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EU non-financial reporting: Good start, could do much better

By Gavin Hinks

Corporate efforts to report on sustainability policies and measures have disappointed close observers.

Recent research has found that only half the companies surveyed provided clear information on targets and principal risks about their impact on the environment under the EU’s Non-Financial Reporting Directive (NFRD). Less than 40% of corporates could clearly describe their social impact and anti-corruption measures.

The report, conducted by the Alliance for Corporate Transparency (AFCT), a body set up to monitor progress on the introduction of non-financial reporting, looked at the disclosures of 100 companies in the energy, IT, and health care sectors from Spain, France, the UK, Germany, the Nordic region, Poland, Slovenia and the Czech Republic.

On human rights reporting there was good and bad news. More than 90% of companies disclosed a commitment to respect human rights, while more than 70% attempted to protect human rights in their supply chains.

However, a majority of companies failed to provide information on how their commitments would be put into action. Only 36% provided any detail of their human rights due diligence system, while only one in ten gave “examples or indicators to demonstrate effective management of those issues”.

In the area of climate change the researchers found the energy industry wanting, with a lack of reporting on “both short and longer time horizons”.

A majority of companies failed to provide information on how their commitments would be put into action.

On social issues there was some good reporting on gender balances and anti-discrimination policies, as well as health and safety. Fewer companies offered details on the effects of their policies or included outsourced workers in their assessments, or gave information on a country-by-country basis.

The report also looked at supply chain reporting and concluded that more transparency was needed for high-risk examples and the results of supply chain audits.

Many of the results chimed with European research undertaken by Board Agenda last year. That survey found that a reassuringly large proportion of companies recognised the importance of sustainability to long-term value creation. More than 50% of the boards surveyed said they had a firm grip on understanding the risks and opportunities embodied in sustainability. However, only half of those questioned could say their sustainability aims were delivered by “effective business policies”. Only a third could say sustainability had been integrated into performance measures and compensation schemes for executives.

The right information

The big conclusion from the AFCT report is that while the new non-financial reporting rules provide an enthusiastic start, what they really need is fresh legislation that would introduce a “mandatory baseline of disclosure requirements and metrics”. The alliance worries that the NFRD does not specify which “precise information and risks” should be reported.

Ellie Mulholland, a lawyer with the Commonwealth Climate and Law Initiative, a campaign body, says companies know social and environmental issues are important, but are not providing the right information for investors and stakeholders.

“Climate change involves far-reaching risks across uncertain or extended time horizons. To bridge this information gap, companies need tools to make climate-related financial disclosures that meet the requirements of the EU Non-Financial Reporting Directive and other legal obligations,” she says.

Meanwhile, the issues with human rights reporting thrown up by the research also prompts concern about the perceived inadequacies of the NFRD. Phil Bloomer, executive director of the Business and Human Rights Resource Centre, says: “The NFRD’s weaknesses echo those exposed in the UK Modern Slavery Act that has a similar approach. The EU now has the evidence and opportunity to take global leadership to harmonise regulations that will demand human rights due diligence by companies across the region.”

Filip Gregor of Frank Bold, a campaigning law firm, says: “To ensure comparable and meaningful disclosure by all companies the legislation needs to be clearer. Standardisation of disclosure balanced with flexibility is absolutely indispensable to enable sustainable finance as well as corporate accountability.”

They are not alone in their opinion. Some academics have concluded that the NFRD is an unambitious piece of legislation with only a “modest scope”. Recommendations have been made that it should seek to harmonise reporting standards by reducing the number of “frameworks”, or disclosure schemes, permissible for reporting.

Others argue that the NFRD should be more closely aligned with reporting guidelines produced by the G20’s Task Force on Climate-related Financial Disclosures (TCFD).

The NFRD is currently under review. The evidence and the calls are mounting for an improved piece of law. It would not be surprising to see it happen.

The post EU non-financial reporting: Good start, could do much better appeared first on Board Agenda.

From:: EU non-financial reporting: Good start, could do much better

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