The European Green Deal and the Review of the Non-Financial Reporting Directive
One of the 50 initiatives announced in the Commission’s Communication on the European Green Deal of 11 December 2019, is the review of the Non-Financial Reporting Directive (NFRD) (Directive 2014/95/EU) planned for Q4 2020. The NFRD requires large companies, including banks and insurers, to report information regarding the environment, social and employee issues, human rights, and bribery and corruption, on an annual basis. Companies have been required to include non-financial statements in their annual reports for the first time in 2018, for information covering the 2017 financial year. The NFRD covers approximately 6,000 large companies and groups across the EU. The NFRD amends the accounting directive 2013/34/EU. The NFRD should ensure that investors are better informed about the sustainability of their investments. It should also ensure that civil society and other interested parties have access to the information they need to hold companies to account for their impacts on society and the environment, avoiding an accountability deficit. At the same time the NFRD should not impose excessive reporting obligations on companies but encourage companies to develop a responsible approach to business.
To this end, the Commission committed to review the NFRD in 2020 as part of the strategy to strengthen the foundations for sustainable investment. This also reflects global trends, with a wide variety of different organisations and stakeholders calling for a consideration of a new regulatory approach to non-financial reporting. The Commission observes that “the non-financial information needs of the investment community are increasing very substantially and very quickly. The demand for better information from investee companies is driven partly by investors needing to better understand financial risks resulting from the sustainability crises we face, and partly by the growth in financial products that actively seek to address environmental and social problems. According to the preliminary conclusions of a Fitness Check that the services of the Commission are finalising (Fitness Check on the overall EU framework for public reporting by companies), the NFRD does not adequately respond to these needs.”
The review will be accompanied by an impact assessment. The services of the Commission have recently contracted two studies that will provide additional data and evidence for the impact assessment: these are (1) a study on the non-financial reporting Directive and (2) a study on Sustainability Ratings and research. To kickstart the review, the Commission launched a short consultation on its inception impact assessment which ends 27 February 2020. But more important is the public consultation on the review (see section Useful links) which takes place from 20 February 2020 to 14 May 2020. In addition to this open consultation, there will be targeted surveys addressed to SMEs, and to companies currently under the scope of the NFRD. The Commission will soon launch an open public consultation on a Renewed Sustainable Finance Strategy, seeking for stakeholders’ views in other Sustainable Finance related issues, including questions related to sustainable corporate governance.
To note is that the Commission’s Executive Vice-President Valdis Dombrovskis, when talking about the review of the NFRD, announced an ambitious target in a speech on 28 January 2020 at a Conference on Implementing the Green Deal: Financing the transition: Not every detail can – or should – be fixed in law. There is also a need for clear reporting standards for companies to apply. So today, I can tell you that the European Commission will support a process to develop European non-financial reporting standards. This is in line with the Council conclusions on the Capital Markets Union at the end of last year. I will soon invite the European Financial Reporting Advisory Group to begin preparatory work for these standards as quickly as possible. The many overlapping international reporting standards and set-ups confuse companies and investors. They also find it expensive. The EU is well placed to address this situation – and show leadership in building consensus for a set of standards that can be widely accepted.”
Another GDPR in the making?
Lieve Lowet
