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UK regulator favours mandatory ESG reporting to stop fragmentation

FRC pitches a Public Interest Report as one-stop shop for non-financial information

The UK’s Financial Reporting Council (FRC) believes that ‘non-financial’ reporting should be placed on a similar statutory footing as financial reporting, in order to tackle the current confusion and fragmentation on the topic, according to a discussion paper published today.

The paper, entitled A Matter of Principles, acknowledges the lack of an overarching reporting framework covering financial and ‘non-financial’ reporting that meets the expectations and needs of all stakeholders beyond investors. 

The regulator supports the development of non-financial reporting standards, which “are needed with some urgency” and should be “prepared with an equivalent level of rigour as financial information”. 

It specifically proposes the idea of a Public Interest Report “focused on how the business interacts with the ecosystem in which it sits” and how the company views and measures “its obligations in respect of the public interest”.

It is envisaged that the Public Interest Report would include information on environmental, human rights, anti-corruption and anti-bribery matters, which are part of the EU’s Non-financial Reporting Directive (NFRD). 

“We also envisage that the report could incorporate existing mandatory reports such as gender pay gap reporting, supplier payment and modern slavery with a view to bringing together all related information in one place,” the paper states.

The FRC said its thinking in this area is still at an early stage, and the paper is open for consultation until 5 February 2021.

It comes at a frantic moment for sustainability reporting, with a number of developments creating a perfect storm that is expected to hit companies’ disclosure rules.

First, the ongoing review of the EU’s NFRD – tipped to become regulation – with a first draft expected in January 2021; as well as the European Single Access Point, a joint platform for sustainability and financial information proposed on the back of the Capital Markets Union’s Action Plan. 

Second, the convergence efforts by the five main organisations in ESG reporting (CDP, CDSB, GRI, IIRC and SASB) to align their initiatives, presumably to become the backbone of the revised NFRD standards. 

Third, the irruption of the IFRS Foundation, which explicitly opened last week the door for the creation of a Sustainability Standards Board, in parallel to its International Accounting Standards Board.