The Non-Financial Reporting Directive: What You Need To Know
The Non-Financial Reporting Directive (NFR Directive) applies to you if you have offices within the EU with over 500 members of staff (or 250 in Sweden, Bulgaria, Hungary and The Netherlands) and don’t already produce an annual sustainability report or integrated report. Pay close attention to this blog – because it affects your business.
The EU Non-Financial Reporting Directive is enshrined in the Treaty on the Functioning of the EU which allows Member States to exceed the requirement set by the EU in matters of environmental protection.
We’ll tell you more about this later (in the section ‘Enforcement – Do Directives Present Business Risk’), but for now let’s look at what you need to know.
The Regulatory Space for Non-Financial Disclosure is Blowing Up
As mentioned already, the Directive still directly applies in countries which haven’t transposed the requirements into national law, so companies with offices in these countries should be prepared.
Even without country measures adopted, individuals can still appeal to the European Union Court of Justice (EUCJ).
But even aside from the EU Directive, the regulatory space is blowing up on non-financial disclosure. Companies not already reporting on those aspects are going to become affected.
For example, the Task Force on Climate-related Disclosures (TFCD) will apply to companies not disclosing on climate related topics. Whether or not this voluntary initiative becomes law, investors deem that climate risk is material – and can therefore sue a company in the courts for non-disclosure.
The number of companies publishing non-financial information grows year-on-year, and the level of detail deepens as companies get to grips with these new requirements as discussed by Emanuela Keyninck, Ontario Pay Equity Commissioner at an SDG reporting event in Toronto on June 12th this year.
The Rising Cost of Non-Financial Risk
While this Directive is a legislation affecting companies with offices based in the European Union, there are rising costs globally for those companies not strategically managing non-financial risks. Additionally, if part of your supply chain is based in the EU, and the entities therein do not comply with the EU Directive, this could have knock on effects for your business.
According to McKinsey and FTI Consulting, and as shown in the infographic below, there is a disparity between the percentage of companies that believe themselves to be prepared for the EU Directive, and the percentage of investors who believe companies are prepared. This highlights a gap in the level of quality companies expect investors to demand in non-financial reporting.
As can be seen in the infographic, the top 10 banks globally lost $200bn through litigation compensation claims and organizational mishaps between 2008 and 2012. The Datamaran Professional regulatory database covers over 3000 emerging and current regulations affecting global business.
We can’t tell you about every regulation that may affect your business in our blog – so if you want to learn more about how Datamaran Professional can help you scan the horizon for emerging risks and opportunities, or to align your corporate disclosure with the regulatory landscape, including investor expectations.
What is the Non-Financial Reporting Directive?
The directive requires public disclosure documents such as annual reports, sustainability reports and integrated reports to include the below topics. You need to ensure you’re disclosing the impacts of your business activities on issues that fall into the following categories:
- Environmental matters
- Social and employee aspects
- Respect for human rights
- Anti-corruption and bribery issues
- Diversity on board of directors
The disclosure must include a description of the company’s business model, a description of the policies adopted regarding the listed issues, the outcome of said policies, the risks related to those matters linked to the company’s operations, and non-financial key performance indicators relevant to the particular business (as referenced within the NFR Directive).
The deadline for transposition has passed, and the Directive can now be considered to apply directly in countries which haven’t transposed the requirements, if need be, until transposition measures are adopted. The deadline to do this was the 6th December 2016, so this change is expected imminently.
The Directive applies a “comply or explain” system, meaning if no policy is in place in one of the above matters, your company must explain the reasons behind this. The “comply or explain” principle ensures that if a company does not apply a policy regarding these issues, it will be disclosed publicly, encouraging companies to address this gap, in order to avoid negative publicity.
What is Required?
The Directive requires companies to report on business impact, development, performance and position relating to a set list of non-financial issues.
These include environmental issues (i.e greenhouse gases, energy use); social and employee aspects (such as employee development, employee compensation and benefits); respect for human rights (such as human rights, children rights, labor rights); anti-corruption and bribery (such as bribery, corruption); and Diversity on the board of directors (such as workplace diversity and inclusion, Board composition, board diversity and independent board directors).
