Directive and this will be the most useful compass for companies in a UK context. The FRC plans to publish its consultation on updating the Guidance on the Strategic Report, taking the new requirements into consideration, in the next month or two. In the meantime companies can refer to the factsheet on the NFRD - published by the FRC on 26th July - which provides some useful information on the key issues raised by the Directive. However, the factsheet still points to the updated guidance for further clarification so we would recommend that you start some internal conversations but wait for the new guidance to appear.
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