The EU has published a new directive regarding external reporting, namely the EU Non-Financial Reporting Disclosure (NFRD) directive. This goes into effect for reports concerning the year 2017. This makes it important for companies to stay up to date on the specifications. Furthermore, as your reports should be compliant in 2018, now is the time to find out what extra data needs to be monitored and gathered.
For example, a number of Belgian companies with more than 500 employees will be concerned as they will have to report about topics beyond purely financial ones in the annual report. Some companies already disclose on non-financial information in integrated annual reports, while others still need to take the first step. This EU-directive stipulates that information will have to be disclosed on five major themes; diversity, corruption and bribery, social and staff aspects, the environment, and human rights. For each of these themes, companies will have to outline their relevant policies, their results, and the procedures in place with regards to risk management. More specifically, KPI’s will have to be set up and monitored. In this way, the progress on the performance for each of the five themes can be tracked for a longer period of time.
The new regulation also requires that an external accountant evaluates the reliability and consistency of the reported information. This creates an urgency for companies to act.
The EU directive entails various general measures but it lets each member state define its own specific implementation. While most countries have already outlined the specifications, the Belgian government has yet to act.
However, the legislation is expected to come into effect soon. A conceptual version is ready to be proposed to the Belgian Chamber of Representatives. But before that, advice from the Council of State and the approval of the Council of Ministers are still needed. In comparison, reporting on non-financial information is already required in France and the UK, and recently regulations have come into effect in the Netherlands.
The EU has suggested that large undertakings, and those which are public-interest entities (i.e. that exceed an average number of 500 employees during the fiscal year), must comply with the new regulation. These are listed companies and credit and insurance companies. When the governance bill gains its acceptance, targeted companies will be specified. There is also a possibility that the Belgian government will tighten the regulation and include criteria related to a minimal balance sheet or turnover.
According to the EU, transparency regarding the social and environmental aspects of doing business will ultimately lead to better performance. If you do not measure your impact, you cannot affect it. Furthermore, once more than just financial information is made available, investors and other stakeholders will gain a more complete overview of a company. Finally, investors will be able to make more accurate predictions about the future value of a company if they can look beyond the financial information. After all, the value and viability of a company can only be assessed when taking into account the value chain in which it operates.
With this directive the EU is striving to create a level playing field for all companies and stakeholders. It will give investors the chance to analyse and compare companies more accurately. But more importantly, it will enable increased trust between companies and their stakeholders. Hopefully it will also encourage European states and companies to set up new policies concerning the non-financial topics that are to be reported. Thanks to the new directive, even the companies who are lagging behind will now be pushed to take action and develop policies regarding important non-financial issues.