Frank Bold, the public interest law group focused on company law issues, is coordinating a research project aimed at assessing the implementation of the EU Non-Financial Reporting Directive, affecting 6,000 large firms since financial year 2017.
The three-year project, dubbed as the Alliance for Corporate Transparency, convenes 12 organisations (among them CDP Europe, ClientEarth and the Business and Human Rights Resource Centre) to develop an assessment tool that would link existing non-financial reporting standards with material and legal requirements needed to comply with the Directive.
The Directive (whose official full denomination refers to the disclosure of non-financial and diversity information) introduced four new areas to be covered by annual reports: environmental, social and employee, human rights and anti-corruption matters.
Enacted in October 2014, it was one of the first legislative steps of the EU to integrate sustainability into financial services policies, preluding the 2018 Sustainable Finance Action Plan.
The Directive granted leeway as to how to prepare such ESG disclosures and mandated the European Commission to draft non-binding guidelines to assist with its implementation.
The European Commission published a first set of non-binding guidelines in 2017 but given the developments in the area, an update will be provided taking into account the metrics the Technical Expert Group on sustainable finance is understood to be working on.
Frank Bold is still concerned about the lack of clarity and comparability, and believes that on a practical level the way forward remains vague and uncertain, according to Susanna Arús, Frank Bold’s EU Public Affairs Manager.
“We are not trying to create a new standard or a ranking of companies. Our aim is to provide data, evidence and a baseline for the development of this legislative framework in the EU,” Arús told RI.
So far, Frank Bold has been working with a sample of 100 companies within three sectors (energy, healthcare and information and communications technology) to design a prototype assessment tool drawing materiality requirements from the main existing sustainability standards and frameworks.According to Filip Gregor, Frank Bold’s Head of the Responsible Companies, the project would comprise a “materiality matrix”, as not all environmental and social issues will be material for all industries.
“We are using the definition of materiality introduced by the Directive, i.e. [information] necessary for understanding [a company’s] development, performance, position and impact of its activity on society and the environment. It is presumed that such information is material to investors,” Gregor explained.
By February 2019, Frank Bold expects to have gathered a considerable body of evidence from companies to then engage with the investment community, which will provide their feedback for the next stage of the project focused on ESG reporting issues beyond the Directive.
Corporate reporting is part of the European Commission’s Action Plan, chiefly under the banner of “strengthening sustainability disclosure and accounting rule-making”. As a result, the European Commission has issued a legislative proposal for regulation on disclosures relating to sustainable investments and sustainability risks.
Some investment firms – which, like corporates, may also be subject to the requirements of the Directive, are not being analysed by the Alliance yet. According to Frank Bold’s Arús, these firms have been put on hold until there is a clearer outcome of the Commission’s draft regulation on disclosures.
In addition, the Commission is conducting an ongoing “fitness check of EU legislation on public corporate reporting” which was subject to a consultation from March to July this year. The 338 responses received have not been published yet.
On 30 November the Commission will hold a “high-level event” which could be the last opportunity to provide input before the May 2019 elections to the European Parliament, from which a new European Commission will emerge.
According to the current Commission, the fitness check will also “encompass the non-financial reporting Directive” [i.e. its implementation review]; and the conclusions of the fitness check “will inform any possible future legislative proposal”.
In that sense, RI understands the fitness check conclusions could include some sort of handover guidance for the EC that will be appointed in May 2019.
Note: This article was updated to change the term ‘benchmark’ to ‘assessment tool’ at the request of Frank Bold