Non-financial reporting as a lever of transformation

by Fabio Galliani | Aug 25, 2021 | Blog

In April 2021, the European Commission released a proposal for a Directive that aims to amend the current Directives and Regulations on corporate sustainability reporting and, over time, bring sustainability reporting up to the same level as financial reporting.

The proposal aims to introduce common corporate disclosure rules requiring companies to disclose sustainability data and information in a standardised and comparable way. Harmonising sustainability reporting rules at European level will help increase transparency for investors and stakeholders, radically improve the way in which sustainability information is communicated and used through digital technologies, and ensure the effective implementation of the European Green Deal and the Sustainable Finance Action Plan.

The action proposed by the Commission responds to the criticalities that emerged from the application of the current reporting system of non-financial information dictated by Directive (EU) 2014/95 (NFRD – Non Financial Reporting Directive), transposed in Italy by Legislative Decree 254/2016. Indeed, the current Directive, which has contributed to a cultural transformation of corporate governance models, introducing ESG (Environment, Social and Governance) factors in many areas of corporate activity, has however highlighted a lack of comparability and reliability of the available information, not allowing investors and stakeholders to compare the performance of different organisations.

 

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That said, compared to the sustainability disclosure requirements of the NFRD, this proposal introduces some novelties, in particular

  • extends the scope of the reporting requirements to other companies, including all large and listed companies;
  • sets out mandatory certification of sustainability disclosures;
  • specifies the information that companies should disclose further and requires them to disclose it in accordance with mandatory EU sustainability reporting principles;
  • requires all information to be published as part of companies’ annual reports and to be disclosed in a machine-readable digital format.

In particular, the Commission proposes to broaden the subjective scope of the NFRD, which is currently limited to public interest entities (as well as groups) that exceed the criterion of an average number of 500 employees during the financial year, by extending the reporting requirements to all large companies (listed and unlisted) and all listed SMEs (with the exception of micro-enterprises). The proposed amendments therefore remove the 500-employee threshold and extend the subjective scope of the non-financial reporting requirement to large unlisted companies, regardless of their legal form, as well as to all companies that are parents of large groups.

Secondly, the Commission proposal envisages the adoption of mandatory reporting standards, developed on the basis of the indications provided by the European Financial Reporting Advisory Group (EFRAG); specifically, in order to meet the need for comparability and reliability of data, it is required that the information be drawn up in a single electronic format, thus contributing to the creation of a digital access platform for the publication of financial and sustainability information of companies.

Moreover, in order to make non-financial reporting more detailed and include sustainability-related information, those subject to the obligation will have to acknowledge the company’s impact on sustainability issues, i.e. with reference to environmental, social and governance (ESG) factors, by including in the management reportthe information needed to understand the company’s impact on sustainability issues and the information needed to understand how sustainability issues affect the company’s development, performance and position”. Moreover, the reporting process must take into account short-, medium- and long-term horizons, in line with the European Parliament’s resolution of 17/12/2020 on Sustainable Corporate Governance (SCGI), which encourages companies and their directors to move away from short-term decision-making in favour of a long-term view.

The Member States are required to transpose the proposed Directive – which, moreover, still has to pass the scrutiny of the European Parliament – by 1 December 2022, so that the provisions contained therein will be applicable to businesses from 1st January 2023.

 

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