EU Non-Financial Reporting Directive guidelines postponed to consider TCFD’s work ‘as far as possible’

European Commission delays issuing guidance until after Carney-backed recommendations

The EU Non-Financial Reporting Directive was supposed to be up and running by December 6, after member states were granted a two-year period to adapt the text to their national law systems.

By that time the European Commission (EC) was also required by the Directive to prepare non-binding guidelines on the methodology for reporting such information.

However, as the deadline loomed, the EC postponed the publication of the guidelines to a date “as soon as possible in the spring 2017”.

It was a case of unfortunate timing as on December 14, the Task Force on Climate-Related Financial Disclosures (TCFD), a high-level panel convened by the Financial Stability Board (FSB), published its draft recommendations, subject to consultation until February 12 2017.

Understandably, the EC stated ahead of this that the planning of its guidelines has been adjusted to take account of recent international developments, including at G20 and FSB levels.

The new date would allow the EC “to consider as far as possible” the work of FSB’s task force, the EU institution stated.

At country level, despite being praised as an EU law that will revolutionise corporate reporting and bring about an extra layer of transparency for investors, at the time of writing (December 16) only five countries have communicated to the EC the adoption of measures aimed at fully transposing the legal text (Estonia, Greece, Hungary, Luxembourg, Slovakia – and partially Romania).

Contacted by RI, a spokesperson for the EC said that no deadline extension has been granted to member states and that the transposition procedure will follow the usual path, expecting to give an update soon on what countries have already transposed the Directive.

In the UK, the Government run a consultation during the first half of 2016, before the Brexit vote, publishing its findings just last November.

Key aspects of the Directive are the new so-called non-financial compulsory reporting requirements, and the law’s very own scope (what companies are affected by such requirements).

The Directive divides the non-financial information factors to be reported into four groups: environmental matters; social and employee matters; human rights; and anti-corruption and bribery issues.

The Directive refers to the inclusion in companies’ management reports of a “consolidated non-financial statement” containing such information, “to the extent necessary for an understanding of the group’s development, performance, position and impact of its activity”.

The legal text goes on to say that this means: description of the policies pursued in relation to those four areas, and “non-financial key performance indicators relevant to the particular business”.When it comes to the corporates affected, the Directive used the concept of Public Interest Entities (PIEs) which have also more than 500 employees on average.

Approached by RI for a technical interpretation, the FRC said that the PIE definition includes:

-All credit institutions in the EU, irrespective of whether listed or not; 
-All insurance undertakings in the EU, regardless of whether they are listed or not and regardless of whether they are life, non-life, insurance or reinsurance undertakings (in practice, insurance undertakings subject to the Solvency II Directive); 
-And entities designated by member states as PIEs, for instance undertakings that are of significant public relevance because of the nature of their business, their size, or number of employees (none in the UK).

Asked whether an investment house could fall under the scope of such a definition, Yen-Pei Chen, Manager Corporate Reporting and Tax at the Association of Chartered Certified Accountants (ACCA), interpreted:

“The reporting requirements will certainly be the same for institutional investors, pension funds an asset managers provided as for other in-scope companies.”

At Accountancy Europe (formerly Federation of European Accountants), Deputy CEO Hilde Blomme told RI about another aspect of the Directive’s scope:

“We already know that Denmark is to reduce the employee limit to 250 to bring more entities under the aegis of the legislation, so is not impossible that investment companies could be included as a PIE in some jurisdictions.”

Asked whether investors, if affected, should disclose, for example, carbon exposure in their portfolios as an environmental matter, Blomme said:

“This would be pushing the scope of the Directive a bit – i.e. you would expect a company to put consideration of their supply chain somewhere in the disclosures, perhaps in the business model and a few lines under each of the relevant matters but it would only concern the PIEs own policies and not actual disclosure of figures in respect of business partners or investments.”

At the UK-based Investment Association, Liz Murrall, Director Stewardship and Reporting, welcomed the EU law, as 37% of the trade body members hold European equities.

“There is no harmonisation at present. Even if member states are going to have wiggle room [when transposing the directive], the fact that somebody is seeking to create a level playing field across Europe for non-financial information is a step in the right direction.”

When it comes to the implementation of the Directive in the UK, sources agree that little transposition will be needed as the EU non-financial reporting requirements are already covered by the Strategic Report companies must prepare.

Murrall, however, shared with RI the association’s main concern over the implementation of the Directive:

“We would be concerned if the scope of the existing EU requirements only applies to large PIEs, so we potentially lose some of the disclosures that we have already been having in the Strategic Report.”

The UK Government, seems to have confirmed IA’s interpretation concerns. In the response to the consultation the Government said:

“Obliging companies outside the scope of the Directive to report under the new framework would go beyond the minimum requirements of the Directive, place a greater burden on these companies and effectively “gold plate” an EU requirement.”

Finally, ACCA’s Yen-Pei highlighted that one of the most interesting and crucial questions about the Directive is whether the concept of materiality should apply.

She explained to RI: “Whether businesses only need to comply with the reporting requirements to the extent thatthe matter is relevant for the business’ key stakeholders, or whether some kind of disclosure must be made about each of the four matters.”

She concluded: “We have pushed the Commission to clarify this point on a number of occasions, but they have been reluctant to tackle this issue in their guidelines. If the EU Commission doesn’t clarify this point, it’s likely to be up to each member state to interpret the Directive as they bring the rules into national law.”

By virtue of the TCFD’s work, it seems an answer to this and other questions will have to wait until Spring 2017. Link