Barely two years after it came into effect, senior figures have confirmed the European Union’s Non-Financial Reporting Directive (NFRD) is to undergo review.
The review will look closely at improvements needed for sustainability reporting rules applied to listed companies across the EU—rules that have faced widespread criticism for failing to produce the kind of reporting required to confront climate change.
Speaking at a recent conference, the European Commission’s vice-president for the economy, Valdis Dombrovskis, conceded that despite the directive, introduced in 2018, there remains a dearth of quality reporting to help investors to make sustainable investments.
Dombrovskis said: “As things stand today, there is currently a sustainability reporting gap that is hampering progress towards a sustainable financial system.
“The needs of investors for corporate sustainability information are growing faster than any improvements in company reporting. So we welcome all views on how best to improve this directive.”
Speaking at a conference of the International Financial Reporting Standards Foundation, Dombrovskis raised not only the issue of the NFRD but the broader issue of financial reporting and whether a wide array of bodies—including the International Accounting Standard Board (IASB) and G20’s Task Force on Climate-related Financial Disclosures (TCFD)—could move climate-related reporting further forward.
Dombrovskis said investors want information that allows them to assess long-term financial performance. This means going beyond “backwards looking” information to the “wider status” of a company “what it stands for and where it is heading next”.
According to Dombrovskis: “This has led to a wide-ranging debate about whether corporate reporting still meets its objectives, whether it is keeping up with social, economic and technological developments.”
The NFRD forms part of the European Green Deal, a plan to ensure the EU is the “first climate neutral bloc in the world” by 2050.
However, criticism of the NRFD has rumbled away among campaign groups and experts since its introduction. The latest round of scrutiny for the NFRD standard came last week when the Alliance for Corporate Transparency (ACT) published research concluding that while there is good deal of sustainability reporting underway in the EU, much of it is poor quality.
The ACT found that less than a quarter—22%—of the companies presented sustainability indicators in summary form, in stark contrast to the way financial metrics are displayed.
The research also found that only 14% of companies report on how they align their climate-change targets with the Paris Agreement goals which aim to keep global warming below 2 deg C.
The NFRD asks large companies to report on policies in relation to environmental protection, social responsibility and the treatment of employees, respect for human rights, anti-corruption and bribery, as well as diversity on company boards. The rules apply to companies with more than 500 employees, roughly 6,000 across the EU.
However, the long standing complaint has been that the legislation failed to offer direction on the detail that is required or the metrics that might be used.
Last week the Financial Reporting Council (FRC) revealed it will undertake a review of climate-related reporting by UK companies.
While, the FRC’s statement made no mention of compliance with the NFRD—the UK has begun the process of exiting the EU—it will focus on the use of reporting guidelines published by the TCFD.
The UK government has signalled that mandatory TCFD reporting is on its agenda, with the insurance sector potentially first to face compliance.
Sir Jon Thompson, the FRC’s chief executive, indicated that the review was in part driven by investor expectations. The review is concerned with companies operating sustainably and whether they are receiving the right challenge from auditors.
“Not only do boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably,” he said.