Alongside financial information, reporting on non-financial performance, such as greenhouse gas emissions, employee diversity and more recently modern slavery, is becoming increasingly important. For many companies, the EU Non-Financial Reporting Directive (EU NFRD) requires more extensive disclosure on environmental and social issues for financial years beginning on or after 1st January 2017. This blog considers the requirements of the new legislation, the impact of the new laws on UK companies and how companies can improve their current reporting structure to effectively comply with the EU NFRD.
What do you need to know about EU NFRD?
Non-financial reporting broadly covers the disclosure of a company’s performance on environmental and social matters. Many companies are already managing and reporting on “sustainability” issues in accordance with other non-financial frameworks, such as Mandatory Greenhouse Gas (MGHG) reporting, CDP, UK Modern Slavery Act, ISO 14001 and ISO 50001. The EU NFRD will extend and enhance non-financial reporting, providing a basis for comparison between large companies across the UK and Europe, thereby increasing transparency and encouraging more responsible business practices across companies.
The directive is broader in application than previous UK legislation and will apply to large public-interest companies with more than 500 employees, including listed companies, banks, insurance undertakings and other public interest entities. Any companies within scope are now required to disclose policies, policy outcomes, risks and key performance indicators (KPIs) surrounding the following matters:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity on company boards (age, gender, educational and professional background)
How will this impact UK Businesses?
There is growing emphasis on the importance of sustainability and corporate social responsibility with many companies in the UK already disclosing “some form” of non-financial information. According to the Department of Business Energy and Industrial Strategy (BEIS), the directive is set to impact 537 companies in the UK and a further 46,170 subsidiaries that will need to provide information to parent companies. Impacted companies will need to review their current reporting structure, improve the quality of current reporting and include additional information on anti-corruption, anti-bribery and diversity.
Why non-financial reporting matters?
As highlighted by last year’s BBC gender pay scandal, the increased transparency associated with non-financial reporting can have a major impact. When the pay disparity was revealed, it resulted in significant public outrage, high profile negative press for the BBC, as well as some long overdue changes to remuneration packages for both men and women. The key point of note is that the scandal sparked a far-reaching public debate and is an excellent illustration of the ripple effects that reporting can have on an organisation. It also emphasises how important it is for companies to manage and review their non-financial performance to comply with new legislative requirements to mitigate against the risk of possible consumer or public backlash. Furthermore, stakeholders and investors are increasingly using this non-financial information when valuing companies and assessing risk. For instance, the Financial Times reported last month that 30 investors with combined assets of over £10 trillion signed an initiative to increase the number of women on FTSE350 boards and in senior management positions to 30% by 2020.
By extending, enhancing and standardising non-financial reporting across the UK and Europe, the EU NFRD can highlight the companies that are not performing well in these areas. Additionally, this directive will shine a light on the companies that are prioritising sustainability and making a conscious effort to improve their performance, setting them apart from their competitors.
What should you do next?
If you think this will apply to your company, you should immediately consider the following steps:
- Confirm whether your organization is within scope
- Review the new reporting requirements and identify any gaps in your current reporting.
- Engage key stakeholders with appropriate knowledge of business model, risks and policies on relevant non-financial issues.
- Create an action plan for capturing the additional data to be disclosed.
- Define Key Performance Indicators (KPIs) and set targets
To learn more about the legislation read our free EU NFRD guide.