The European Commission (EC) is determined to have a draft law on non-financial reporting ready by Autumn this year and it will be seeking stakeholder views in a consultation expected imminently.
The move follows the political will encompassed by the European Green Deal, in which the revision of the Non-financial Reporting Directive (NFRD) has been made a priority which underpins other policy and legislative initiatives.
"Long-term and ESG-driven investors have been raising concerns that portfolio companies have not improved their non-financial information as expected"
When passed in 2014 with a two-year period for transposition into national law, the NFRD was a pioneering legislative text requiring companies to report information not strictly considered “financial” in the traditional sense but material to the bottom line.
It anticipated and paved the way for sustainable finance policy-making in the European Union and most notably the EC’s landmark initiative, the Action Plan on Financing Sustainable Growth.
Key legislative initiatives that emerged from the Action Plan, such as the Taxonomy and Disclosures Regulations, are reliant upon the more consistent, comparable and reliable flow of non-financial information that the NFRD was supposed to bring about.
This has not been the case, hence the need for its revision.
The issue is not new and different stakeholders, particularly long-term and ESG-driven investors, have been raising concerns that portfolio companies have not improved their non-financial information as expected.
The climate crisis has made the NFRD revision more urgent in aspects related to risk reporting, particularly on the back of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Two sets of non-binding guidelines issued by the EC (in 2017 and 2019) seem to have not been enough to clarify how companies should report against the NFRD.
"The Taxonomy and Disclosures Regulations are reliant upon the more consistent, comparable and reliable flow of non-financial information that the NFRD was supposed to bring about"
In addition, the Disclosure Regulation also requires investors and other “financial market participants” to report some of the ESG-related information that they should obtain from portfolio companies via the NFRD.
Likewise the Taxonomy Regulation and the Capital Requirements Regulation (for the banking sector) are also dependent on a strengthened NFRD.
The EC is aiming to draft a ‘Regulation’, possibly for the sake of harmonisation, which unlike a ‘Directive’, is directly applicable in EU member states without transposition into local law.
Responsible Investor understands that the EC has gathered evidence showing that companies prefer now a stricter approach to non-financial reporting.
When the law was first introduced and when the EC consulted for its two sets of guidelines, corporates advocated for a flexible approach to give them leeway as to how to comply with the reporting requirements of the NFRD.
RI understands the EC will be seeking views from stakeholders on specific issues some of them identified by the Fitness Check on Public Reporting by Companies (an initiative included in the Action Plan whose findings have not been published yet).
Those issues could include whether non-financial information should be audited, whether it should be part of the main company filings (i.e. the management report) or whether new reporting standards are needed.
Once published the consultation will run for 12 weeks.