Lack of clarity over new EU non-financial reporting rules

Problems in the way the EU’s Non-Financial and Diversity Information Directive, also known as the NFI Directive, has been implemented and a lack of clear reporting guidance means organisations are struggling to know exactly how to respond, according to a leading expert at Ferma’s seminar. As a result, the information disclosed is hard to compare and therefore of little value, he added. A fellow speaker stressed that simple tickbox compliance with global sustainability rules, including the new EU non-financial reporting regime, will not lead to better discussions and decisions needed when it comes to managing environmental, social and governance (ESG) risks. The NFI Directive requires member states to have related legislation in place by the end of 2016 and the first set of reporting under the regime has now taken place. It requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. According to Paul Gisby, a manager at Accountancy Europe, the directive is an important first step in moves towards improving and harmonising non-financial disclosure rules across Europe, but is by no means perfect. He said the directive is “extremely” high level and sets overarching principles, but is short on detail. There have been transposition issues with some member states goldplating its rules, said Mr Gisby at the Ferma seminar in Antwerp this week. As a result, the directive has been interpreted differently in member states and there are variations in the organisations it applies to across the EU, he said. Mr Gisby explained that while 11 countries across Europe have stuck to the standard definition of companies that need to report under the directive, 19 have enhanced the definition and brought more organisations under its scope. But the biggest problem with the directive surrounds a lack of guidance over how the information should be reported, added Mr Gisby from Accountancy Europe, which brings together the accountancy profession across Europe. The directive says companies can use any recognised national, international or European standard to disclose non-financial reporting required. All companies must do is disclose the standard, or combination of standards, they use. This is leading to a lack of consistency and undermining the value of information reported, said Mr Gisby. “Bearing in mind we seem to be getting a new disclosure standard every week, especially on climate and human rights reporting, this does give the option to break the consistency in NFI reporting. We believe consistency in NFI reporting is very important,” he said. Mr Gisby added that comparing and extracting non-financial reporting remains extremely difficult. “Extracting comparable information from current annual reports is an extremely difficult thing to do. This information has no value if you can’t compare it to people in the same sector,” he said. He added that we are not going to see any further legislation on non-financial reporting from the EU in the next few years, so it is going to be up to business, with the help of organisations such as Accountancy Europe, to come up with a common approach. Fellow speaker Rodney Irwin, director of redefining value and education at the World Business Council on Sustainable Development, said sustainability reporting across the world still often follows a tickbox approach. He said this will not deliver the true risk management needed to manage ESG risks, and said companies need to begin by having proper discussions in-house before rushing to disclose. “I think sometimes we have got the conversation around the wrong way. This isn’t a rush to disclose information. This is about having better conversations and decisions taken internally. I appreciate there is all this going on in terms of disclosure but the starting point for us is getting better decisions [and] useful information within organisations, so those charged with governance and oversight can make better, informed decisions,” said Mr Irwin. “I was a risk manager for 25 years and for me, risk management is nothing more than a good conversation with better information, allowing better decisions. Many companies today do not even have this [ESG] on the agenda. That is where the conversation needs to start, inside the company, before we rush to disclose,” he added.

Lack of clarity over new EU non-financial reporting rules

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