Implementation EU-directive on non-financial information and diversity starts with by integration in the planning & control cycle

Last December the Dutch Authority for the Financial Markets (AFM) reviewed the implementation of the EU-directive on non-financial information and diversity in annual reports. In this ‘Thematic review of non-financial information in management reports 2017′, the AFM concludes that the vast majority of the companies provide insight into the policies regarding the four prescribed themes; environmental, social and employee-related issues, respect for human rights and combating corruption and bribery. However the directive also requires companies to provide information on the potential risk, how these risks are mitigated, which KPI’s have been set to monitor progress and insights into the results related to the policies of the above-mentioned themes. The AFM concludes that the information related to these aspects was not sufficient in the 2017 annual report. We have noticed that this is not only the case in the Netherlands, but also in other European countries research showed that the implementation of the directive is not sufficient.  

In particular the information provided on risks related to the themes human rights and corruption was not included properly. This is often related to the assumption made by Western companies that human rights are not that relevant to them. “Our head office is located in the Netherlands, we have a collective agreement for our employees and an anti-discrimination policy and no branches in Asia. Therefor human right issues are not relevant for our business”, is an example of a frequently heard statement.

A growing jungle of reporting guidelines

Where companies only used to provide information related to their own activities, they are now required to provide information on their supply chain responsibilities. In our opinion this is a positive development, due to the fact that the societal impact of companies is mostly related to the role they take in the supply chain, both towards suppliers as well as clients.

But the EU-directive also raises questions from companies. Does the EU require companies to report on topics that they, for example by using the GRI Standards, assessed as not material within their materiality analysis? Furthermore we see a trend that companies only want to report on those topics that are deemed relevant and bring focus in the annual report, but what is the potential impact of the directive on this trend? Are companies obliged to include more information and report on topics that might not be material? We see that companies are struggling with these questions as well as the growing ‘jungle’ of reporting guidelines and the apparent contradictions and overlaps between them.

Use reporting guidelines to bring focus in your control framework

Reporting should not be the means to link all of these guidelines together in an ad-hoc fashion solely for the purpose of ticking boxes. The challenge is to instead include the requirements from these reporting guidelines at the beginning of the planning and control cycle when you set out the priorities for the coming year. The EU-directive should be used as a framework to decide how you want to present your company and what the impact of your company is on it’s environment. Themes like the environment and social and employee-related issues are of strategic importance for every organization, while human rights and corruption should at least be relevant for the risk-analysis of these companies.

Taking this into consideration, the EU-directive requires companies to be transparent about how they determined whether or not the requested themes are relevant (read: material) for your organization. This will differ per company.

An example is the way in which ABN AMRO and Unilever have tackled the issue of human rights. Both organizations have analyzed the impact of their activities and identified the possible threats and opportunities in relation to the performance of the company. Both organizations then incorporated this into a human rights report in which they described their analysis, the risks involved in the supply chain and the actions they take to mitigate these risks.

Such an analysis should be the basis for the internal control framework in which the KPI’s and KRI’s (Key Risk Indicators) are set.

In their thematic review the AFM states that it will discuss its findings with companies and audit firms to improve compliance with the Directive. Our advice: do not wait until you start writing  the 2019 annual report to consider these issues, but rather you should start now, at the beginning of the management cycle, by integrally determining the material themes and key risks for your organization.

Author: Tijn Willems, consultant Sustainalize