The EU standardises non-financial reporting

Keywords: Mazars, Thailand, IFRS, Sustainable finance, Non-financial reporting, European Union, European Commission, NFRD

18 November 2020

The revision of the Non-Financial Reporting Directive (NFRD) takes pride of place in this Sustainable Finance 2.0 strategy. Adopted in 2014, the NFRD amended the 2013 accounting Directive (on annual financial statements and consolidated financial statements). Since 2018[1] it has required certain large undertakings and groups to publish an annual report on the environmental and social impact of their business.

1. Increased awareness of the importance of non-financial reporting, but a practice that still needs improvement

The importance of non-financial information that is comparable in quality to financial information, making it possible both to direct financial flows towards projects that contribute to European and international environmental and social objectives and to measure the real impact of these projects, is now widely accepted by all economic and financial players, by public authorities and within civil society.   

However, there are still many areas for improvement in current non-financial reporting practice, as highlighted in the introduction to the consultation document published earlier this year by the European Commission to gather the opinions of stakeholders ahead of the revision of the NFRD.

In particular, the non-financial information presented is not sufficiently reliable or comparable, and not all the relevant information is always disclosed.

Further, the cost of producing this non-financial information is too high for entities.

2. The European Union goes to work...

On this basis, the Commission has also announced its intention to consider the creation of a European standard-setter for non-financial information.

To this end, in July 2020 it asked the Europe Financial Reporting Advisory Group (EFRAG) to undertake preparatory work for the adoption of European standards in order to provide the Commission with technical advice on the introduction of a robust standard-setting process.

A Task Force has been set up to carry out this work. Its composition was announced in early September. It is chaired by Patrick de Cambourg[2], the current President of the French accounting standard-setter (the ANC).

3. …but other initiatives have been launched too!

The European Union's initiative seems to have kicked off a race for the standard-setting of non-financial reporting, among international players. Since the creation of the European Task Force, many similar initiatives, taken in more or less scattered order, have been announced:

• on 11 September 2020, the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB ) – five international organisations whose conceptual frameworks, standards and platforms currently guide a very high proportion of non-financial and integrated reporting – announced a shared vision of what is needed for progress towards comprehensive corporate reporting (integrating financial and non-financial reporting) – and the intent to work together to achieve it;
• on 23 September 2020, the World Economic Forum, along with a number of major accounting firms, published a set of non-financial indicators (ESG metrics). 140 businesses comprising the International Business Council, which was behind this initiative, immediately undertook to apply them. International companies as a whole were urged to follow suit to facilitate the comparability of non-financial statements;
• finally, a week later, the IFRS Foundation announced the launch of a consultation to assess the scale of the need and demand for international standards in non-financial reporting and the extent to which the IFRS Foundation could contribute to the development of such standards (see our report under ‘IFRS Highlights’ in this issue).

While we can only welcome the growing awareness of the urgent need to provide all stakeholders concerned by non-financial information with the tools for effective and transparent management of sustainable policies (whether at entity or sectoral level, within countries or even across a continent), we cannot help but be struck by the irony of this situation. A large part of the current difficulties encountered by issuers and users of non-financial information stems precisely from the proliferation and fragmentation of diverse initiatives, with multiple and potentially competing objectives, which are sources of confusion for many people. So it seems difficult at this stage to identify the path towards the rapid, yet robust and independent “rationalisation" that the world seems to need.

Against this background, it is reasonable to assume that while the formal decision to create a European standard-setter has yet to be taken by the Commission, this is now purely a matter of form. The real question now seems to be how to make quick and effective progress, integrating the worthy aspects of these international initiatives, without being held back by political games.

A response is expected in early 2021. The EFRAG Task Force, which began its work on 11 September 2020, will deliver its conclusions to the European Commission on 31 January 2021.

^[1] First application to reporting periods current at 1^st January 2017, with the first reports having been published in 2018.

^[2] Readers will recall that in May 2019 Patrick de Cambourg presented a report to the French Minister of Economy and Finance on “Ensuring the relevance and reliability of non-financial corporate information: an ambition and a competitive advantage for a sustainable Europe".