INT_T_Reorting

This article was first published in the May 2016 international edition of Accounting and Business magazine.

Non-financial reporting requirements that come into force throughout the European Union at the end of this year are as crucial as the annual financial report. 

That was the message from a Brussels conference with the theme ‘Non-financial reporting: the impact on the relationship between boards and auditors’, which ACCA co-hosted with the European Confederation of Directors’ Associations (Ecoda) and the European Confederation of Institutes of Internal Auditing (ECIIA) in March.

The EU’s 2014 directive on non-financial reporting will this year start to require large companies with more than 500 employees to disclose information on their environmental, social, labour and human rights policies. The first reports will have to be published in 2018 about 2017 financial year activities. 

Opening the conference, Ecoda chair Turid Elisabeth Solvang urged companies to take non-financial reporting  seriously. It ‘should be owned and fulfilled with the same vigour as financial reporting’, she said. ‘If companies compromise the trust of society, customers and shareholders will migrate elsewhere.’

Nicolas Bernier Abad, from the European Commission’s directorate general for financial stability, financial services and capital markets, which drafted the directive, stressed: ‘Disclosure is a requirement.’ 

Bernier Abad, who spoke in a personal capacity at the conference, revealed he had attended ‘so many meetings’ where executives complained about producing these reports. He pointed out that it was obligatory to report both financial and non-financial matters, and called the attitude to non-financial reporting ‘illogical and so unreasonable’.

Misnomer

Bernier Abad argued that non-financial reporting is a misnomer. Rather, he said the directive’s requirements ‘are about adding context to the management report’. He said it was about explaining to shareholders and investors a company’s stance on the environment, and attitudes to bribery and corruption as well as to human rights. ‘You need to talk about these things in the same way you need to talk about profit and loss,’ he said.

Other participants in the conference said reporters should release more than the bare minimum of information, although Solvang argued that companies ‘should not be judged on whether there is minimum compliance, but on whether the intentions behind the regulation are fulfilled. Companies should avoid treating this as a comply-or-explain exercise and instead respond to the intention of the regulation.’

Like many others at the conference, Solvang wanted to see compliance assessed on key performance indicators (KPIs). She told the conference that non-financial reporting often existed in ‘a backwater between compliance and communication’, and could end up being ‘wishy-washy’. To combat this risk, Solvang said non-financial reporting needed ‘ownership’ in a company, with ultimate responsibility for compliance lying with the board.

People like to do business with companies they trust and if they lose trust they go elsewhere, she said, adding: ‘Building trust is building your company’s future.’

Pro-business

Bernier Abad argued that non-financial reporting was ‘a business tool’ that could bring benefits for companies, and underlined that transparency was good for business: ‘This is pro-business legislation – this is the point we want to make.’

The commission official described the EU directive as ‘a natural evolution’ because legislation already existed in France, the UK, the Netherlands, Sweden, Denmark and non-EU Norway. He said: ‘We are now taking the next step, raising the bar.’

Nevertheless, Bernier Abad said the directive was not prescriptive: ‘We don’t tell companies how to manage themselves.’ He said companies could follow upcoming EU guidelines, which will provide companies with a methodology to facilitate the disclosure of this type of information – on which a public consultation closed in April.

It is also possible to produce a single report covering all the companies in a group for non-financial issues, which is not the case with financial reporting. The requirements for external auditors are also less onerous as they only need to check that the information has been provided.

Investor pull

Neil Stevenson, managing director for global implementation at the International Integrated Reporting Council (IIRC), agreed that non-financial reporting brought benefits to business: ‘We are seeing a stronger pull from investors for more relevant information that goes beyond financial.’ 

As an example, he cited information about what companies were doing about climate change in adapting to its impact and lowering their contribution to global warming. ‘We should see this as an opportunity,’ he said.

Integrated reporting helps companies file reports and understand how to create value over time, Stevenson explained. Up to now, he said: ‘We believe company reporting has been a silo,’ with a disconnect from risk.

While others spoke about external auditors, non-financial reporting, especially using an integrated approach, renders the role of the internal auditor more important than ever, Stevenson argued. He acknowledged that companies and internal auditors can choose how to comply with the directive but warned: ‘If you use it as a box-ticking exercise, you will only go so far.’

British Labour MEP Richard Howitt, who as one of two European Parliament ‘rapporteurs’ coordinating votes on the issue was an architect of the directive, flagged up ACCA’s role in shaping the legislation. He told the conference: ‘They’ve worked very closely with me’ on the directive.

Howitt recognised that the directive ‘is going to create a bit more work for you’, but told the auditors present: ‘When you do your job well, businesses do their job well.’ He stressed: ‘This is not a whole set of box ticking. We’ve designed this legislation in a way that is enabling.’

Nevertheless, Howitt made clear that while it may be called the non-financial reporting directive, ‘don’t be fooled by the title, because the environment, abuses of human rights do affect the finance of companies’.

Non-financial hit

Carl Rosen, outgoing CEO of the Swedish Shareholders’ Association, also told the conference: ‘I don’t like the word “non-financial”,’ noting that shareholders in the EU had lost a lot of money because of non-financial issues, such as the Volkswagen emissions scandal.

Howitt urged companies to look to integrated reporting not only in Europe but worldwide. ‘Please do not think of this as a bubble. I believe in the concept of integrated reporting,’ he told the conference, going on to note that many companies were already doing it under Organisation for Economic Cooperation and Development (OECD) standards. 

He argued that non-financial or integrated reporting was not about adding a burden to companies, but part of reforming financial reporting. ‘This directive is very much about long-term value creation. We call it non-financial, but in the end it is all about finances.’

However, Paola Schwizer, Ecoda board member, and chair of Nedcommunity, the Italian association of non-executive and independent directors, made clear that boards are expecting more than a couple of pages in the management report, saying it was ‘not such an easy task’.

Moderator Jo Iwasaki, ACCA head of corporate governance, noted that in drawing up audit plans, ‘if risks occur you may miss your targets’, and said that having non-financial reporting ‘helps an organisation’.

Iwasaki stressed the importance of external assurers for non-financial reporting. Noémi Robert, senior manager at the Federation of European Accountants (FEE), agreed, saying that many companies were asking for information to be assured ‘because they want to be sure that the company is not only showing the nice side of the picture’.

Schwizer saw a role for non-financial reporting standards but said there was ‘a trade-off between standardisation and customisation’. She saw standards as a way to prevent companies greenwashing or otherwise overplaying their social or environmental credentials. She said: ‘Let’s try to avoid it becoming a marketing exercise – the company showing off.’ 

Sara Lewis, journalist based in Brussels