Non-Financial Reporting: «…it is about staying in business»

August 14, 2019

Published: Accountancy Europe

This interview was realised by Ivan Chaliy, Chief Editor of IFRS Practice Journal with Hilde Blomme, Accountancy Europe Deputy CEO.

 
Ivan Chaliy (IC): What do you think of the obliged regulation of forming a sustainability report?

Hilde Blomme (HB):  Since 2018 large EU companies need to report such information according to the EU Directive on the disclosure of non-financial and diversity information (2014/95/EU) as transposed in their national laws. We consider this Non-Financial Reporting Directive as a very good starting point.

Companies need to disclose their business model, policies (and outcomes), risks, and non-financial key performance indicators in the following categories:

o    Environmental matters

o    Social and employee aspects

o    Respect for human rights

o    Anti-corruption and bribery issues

o    Diversity on board of directors

Transposing this Directive in EU countries has paved the way to more non-financial reporting, but it is just the beginning. There is still considerable flexibility about what is reported and how. Such information is reported in different ways in different countries. It can be part of the management report, other countries have included it in a separate report, or companies can also issue a variety of separate reports which covers such ESG, CSR or sustainability information. See also our overview Member State implementation of EU NFI Directive (2018).

Non-financial reporting provides a clearer picture of a company’s performance than only financial reporting can. This is increasingly important for investors and the increasingly wide array of stakeholders that are interested in corporate information on the company’s business model, long-term strategy and value creation. The Non-Financial Reporting Directive plays an important role in boosting private sector action and commitment towards meeting the United Nations Sustainable Development Goals (SDGs) and the Paris Climate AgreementReporting this can help companies move from merely complying with legal requirements, to behaving more responsibly towards building a sustainable future.

IC: What do you think about Oxford Union idea that sustainability reporting should be standardised by FASB and IASB?

HB:  The Oxford Union idea is one among different solutions for setting non-financial information standards. We are currently working on a thought leadership project to interconnect financial and non-financial reporting, ultimately resulting in one global integrated corporate reporting standard setter or standard setting approach. I will briefly highlight 3 out of all proposals that we are considering:

1. IFRS Foundation as the oversight body for global corporate reporting. Its Executive Board would provide day to day oversight of the following independent standard-setters:

–    private sector financial reporting (IASB)

–    public sector financial reporting (IPSASB)

–    International Integrated Reporting Council (IIRC) for framework and concepts in management commentary

–    ESG and broader metrics are represented by Sustainability Accounting Standards Board (SASB), Task Force on Climate-related financial disclosures (TCFD) and Climate Disclosure Standards Board (CDSB) vs. Global Reporting Initiative (GRI)

2. De Cambourg Report for regional consolidation. The report envisages a codified approach to extra-financial information as the stage is not set for a comprehensive initiative. It only focuses only on non-financial measures reporting. It presumes a new revised EU Non-Financial Reporting Directive and EU instruments to achieve legitimacy and accountability. At operational level this would mean establishing a European-level standard setter, that cooperates internationally (between public authorities and with relevant private organisations) and has a gradual timeline.

3. Open-source register based on blockchain protocols amounting to a consistent rulebook for non-financial data aggregators. Open-source solutions would be market-led and technology would make them comparable and rigorous. They would be systematised but unregulated, so users and preparers would agree on what should be reported. There would be little (if any) embedding in jurisdictional legal structures or accountability to public authorities.

IC: Chair of the IASB Hans Hoogervorst recently delivered the keynote speech at the IFRS Foundation Conference 2019. He referred only on Framework of the International Integrated Reporting Council. Does this mean that Europe will focus only on IR-standards?

HB: No, the EU as European legislator will be the one to decide that. Currently the EU has not indicated a specific reporting framework to be used for fulfilling its non-financial reporting requirements and indicated in the Directive that the disclosures may rely on a national, EU-based or international reporting framework.

There is much progress in the area of non-financial reporting, but there is also proliferation of standards and frameworks. The time has come for consolidation: this would increase consistency, transparency and comparability as we stated in our Call for Action: Enhance the Coordination of the Non-Financial Information Initiatives and Frameworks (2017). The main general reporting frameworks are Integrated Reporting , SASB and GRI standards, and the main environment specific ones are by the TCFD, CDP and CDSB as we set out in our position paper EU Directive on disclosure of non-financial and diversity information (2016).

Using integrated reporting should be supported. We believe integrating financial and non-financial reporting has become indispensable. Non-financial reporting provides a clearer picture of how a company performs than only financial information can. Non-financial reporting’s impact would be limited if it is not connected to financial reporting. Financial performance results from success in e.g. strategic planning, resource utilisation and business processes. Performance needs to be judged holistically and needs to focus on value creation and longer-term business sustainability.

IC: Some research show that a younger generation of investors is showing more interest in sustainable information. How can you explain this?

HB: Companies started to acknowledge that communicating non-financial information, such as on environmental, social and governance (ESG) matters, is essential. We believe that changes in technology have led to increased access to, and interest in, corporate affairs. In a 2015 paper The Future of Corporate Reporting, we put forward the idea that the audience for corporate reporting is growing. As such, the needs of this growing audience, both from a corporate reporting as well as an assurance perspective, must be properly addressed.

This is because our economy brings growing development and wealth but also causes natural resource depletion, pollution, overconsumption and social unrest to a level that is not sustainable anymore. The only way forward is to change how the economy operates. This starts with changing how businesses are run. It is no longer about doing good and making the world a better place: it is about staying in business.

Sustainability must become the cornerstone of business decisions; once ecosystems and societies fail, there is no business and no polity either. This has certainly not escaped the attention of the younger generation of investors and stakeholders alike. See more on this in our recent Cogito paper 10 ideas to make corporate governance a driver of a sustainable economy.

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