This blog post contributed by our partner DFGE, an Official EcoVadis Training and Consulting Partner
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How can companies adapt to the EU directive on non-financial reporting?
Many companies in the EU are already required by national laws in the country where they operate to regularly disclose financial and non-financial information. However, as there are very different laws on national level, the existing requirements regarding non-financial information are often regarded as unclear and ineffective. Given this situation, the EU decided to harmonize the EU legislation, resulting in the directive 2014/95/EU which defines requirements for the reporting on social, economic and environmental topics. With this article, DFGE – the Institute for Energy, Ecology and Economy – examines the directive’s requirements in more detail, illustrates in which ways it could affect companies and how companies can adapt to it in the short and medium term.
Background: 2014/95/EU Directive on non-financial reporting
The notion of “non-financial information” refers to environmental and social as well as to governance aspects. Despite a growing number of companies reporting on this information, the EU criticizes that most companies do not yet disclose it to a sufficient amount or quality. The goal of the new directive is therefore the creation of a comparable, consistent and meaningful standard for the publication of non-financial corporate information which is intended to lead in the end to a better environmental performance.
By the end of 2016, the directive will be transformed into national law which then applies to fiscal years beginning in January 2017 and thereafter. In Germany, the final legal text is not available yet, but a preliminary draft published by the responsible ministry largely follows the original text of the directive(1).
Companies impacted: large companies, as well as SMEs
To the large majority of EU companies, the directive is not directly relevant, as it targets companies with more than 500 employees with total assets of more than €20 million and a sales revenue of more than €40 million, which are “of public interest”. This definition, which is not yet conclusively defined, includes mainly stock-listed companies as well as some unlisted companies like banks or insurance companies. In total, the EU estimates that about 6000 companies will be affected EU-wide; SMEs, in contrast, will not face any further direct obligation (2). As concerned companies will have to disclose information about their supply chain too, however, it may well be that SMEs will be affected indirectly through requests regarding data collection, for example by means of EcoVadis.
Companies concerned will have to publish in their annual report a declaration about policies, outcomes and risks regarding environmental, social and employee-related matters; further topics are human rights, anti-corruption, bribery issues, diversity on the boards of directors and due diligence mechanisms, if relevant also regarding a company’s supply chain. The actual methodology and required data points are not yet set, but the suggested reporting frameworks can give some hints about what is expected; further non-binding guidance will be given by the EU commission at the end of 2016.
The declaration is not intended to be a comprehensive reporting on environmental and social topics, but will merely contain selective information; with less than €5000 per company per year, the EU expects the additional expenses for the reporting to be quite moderate (3). The assessment of the declaration will be a formality; an evaluation of the content will not be mandatory. Non-compliance can nevertheless be expensive, as the respective maximum fine in the German legislative draft amounts to €10 million.
The publication of a separate report covering the directive’s topics (e.g. a sustainability report) would exempt companies from including the non-financial declaration to the annual report. The format of this separate report is not prescribed; companies are nevertheless encouraged to align their reporting to international guidelines like the UN Global Compact, ISO 26000, the Global Reporting Initiative (GRI) or the German sustainability code (Deutscher Nachhaltigkeitskodex).
Adaptation: Gap analysis and beyond compliance strategy
Concerned companies should start aligning their ESG (Environment Social Governance) reporting as soon as possible in order to be able to disclose the information which is requested by the directive. After an impact analysis (determination whether a company is concerned), companies should try to identify gaps in their reporting with regards to the topics of the directive, and set measures to tackle these gaps.
In the medium term, companies should consider aligning their strategy: The new legislation shows that CSR (corporate social responsibility) is a topic the EU takes seriously, and it is likely that further regulation (e.g. regarding integrated reporting) can be expected in the coming years. Instead of just complying with a regulation constantly being tightened, it would make sense to apply a more proactive approach towards CSR, and thus to profit from the many advantages that comprehensive sustainability management and reporting offers.
Many studies have shown, for example, that companies acting beyond compliance perform better (4), have lower financing costs (5), retain talented employees (6) and have better relations with consumers and stakeholders (7) (advantages which of course also apply to SMEs).
Exemplary strategic measures could include the participation in reporting initiatives like EcoVadis or CDP, the publication of a CSR report which is compliant with the UN Global Compact or the Global Reporting Initiative (GRI), or the evaluation of the corporate carbon footprint.
This guest blog contributed by Camille Bailly-Leclerc, from DFGE
DFGE – the Institute for Energy, Ecology and Economy – offers complete consulting, software and audit solutions in the field of CSR. DFGE is an official training and consulting partner of EcoVadis for German-speaking countries. Learn more at dfge.de.
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