If you would like guidance on the key non-financial issues impacting your business, and how to disclose this information to comply with the regulatory requirements for your sector, get in touch. Datamaran’s smart technology can help make this task easier, faster, and more effective.
What Story Does The Data Tell?
There are 867 companies based in the EU within the Datamaran business intelligence platform. Our analysis shows that less than half of these companies are actively releasing sustainability reports or integrated reports.
While this doesn’t mean the issues are not being reported within the financial reports, it does signify the extent to which European companies may have to improve on their reporting requirements regarding the wealth of non-financial issues that will need to be disclosed on.
The analysis Datamaran provides is based on the largest companies by market capitalization across the EU. The picture for smaller businesses could be starker still, with a greater majority of companies needing to make the transition.
Are You Disclosing on Non-Financial Reporting Directive Topics?
The graph shows the top 10 most common non-financial issues being reported in EU corporate disclosure (Annual Reports, Sustainability reports and SEC-filings) amongst the corporate reports of the 867 EU companies listed in Datamaran. As you can see, there are still a significant proportion of companies not disclosing on these topics.
Using expert insights from our team of legal, risk and non-financial issues experts, we explore what companies are doing now, what they need to know, and how they can prepare themselves for the regulatory requirements impacting their corporate reporting.
From our analysis, we see that companies in the majority of EU member states are prioritizing at least one environmental and employee related issue in their Annual Reports.
There is a wide variety in how companies disclose on other non-financial issues in the scope of the directive.
Our analysis highlighted the most common non-financial topics being disclosed within their corporate disclosure (across both financial and non-financial reports). These were:
- Employee compensation & benefits
- Business ethics
- Anti-corruption & bribery
- Greenhouse gases
- Shareholder activism
- Board composition
- Employee development
- Occupational health & safety
- Energy use
- Workforce diversity & inclusion
Are You Leading or Lagging?
Our analysis, presented in the infographic below, shows the most emphasized topics being discussed across annual reports, sustainability reports and SEC filings by country, relevant to the NFR Directive topics.
If your company is not disclosing on these topics within your corporate filings, you may be falling behind the curve.
Gaps in Non-Financial Reporting By Country
In our analysis, we considered all companies based within the EU in the Datamaran database (867 companies), and have drawn out some of the greatest gaps between EU countries and the percentage reporting or not reporting on topics relevant to the NFR Directive.
The results suggests that companies based in France are the most prepared for the NFR Directive based on French companies’ disclosure on related topics.
This could be explained by the number of mandatory disclosure regulations which exist in France relating to this topic.
In Datamaran’s regulatory database, there are 19 mandatory disclosure requirements in France relating to non-financial disclosure.
The most relevant of which is perhaps the Grenelle Act II (Law No. 2010-788 on the national commitment for the environment – Grenelle Act II) which has been in place since 2010.
Non-Financial Reporting Directive Category: Labor Rights Issues
On the issue of fair remuneration, French companies are leading on the issue, with only 30% of companies in France not covering the topic. In contrast 75% of Danish companies are not disclosing on this issue.
Under the topic of labor rights, we discovered 50% of Irish companies in our database were not reporting on labor rights issues, in comparison to only 5% not reporting on the topic in France.
On the issue of forced labor, 75% of companies in the Netherlands were not reporting on the issue in comparison to only 25% of French companies.
Non-Financial Reporting Directive Category: Environmental Issues
On the issue of climate change, we found 40% of Swiss companies not reporting vs only 5% in France.
On the issue of energy reduction and efficiencies, we found the most prepared countries to be France and Austria, with Ireland lagging behind in terms of corporate disclosure on the topic.
On the issue of water pollution, UK companies are lagging with 70% of UK companies not reporting on the issue, in comparison to Finnish companies with only 20% not covering the issue in corporate disclosure.
