Time for the next phase of sustainability disclosures

Week of 14 December 2020

Time for the next phase of sustainability disclosures

When it was implemented in 2014, the EU Non-Financial Reporting Directive was one of the first laws requiring large companies to publicly share their efforts on protecting people and the planet. Now, as the ‘smart mix’ of measures called for by the UN Guiding Principles is picking up momentum around the globe, it’s time for the Directive to keep pace. The Alliance for Corporate Transparency has developed research-backed recommendations for the European Union, boiling down to a few key themes: (1) expanding the scope to small- and medium-sized companies; (2) aligning non-financial and annual financial reporting timelines; (3) clarifying the definition of ‘materiality’ for companies; (4) requiring disclosure on sustainability governance and accountability; (5) connecting general reporting requirements; (6) defining thematic and sector-specific reporting requirements; and (7) requiring disclosures to be assured by a third-party auditor. 

The Alliance for Corporate Transparency, a partnership of civil society organisations and experts (see a full list below) focused on improving sustainability reporting, carried out a multi-year study on corporate sustainability reporting with the goal of providing recommendations to the European Union as it undergoes a reform of the EU Non-Financial Reporting Directive next year. The study included research on the reporting of nearly 1,500 European companies over three years. The methodology and findings were tested by organisations including the Principles for Responsible Investment, Global Reporting Initiative, European Trade Union Institute, FERN, ActionAid, E3G and Clean Clothes Campaign; and with companies including Novo Nordisk, SAP, Vodafone and Repsol.

The partners of the Alliance for Corporate Transparency include: Frank Bold, Sustentia, Business and Human Rights Resource Centre, Future-Fit Foundation, Transparency International and WWF. The Advisory Group includes: ClientEarth, CDP Europe, CORE Coalition, Germanwatch, Shift Project, Themis Research, Oxfam, ShareAction, SOMO and Climate Disclosure Standards Board, Global Witness, 2 Degrees Initiative Investing and Publish What You Pay. Academic support was provided by: Cass Business School and Nyenrode Business School.

What is the EU Non-Financial Reporting Directive 2014/95/EU (NFRD)?

The EU NFRD “requires large companies to disclose certain information on the way they operate and manage social and environmental challenges” on an annual basis alongside their regular financial reporting. Under the Directive, companies must report on:

    • environmental protection
    • social responsibility and treatment of employees
    • respect for human rights
    • anti-corruption and bribery
    • diversity on company boards (in terms of age, gender, educational and professional background)

What is the Alliance for Corporate Transparency calling for?

According to the Alliance for Corporate Transparency, “the NFR Directive fails to define which specific information and KPIs companies must disclose, nor the specific matters they should address. Furthermore, the general reporting requirements listed in the Directive allow contradicting interpretations, all of which undermines the objective of the law to increase the consistency and comparability of sustainability information.”

In addition, the quality of information shared is inconsistent across companies and across EU Member States: per the findings of the Alliance’s research, “most undertakings in all Member States fail to disclose relevant, material, meaningful and comparable sustainability information, calling for the need to clarify and further specify reporting requirements for companies in Europe.”

The Alliance has developed seven recommendations for the EU to reform the NFRD and bridge these gaps:

  1. “Expand the scope of the EU Non-Financial Reporting Directive” to cover:
    • “All public interest companies, irrespective of their size, including non-EU companies which securities are admitted to trading in the EU”
    • All large companies as defined in the Accounting Directive” (i.e. those that fulfill two out of three criteria: Balance sheet total of at least EUR 20 million; Net turnover of EUR 40 million; Minimum 250 employees)
    • All small and medium-sized companies whose business activities are linked to significant impacts” (Medium-sized companies fulfill two out of three criteria: Balance sheet total of at least EUR 4 million; Net turnover of EUR 8 million; Minimum 50 employees. Small companies fulfill two out of three criteria: Balance sheet total of at least EUR 350 thousand; Net turnover of EUR 750 thousand; Minimum 10 employees)
    • “Financial market participants based on a specific threshold to be defined that reflects assets owned, managed or controlled”
  1. “Alignment with the annual report”
    • “Ensure that the non-financial statement is made available together with the annual report and that financially material information is disclosed and treated as any other material financial information provided by regulated issuers.”
  1. “Clarify the double-materiality definition and principles”
    • “In order to define the focus of corporate disclosure (that is, material issues), undertakings should consider which information is relevant from the perspective of their economic, social and environmental dependencies (information necessary for an understanding of the company’s development, performance and position and/ or resilience from a financial perspective) and from the perspective of understanding their impact on people and the environment”
    • “Information concerning severe impacts is material irrespective of the assessment of whether it is considered material or likely material from the perspective of the undertaking’s economic development, performance and position”
  1. “Integrate reporting requirements covering the issues of governance and accountability for sustainability matters:”
    • “Introduce a requirement mandating undertakings to describe the board’s oversight of and management’s role in assessing and managing of non-financial risks and opportunities; and ensure transparency on integration into overall corporate strategy”
  1. “Better definition and connectivity of general reporting requirements in the Directive” to include:
    • More details on the company business model
    • Material risks and opportunities per issue, and how they are integrated into the company’s risk management process
    • The “most significant” impacts and risks on people and the environment, and where in the value chain these occur
    • Strategy to address these risks and impacts
    • Timebound “targets or objectives” related to these risks and impacts, and performance against KPIs
    • Information required by the EU taxonomy of sustainable business activities, and other EU reporting requirements
  1. “Specification of thematic and sector-specific reporting requirements for climate, natural resources and biodiversity, workforce information, human rights and environmental due diligence, and anti-corruption”

“Requirement for mandatory assurance” by an independent third-party auditor

Read the full set of recommendations and more detail on the rationale here: Alliance for Corporate Transparency, Reform of the EU Non-Financial Reporting Directive: Joint Position Paper (December 2020)