The Non-Financial Reporting Directive came into force on 6 December 2014, giving EU member states two years to transpose it into national law. Thus, by December of this year, all member states should have adopted legislation requiring non-financial reporting and will begin publishing such reports in 2018 based on fiscal year 2017. The Directive applies to what are termed Public Interest Entities,in other words those public companies with an average of 500 employees.
The U.K. government is committed to the proposed timetable but, in the meantime, the U.K. Department for Business, Innovation, and Skills launched a two-part consultation in February this year. The first part of the consultation raises questions about the approach to implementing the Directive, with the aim of raising awareness and seeking views on the U.K.’s plans to implement the law, including the use of the flexibilities within it. The second part of the consultation explores whether there is a desire for wider reforms to narrative reporting by companies in the United Kingdom. The consultation is open until 15 April this year.
U.K. legislation introduced in 2013 required companies to produce: “a concise Strategic Report, that should include the high-level information, that shareholders need to gain an immediate understanding of the business,” as well as a simplified Directors’ Report. The Non-Financial Reporting Directive mirrors many of the requirements of the U.K. legislation, and its aim is to improve the quality of reporting across all member states. A European Commission impact assessment indicates that only 2,500 large companies in the EU currently publish some kind of non-financial report on their business. Therefore some 42,000, or 94 percent, of large EU companies do not disclose non-financial information, so there is a long way to go .
As it stands, the Directive requires a company to report on the: “development, performance, position and impact of its activity relating to, as a minimum, environmental, social, and employee matters, respect for human rights, and anti-corruption and bribery matters,” including a brief description of:
Their business model
Information on their policies for the areas listed above including any implemented due diligence processes
The outcome of these policies
The principal risks related to these matters linked to the company’s operations, including, where relevant and proportionate, its business relationships, products, and services likely to cause adverse impacts in those areas and how the company manages these risks
Any relevant non-financial key performance indicators
There are minor differences between current U.K. law and the new Directive regarding disclosure of a company’s risk associated with environmental, social and community, employee and human rights matters, with the Directive adding anti-corruption and bribery matters into the mix.
As Baroness Lucy Neville-Rolfe notes in her foreword to the consultation, however, the focus of her department is on deregulation and innovation, so the current consultation is designed to implement the directive in as unburdensome way as possible, as well as to see if there are other areas of reporting that might be streamlined, in particular through the use of technology.
Current U.K. law requires the non-financial report to be published at the same time as the annual report and accounts. The consultation asks whether the Directive’s flexibility on publishing the non-financial report as a separate report and to a different schedule would be helpful.
While most non-financial reports are internally audited, the Directive allows member states to require objective verification. There is also no specific requirement in the Directive that the non-financial report be physically published, so it is possible for companies simply to post it on their websites; the consultation also seeks opinions on this option. The U.K. legislation also requires reporting on gender diversity split by directors, senior managers, and employees, and the current consultation is seeking a more effective definition of what a senior manager is. While U.K. companies are already required to publish greenhouse gas emissions data, the Directive does not require this specifically, although this information is likely to be given within the more general environmental reporting matters.
The consultation also includes a series of questions on costs under a number of scenarios. Questions are posed about the cost of preparing the current non-financial report, as well as the cost of preparing the whole annual report and the costs of implementing the Directive and, most importantly, the benefits that might accrue from implementing it.