Reform of the EU Non-Financial Reporting Directive: clarity, consistency and comparability across value chains 

The EU Commission has initiated the process to reform the Non-Financial Reporting Directive and announced plans to create EU standards for corporate sustainability reporting. For this purpose, a public consultation has been opened by regulators to gather input from all stakeholders until 11 June 2020. The European Securities and Markets Authority (ESMA) also recently published a report on their activities and actions carried out in 2019 showing the shortcomings of the implementation of the Directive.

On 11 May 2020, we co-hosted a webinar with Frank Bold (Alliance for Corporate Transparency) which took stock of the current NFRD review and reflected upon how its reform could enhance transparency and access to consistent non-financial information from companies. This would permit sustainability-related risks, environmental, social and governance (ESG) factors to be clearly factored into investment decisions. This underpins the EU’s ambition to create a sustainable and resilient economic recovery post COVID, which will address climate risks, environmental degradation, and human rights violations across global value chains.

Key takeaways:

• Companies’ reporting at large is insufficient.
• A clarification of definitions of non-financial performance is needed.
• There is market failure in corporate disclosure on sustainability risks and impacts.
• Double materiality along with clear requirements for both its dimensions need to be explicitly recognised; Materiality analysis disclosures should not be limited to the identification of what the issues are but companies should also describe what they do to address and manage those same issues; There needs to be a dynamic relationship between materiality and mandatory reporting standards; Mandatory standards/requirements are necessary especially for issues that are crucial from a public perspective but typically outside of scope of a company’s own considerations of materiality.
• Companies’ disclosure on certain matters should be triggered by elements of their business models that are inherently connected with particular risks and impacts.
• Disclosure on governance is essential and should have a central space in the reform of the law.

Watch the webinar recording and read the report.