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Commentary on the guidelines for non-financial reporting

Where has the European Commission gone beyond and where has it fallen short? 

The Commission has published the long-awaited guidelines on the Non-Financial Reporting Directive with the aim of assisting companies in preparation of their non-financial reports and increasing consistency and comparability between different companies in the Member States. 

Approximately 6,000 companies fall within the remit of the Directive as it stipulates that all large public-interest companies with a workforce of at least 500 employees prepare non-financial reports. The objective of the Directive is to lay the basis for a new model of corporate reporting that considers financial and non-financial data equally important for the future of business and for understanding a company’s development, performance and position, as well as the impact of its activity on society. The new EU-wide legislation will require information to be disclosed on policies, risks and outcomes regarding environmental, social and employee matters; respect for human rights; anti-corruption and bribery issues; and board diversity.

Filip Gregor, Head of Responsible Companies at Frank Bold, highlighted that the guidance provides “useful clarifications on how to integrate considerations of the impact of a company’s activity into the assessment of materiality of information. Furthermore, in line with the trend towards integrated reporting, it is positive that the Commission suggests that companies include the information in their annual report and pay attention to the appropriate corporate governance arrangements, stakeholder engagement and independent assurance.”

It should be noted that the guidelines fail to provide clarity on some of the points of the Directive. In particular, it falls short in providing clear guidance for reporting on indicators for the use of resources, supply chain aspects and the expected impact of science-based climate change scenarios on company’s strategies and activities. Nevertheless, it provides useful guidance to companies on a number of issues:

1. How to assess material issues

One of the major changes introduced by the Directive is how to integrate considerations of impact in assessing materiality of information. The recital of the Directive has already provided guidance on this  new element by referring to the “matters that stand out at as being most likely to bring about the materialisation of principal risks of severe impacts, along those that have already materialised”. The list of recommendations provided by the Commission this week is not exhaustive, but added some useful clarifications. Among other things, the guidelines advise companies to take into account:

  • the frequency and severity of the impact of a company’s activity, products, services and business relationships;
  • the main sectoral issues;
  • the interests and expectations of relevant stakeholders as a collective group (the guidance builds on a wide definition of stakeholders including investors, workers, consumers, suppliers, customers, local communities, public authorities, vulnerable groups, social partners and civil society); and
  • public policy and regulatory drivers.

The guidelines document published by the Commission make an explicit note that “Companies should avoid immaterial disclosures of promotional or aspirational nature which distract attention from material information”

2. Corporate governance arrangements

The way in which corporate activity is accounted for is crucial in shaping how investors and other stakeholders view and assess a corporation. The form of corporate reporting used creates powerful incentives for corporate boards to establish their targets and to decide the means of achieving those targets. As part of the “fair, balanced and understandable” principle, the Commission recommends that companies  implement governance, engagement and assurance arrangements to improve the accuracy and fairness of information (for example, ensuring that  independent board members or a board committee are entrusted with the responsibility of sustainability and/or transparency matters). The guidelines also mention effective stakeholder engagement and recommend independent external assurance.

3. Clarification of the “comply or explain” principle

The guidelines provides useful clarification on the flexible nature of the disclosure requirements. It confirms that companies, at minimum, should disclose information regarding environmental, social, human rights and anti-corruption matters. If the company has not provided a policy for some of the matters it considers material, it is required to  provide explanations. However, this “comply or explain” principle is not applicable to other reporting requirements such as the business model and principal risks.

4. Thematic aspects

The guidelines also provide a number of examples on how companies may report on policy outcomes, principal risks, their management and KPIs for specific thematic aspects. For example:

  • Environmental matters: the guidelines refers to the life-cycle assessment, environmental impact from energy use, direct and indirect atmospheric emissions (including, in particular, greenhouse gas emissions), natural resource use, impacts and dependencies on natural capital and biodiversity, as well as the development of green products and services.

  • Social matters: the guidance highlights, amongst other things, diversity and gender equality information, parental leave, temporary contracts and employee consultation processes.
  • Human rights matters: the guidance refers to the UN Guiding Principles on Business and Human Rights, and to the OECD Guidelines for Multinational Enterprises, which implies the concept of human rights due diligence. The guidance furthermore explicitly mentions occurrences of severe impacts relating to companies’ activities or decisions.

Anti-corruption matters: companies may focus on their due diligence system, as well as on pending and completed legal actions regarding anti-competitive behaviour.

5. Climate-Related Financial Disclosures

The guidelines make an explicit, although rather fleeting reference, to the disclosure of the expected impact of science-based climate change scenarios on a company’s strategies and activities. This is a key element of the FSB Task Force Recommendation on Climate Related Financial Disclosure due to be released on the 29 June this year and the French Energy Transition law for Green Growth.

6. Supply chain aspects

According to the Directive, companies are expected to disclose information on supply chain matters - in particular with respect to principal risks and impacts  where relevant and proportionate. The Commission has suggested that relevance and proportionality should be assessed with the help of the materiality test. Accordingly, in addition to situations where aspects of the supply chain present a risk to the company’s position and development, companies should also consider at least two additional materiality criteria which may trigger disclosure requirements:

  • companies are expected to consider the actual and potential severity and frequency of its impacts; and
  • disclosures should meet the interests and expectations of the relevant stakeholders'.

The guidelines also refer to the UN Guiding Principles for Business and Human Rights as well as the  OECD Guidelines for Multinational Enterprises, which delimit the scope of corporate responsibility and due diligence in respect of business partners (including supply chains). These two interconnected standards - along with related sectoral frameworks and legislation - further clarify the situations in which companies should include information that is relevant and proportionate in regard to supply chain aspects.

In addition to the Directive’s requirement to include information on business relationships in the description of principal risks and their management, the guidelines also suggest that the report provides information outlining the company’s supply chain and the relevance of non-financial matters in managing the supply chain.


Filip Gregor

Head of the Responsible Companies Section

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