Companies may feel ill-equipped as they prepare to disclose the required information for the first time.
Regulatory guidance tools, and examples of industry best practice from peers in their sector will be a useful guide to leverage when deciding what to disclose and whether it meets the minimum requirements of the directive. That’s where Datamaran can help.
Enforcement – Do Directives Present Business Risk?
Once approved, EU Directives must be transposed into national law. This means the country in which your business is based will take decision on the details in terms of enforcement.
Once the transposition measure is adopted, it is enforced through the national administrative mechanisms applicable to national law.
Therefore, prosecution and penalties for non-compliance can present a serious business risk – both in terms of a regulatory risk, but also a reputational risk.
The violation of the requirements of a Directive is therefore considered as a violation of the transposition measure itself. National tribunals and courts will have jurisdiction over the non-financial statements, and will judge according to the texts of relevant national laws, and not the Directive.
However, these national administrative mechanisms responsible for enforcing EU law must satisfy EU standards of enforcement. The effectiveness of national administrative enforcement mechanisms in enforcing EU law is subject to review.
The European Union Court of Justice (EUCJ) may be seized by the European Commission or a Member States against another Member State for failing to transpose the Directive within the assigned deadline or for inadequate enforcement of the requirements.
Most cases are referred by the Commission, within the context of its mandate to oversee the correct implementation of EU legislation (usually after a fair amount of warning).
It is important to note that Directives are considered to be a risk where unimplemented or badly implemented. This allows for legal force and therefore legal recourse even if the national transposition is lacking.
In case of violation, the Directive itself will only be invoked in case of referral to the CJEU. There are mechanisms to prevent this. The Court may only be seized if all domestic remedies have been exhausted, including appeals and referrals to existing Supreme Courts.
Even then, the Court doesn’t rule on the merits of the case, but on whether the national courts have correctly interpreted the Law and whether the requirements of the Directive have been respected. The merits of the case (including penalties) are always ruled on by domestic tribunals.
Which Countries Have Transposed the Non-Financial Reporting Directive into Law?
As is the rule in EU Law, Directives must be transposed into national law by each member state, giving them a certain amount of liberties in the ways to implement the requirements set by the Union – as long as the outcome of the Directive is upheld. Countries are mandated with interpreting and deciding the best method of implementation.
As of the 14th of July 2017, 22 countries have transposed the directive into law.
The following countries have still not transposed the directive.
Significantly, some countries (Sweden, Bulgaria, Hungary and The Netherlands) have chosen to lower the minimum employee threshold to an average of 250 employees.
These countries demonstrate that they are engaged with the issue, and may set a trend for more countries to adopt similar measures in the future.
We’re expecting to see major shifts in the ways in which companies report, and more details on the relationship between company financial statements, and the non-financial issues impacting business and society.
Companies are given the freedom to disclose this information in the way they find useful or in a separate report. In preparing their statements, companies may use national, European or international guidelines such as the UN Global Compact.
An important point here is that while most countries encourage the use of voluntary frameworks, companies are required to disclose which framework was used, if any.
A number of voluntary frameworks exist, which can be followed to report on the issues.
Notably, the GRI standards can be used for each topic and are the most commonly used framework.
They have released the following to help companies implement the Directive: Linking the GRI Standards and the European Directive on non-financial and diversity disclosure (14 Feb 2017)
How Can Business Intelligence Help?
If you are an organization impacted by this directive and want advice on how to better disclose on traditionally non-financial disclosure topics, get in touch for a demonstration of Datamaran. Our business intelligence platform can help you to identify and emulate best practice from the world’s leading 7000 companies.
The Datamaran platform also offers alerts to expected changes across the global regulatory landscape with global coverage of over 3000 regulations which are relevant to your business. Finally, it monitors trends across news channels and social media to track, on a continuous basis, the evolution of non-financial topics, including those related to the NFR Directive.
Relevant Blog Reading
To read more on the importance of non-financial reporting, you might also enjoy our blog “Why integrating non-financial issues are essential to future business strategy”.