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Urgent revamp of EU reporting directive needed

A possible review of the EU’s reporting directive must lead to comprehensive disclosure of non-financial information to enable the flow of sustainable investments, an NGO has said.

Mardi McBrien, the managing director of the Climate Disclosure Standards Board (CDSB), wrote in a blog: “While the introduction of the Non-Financial Reporting Directive (NFRD) was a significant milestone for Europe, it has not achieved its objectives in its current form.

“The current NFRD is flawed and steps need to be taken to bolster the linkage between financial and non-financial information and effectively convey material issues to the reader.”

Insufficient directive

McBrien was commenting as part of the European Commission’s recently launched feedback period on the EU’s reporting directive.

EU rules on non-financial reporting apply to large public-interest companies with more than 500 employees, currently approximately 6,000 companies, which reported for the first time in 2018 according to the NFRD requirements.

The EU launched the feedback initiative as it assessed that the directive has not led to the desired effects.

It found that the requirements of the NFRD “are not detailed, are difficult to enforce, leave a lot of discretion to reporting companies, and do not apply to some companies from which users say they need information”.

This leads to non-financial information which is not sufficiently comparable or reliable.

Investors are unable to take sufficient account of sustainability-related risks and the opportunities of their investments, which also results in systemic risks to the economy, the EU explained in its inception impact assessment document.

“Market pressures on their own have not proven to be sufficient to ensure that companies report the non-financial information that users say they need,” it added.

CDSB’s recommendations

One of McBrien’s suggestions to improve the NFRD is to remove an exception, which allows that material information required for the non-financial statement can be disclosed outside companies’ management reports.

“In particular, ensuring that information is reported in company management reports, and not published up to six months after the financial report, could drive significant improvements in the consistency and comparability of disclosure,” she said.

“To further facilitate a unified approach to disclosure and ensure consistency and connectivity of information, environmental, social and governance (ESG) information in the management report should cover all four elements of the Task Force on Climate-related Financial Disclosures (TCFD),” she added.

The CDSB supports the mission of the TCFD of making climate disclosure mainstream.

It hosts the TCFD’s knowledge hub, which is an online platform with resources and tools that seek to realise the TCFD’s recommendations.

McBrien called for a comprehensive review of the directive, saying that “a light touch to the existing directive simply won’t do and certainly won’t channel the extra €260bn needed in annual investments to deliver on the EU’s 2030 climate and energy targets”.

The feedback period is open until 27 February and is followed by a public consultation in the first quarter of 2020.

Elena Johansson

Senior Reporter

Part of the Mark Allen Group.