Non-financial reporting must be in the management report to satisfy investor needs and ensure that the Directive on Non-Financial Reporting is fit for purpose to achieve Europe’s ambitious sustainable finance goals.
As outlined in the EU Green Deal, the European Commission will review the Non-Financial Reporting Directive (NFRD). Last week, the European Commission started the revision of the Non-Financial Reporting Directive, which will run until the 27 February 2020. An Inception Impact Assessment on the updated directive is currently open for comments.
While the introduction of the NFRD was a significant milestone for corporate accountability and transparency in Europe, it has not achieved its objectives in its current form. The Climate Disclosure Standards Board (CDSB) therefore welcomes the European Commission’s announcement to review the Directive.
In response to this, CSDB has published its draft position on the key changes needed to the Directive should take into account, including red lines and tracked changed to current Directive.
- Make reporting in the management report mandatory by removing the exemption to allow the non-financial statement to be reported outside the management report;
- Increase scope by changing business size to >250 employees, as by definition of PIEs in Accounting Directive as opposed to >500;
- Explicitly state the word climate in the Directive;
- Apply the TCFD’s recommendations to disclosure of ESG information in the management report;
- Elevate materiality as a useful construct for making decision-useful disclosures from guidance to the Directive and adopt IASB’s new definition of materiality – materiality from the accounting world in the Accounting Directive;
- Set the investor as primary audience, while recognising that information may satisfy other stakeholder needs;
- Strengthen linkages between non-financial and financial information, in line with the TCFD recommendations; and
- Strengthen governance disclosures by incorporating TCFD recommended disclosures a) and b) on governance into the ‘corporate governance statement’ in Article 20 and in the non-financial statement in 19a and 29a of the Accounting Directive.
The purpose of the Directive is to help investors evaluate the non-financial performance of large companies and encourage these companies to develop a responsible approach to business. To achieve these objectives, the current Directive needs to be strengthened. CDSB believes that our red lines and tracked changes and proposals can help bolster the linkage between financial and non-financial information and effectively convey material issues to the reader.