The European Commission is expected to present on 21 April a revision of the Non-Financial Reporting Directive (NFRD), which dates from 2014 and obliges large, public interest companies with more than 500 employees to include in their annual report a non-financial statement including information on the environmental impacts of their activities (see EUROPE 12618/20).
A provisional version of the draft text, of which EUROPE received a copy on Thursday 8 April, already gives the broad outlines behind the institution’s thinking, even if the text is, of course, likely to be subject to modifications before its official publication.
The proposal seeks to ensure that the public has adequate information on the risks that sustainability issues pose to business and on the impact of business itself on society and the environment.
It also aims to ensure that reporting requirements for companies are consistent with other EU initiatives in this area, including the taxonomy on sustainable finance (see EUROPE 12684/3).
49,000 companies affected
According to the text, the Commission intends to extend the scope of the current reporting requirements to all companies listed on regulated markets in the EU, with the exception of micro-enterprises.
In concrete terms, nearly 49,000 companies would be affected, compared to the 11,600 that currently fall under the scope of the NFRD.
SMEs listed on EU regulated markets must therefore comply with the proposed new sustainability reporting requirements. However, for these SMEs, the requirements would come into effect 3 years after those that apply to other businesses in order to “allow for the relative economic difficulties faced by smaller undertakings as a result of the Covid-19 pandemic”, the Commission explains.
The disclosure requirements would not, however, apply to SMEs listed on SME growth markets or multilateral trading facilities (MTFs).
For other, non-listed SMEs, the text provides instead for the development of “proportionate and voluntary standards” by the Commission by the end of October 2023.
The draft text also recognises that there is a risk of negative repercussions on the international competitiveness of European companies, if other jurisdictions do not adopt the same approach.
For example, it suggests that European subsidiaries of non-European companies and any non-European entity whose securities are listed on a regulated market in the EU should be subject to its reporting obligations.
European non-financial reporting standards
The text also seeks to specify in more detail the information that companies must communicate.
In particular, it clarifies the principle of “double materiality”, removing any ambiguity about the fact that companies should disclose the information needed to understand how sustainability factors affect the company and the information needed to understand the company’s own impacts on society and the environment.
It also introduces new requirements for companies to provide information on their strategy, objectives, the role of the board and management, the main negative impacts of the company, intangible assets and how companies have identified the information they disclose.
Most importantly, the draft text requires that all affected companies report in accordance with the European non-financial reporting standards to be established.
In June 2020, the Commission asked the European Financial Reporting Advisory Group (EFRAG) to provide initial technical advice on the development of European non-financial reporting standards. Its recommendations were delivered in early March (see EUROPE 12673/18).
The text thus empowers the Commission to adopt these European standards by means of delegated acts. A first set of standards should be adopted by 31 October 2022, covering information on all sustainability factors and reporting areas and taking into account information provided by well-established reporting standards and frameworks.
A second set of standards should be adopted, by 31 October 2023, to cover additional information for sustainability factors and areas of disclosure, if necessary, and information specific to the sector in which a company operates.
According to the text, these European standards should also specify the information that companies must disclose with regard to social factors, including employee-related factors and human rights.
They are also expected to indicate what information must be disclosed with regard to aspects of governance, such as information on the role of the company’s administrative and supervisory bodies in sustainable development, but also in the fight against corruption and bribery, for example.
In developing these standards, the Commission should take into account the technical advice of EFRAG. It is also expected that consultation with Member States’ expert groups on sustainable finance will be required before adopting standards, as well as the Sustainable Finance Platform, and that the advice of the three European financial supervisory authorities will have to be sought.
Once adopted, the standards should be reviewed at least every 3 years to take account of new developments, including at the international level.
Comparable information in digital format
One of the objectives of the proposal is also to ensure that the information provided by companies is comparable, reliable, easy to find and easy to use for users through digital technologies.
To this end, the draft text requires companies to prepare their financial statements and management reports in a single electronic reporting format.
Information on the sustainability of their activities should then be labelled digitally, according to a digital taxonomy. (Original version in French by Marion Fontana)