One year has passed since the Belgian legislation adopted the European Directive on non-financial information for large companies. Aside from regulatory compliance, why should your company publish its non-financials? Who is reading this information and what are the advantages?
In Belgium it has been exactly one year since it became mandatory for large organisations to report non-financial information. During the first couple of months, we noticed three types of reactions. One group of companies sighed deeply: “more work to do”. Another, more reporting-savvy, group couldn’t be bothered as the new legislation, aimed at raising the non-financial reporting bar, didn’t even come near their current practices: “we have already been reporting about these topics for ages!” The last group raised their eyebrows: “why would I need to report on my environmental and social performance?”
Does any of these reactions sound familiar? Chances are that your company is in one of these groups.
In our opinion, the reporting requirements are a positive development for business. We therefore list the reasons why you should embrace this opportunity to publish non-financial information.
1 – Investors increasingly look for your non-financials (and will be obliged to do so)
Both academic literature and the media agree: investors and traders are increasingly considering the environmental, social and governance (ESG) performance of companies when making investment decisions. For instance, Bloomberg has an entire team of ESG analysts extracting non-financial data from company annual reports, sustainability publications and websites, and turning these into scores, which are used by traders and investors.
Moreover, a proposed legislative package of the European Commission focuses on financing sustainable growth. It includes, among others, a taxonomy to determine whether an economic activity is sustainable, and new duties for institutional investors, such as how they should integrate ESG information into their decision making. If you publish high-quality non-financial data, you’ll be more visible for investors, whether they consider ESG information voluntarily, or do it because they have to.
2 – It prepares you for sustainability benchmarks
Sustainability benchmarks and ratings, such as MSCI, Sustainalytics, Dow Jones Sustainability Index (DJSI) or the Carbon Disclosure Project (CDP), offer the opportunity to demonstrate your company’s sustainability accomplishments in comparison to others. Participating in these sustainability ratings and benchmarks has several advantages, such as higher visibility among investors (as mentioned earlier), easier access to capital, and an improved company image.
But participation takes considerable effort. The questionnaires require participants to provide extensive (and provable) quantitative and qualitative information, which can be a time-consuming process when you’re not prepared. If monitoring and measuring non-financial information is common practice in your business, participation in benchmarks becomes much easier.
3 – Legislation will only get more demanding
Implementation of the European Directive is the first step in the Belgian legislation on mandatory non-financial reporting and up until now the only one. This is rather surprising if we look at our neighbouring countries. In France, Grenelle II, a law implemented in 2008, requires large companies to monitor and report environmental data. More to the East, the German Bilanzrechtsreformgesetz makes it mandatory for listed companies to publish non-financial quantitative indicators. Looking across the Channel, UK listed companies are required to publish about environmental and social matters in a standalone strategic report, due to the Companies Act 2006. Furthermore, companies in the Netherlands are frontrunners when it comes to organisational non-financial reporting. The country is also home to the headquarters of both the Global Reporting Initiative (GRI) and Sustainalytics.
Considering our neighbours, we can state that Belgium is a slow learner – we therefore expect that legislation on disclosure will only become stricter.
4 – It can help improve internal organisation and employee awareness
The non-financial information to be published comes from different departments inside your organisation. Think of human resources, procurement and operations. On the one hand, the requirement to report non-financials can help you streamline the process of gathering this information. In contrast to financial information, we notice that measuring and consolidating non-financials is still a challenge for many companies.
On the other hand, working with different departments to gather non-financial information helps to create awareness among your employees. It shows that, complementary to the financial performance, the improvement of non-financial performance is relevant to management and the organisational well-being as well.
5 – Measuring = managing your sustainability performance
Measuring performance (often by means of (key) performance indicators) will give your company an idea of how they are performing on specific sustainability metrics. This measurement allows management to identify developments and patterns. Examples are CO2 footprint, water consumption and employee satisfaction rate. A logical next step is to set targets and implementing an action plan on how to achieve them.
In the end, it all comes down to integrating thinking – using non-financial information as input for your corporate strategy. This is what the future of business is all about.
Author: Johanna Haerens, consultant at Sustainalize Belgium