The Non-Financial Reporting Directive: Three Key Questions and How to Approach the New Requirements
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In December 2016, the EU non-financial reporting directive (Directive 2014/95/EU) was transposed into UK law via The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016.
In short, this legislation requires large companies to report additional non-financial (i.e. environmental and social) performance-related information within their annual reports.
The original timetable for transposition into national legislation by member states was the 6th December 2016. On the continent, several states are reported to have missed this deadline, which presents uncertainty as to how and when these requirements will be interpreted across jurisdictions.
1. Which companies are affected?
‘Public interest entities’ matching both of the following criteria are required to report against these new requirements:
A. Traded/listed company (anywhere in European Economic Area), banking company, insurance company, or company carrying on insurance market activity
B. ≥ 500 employees (on average during the financial year)
[Notwithstanding these criteria, in our opinion it would be a valuable exercise for any organisation to review their opportunities to develop or improve reporting of non-financial information to relevant stakeholders.]
2. What must be disclosed and when?
The legislation requires disclosure of these aspects of performance:
- Description of the company’s business model
- Policies (incl. due diligence procedures)
- Principal risks and corresponding risk management procedures
- Management approach
- Non-financial key performance indicators
All the above aspects of performance should be reported in relation to these ‘non-financial’ issues:
- Environmental matters
- Social matters
- Employee matters
- Respect for human rights
- Anticorruption and bribery matters
- Board diversity (i.e. age, gender, geographical diversity, and educational and professional background) 
Information must be relevant and material, in order that stakeholders can fully understand an entity’s approach, impact and performance in relation to these environmental, social and governance matters. Where there are gaps in disclosures, an explanation must be provided.
For affected entities, these reporting requirements apply to reporting in relation to financial years starting in 2017. This includes financial years that begin on 1st January 2017.
Interestingly, the European Commission has committed to preparing a report for the European Parliament and Council by 6th December 2018 on the implementation of the Directive, including its scope, effectiveness and the level of accompanying guidance and methods. However, clearly, with the UK now committed to leaving the EU by April 2019, the outcomes of this review will not automatically directly impact UK legislation. More fundamentally, the entire existence of this piece of legislation may be threatened as a result of the UK leaving the EU, as the UK Government will be completing a process of reviewing the applicability of all laws passed pursuant to EU Directives. However, please note that in the meantime and until further notice [by UK legislators] companies will be required to apply this new legislation in its entirety.
3. Where should these disclosures be reported?
According to the legislation, the required information should be included as part of a ‘Non-Financial Information Statement’ within the strategic report of the entity’s annual report. Importantly however, “If information required by subsections (1) to (5) to be included in the statement is published by the company by means of a national, EU-based or international reporting framework, the statement must specify the framework or frameworks used, instead of including that information.”
As such, if for example an entity presently or plans to report through the UN Global Compact (UNGC) or Global Reporting Initiative (GRI), they may already be compliant and can continue to report this information outside of their annual report. In this instance, these separate aspects of reporting would need to correspond to the same financial year.
In our opinion, for companies that present UNGC or GRI-related information outside of their annual report, we hope that they will elect to include more than just a sign-post to this information within their Non-Financial Information Statement. Providing at least a summary of this information will clearly better comply with the intent of this legislation, which is to have relevant and material non-financial information presented alongside financial information in an integrated manner.
Final thoughts on how to approach these new requirements
- Consider the relevant criteria to determine whether your organisation is affected.
- Unpick the requirements and complete a gap analysis against your organisation’s current activities, performance and data/information collection procedures.
- [Optional] Explore synergies with other voluntary/mandatory reporting frameworks that your organisation already reports or would like to report against – e.g. Modern Slavery Statements (Modern Slavery Act 2015); Financial Standards Board (FSB) Climate-related Financial Disclosures (currently draft); GRI; UNGC; and, European Public Real Estate Association (EPRA) Best Practice Recommendations on Sustainability Reporting.
- Take a look at what your peers are doing – the Climate Disclosure Standards Board (CDSB) have helpfully compiled some relevant good practice examples that can be accessed here.
- Develop a plan to both improve your organisation’s performance in these areas and ability to report accurately and completely.
- Implement the plan.
Nearly finally… we would recommend discussing with your auditor the level of assurance/verification incumbent upon information contained within your non-financial information statement. That said, we would always recommend that such information and data be generated and checked via robust procedures and, where appropriate, supported by third-party advisors and/or software tools. For example, our proprietary software SIERA holds all an organisation’s property-related environmental data in one secure database with powerful validation tools to ensure the accuracy and completeness of data.
And finally, please do get in touch if you would like to explore these requirements further and/or to discuss how your organisation can:
derive benefits from better risk management and transparent reporting
We’re ready to help. Contact our experts today.
 Please note: Board diversity disclosure requirements are nuanced depending on the exact nature of the business. EVORA can provide more information upon request.