EC is launched a consultation on the review of the Non-Financial Reporting Directive or NFRD (Directive 2014/95/EU, as part of its strategy to strengthen sustainable investment in Europe. The Directive requires certain large companies to include a non-financial statement (for example, on environmental or social issues) as part of their annual public reporting obligations. The consultation is intended to collect views from across EU on possible reforms or improvements that could be made to the Directive. The consultation ends on May 14, 2020 and the feedback from this consultation will feed into the EC impact assessment on the review of the Directive. EC also published the remarks given by the Executive Vice-President Valdis Dombrovskis, at the IFRS Foundation Conference. Mr. Dombrovskis discussed ongoing and potential developments in the areas of the non-financial reporting, reporting in the European Single Electronic Format, and disclosures related to sustainable finance.
A review of the Non-Financial Reporting Directive is an essential part of the effort of EC to scale up sustainable finance by improving corporate transparency and providing all stakeholders with more comparable and relevant information on sustainable business activities. In addition to this public consultation, EC will also conduct targeted surveys that will be addressed to small and medium-size enterprises and to companies under the scope of the Non-Financial Reporting Directive. The targeted surveys will collect more detailed opinions and data from companies on certain issues, including costs related to non-financial reporting. In addition, the services of EC will soon launch a public consultation on a Renewed Sustainable Finance Strategy to seek stakeholder views on other issues related to sustainable finance, including questions on sustainable corporate governance.
EU rules on non-financial reporting only apply to large public-interest companies with more than 500 employees. They cover approximately 6,000 large companies and groups across EU, including listed companies, banks, insurance companies, other companies designated by the national authorities as public-interest entities. The NFRD identifies four sustainability issues (environment, social and employee issues, human rights, and bribery and corruption) and with respect to these issues it requires companies to disclose information about their business model, policies (including implemented due diligence processes), outcomes, risks and risk management, and key performance indicators relevant to the business. It does not introduce or require the use of a non-financial reporting standard or framework, nor does it impose detailed disclosure requirements such as lists of indicators per sector.
In addition to the provisions of the NFRD, several other EU legislative acts require disclosures of sustainability-related information for financial sector entities:
- The Regulation on prudential requirements for credit institutions requires certain banks to disclose ESG risks as of June 28, 2022.
- The Regulation on sustainability‐related disclosures in the financial services sector requires financial market participants to disclose their policies on the integration of sustainability risks in their investment decision-making process and the adverse impact of investment decisions on sustainability factors, as of March 10, 2021.
- The Regulation establishing a framework to facilitate sustainable investment (the Sustainable Finance Taxonomy) creates new reporting obligations, including for companies subject to the NFRD, starting in December 2021.
Comment Due Date: May 14, 2020
Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, Disclosures, Reporting, Climate Change Risk, Non-Financial Reporting, EC, ESG
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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