Review of NFRD ‘decisive step’ to improve quality, comparability and consistency of corporate reporting, ACCA argues
As the Covid-19 crisis further exacerbates urgent issues and risks affecting businesses globally, it has also highlighted that economic, social, environmental and governance (ESG) aspects need to be considered, ACCA says in response to a public consultation on EU’s Non-Financial Reporting Directive, which closed on 11 June.
The revision of the NFRD is an opportunity to extend the scope and quality of reporting by companies to ensure their stakeholders have the information they need in the context of a transition to a more sustainable business model, contributing to a more long-term geared society.
ACCA considers that the NFRD review can be a decisive step towards improving the quality, comparability and consistency of corporate reporting, including ESG information. But this requires bold decisions and should start with a clean sheet.
Richard Martin, head of corporate reporting at ACCA said: ‘We’d like to see a revision of the Directive that would withdraw Articles 19 and 19A and replace them with a new requirement for a comprehensive and high quality annual report that covers all material aspects of a company’s business model, strategy, performance, position, risks and prospects integrating financial and non-financial aspects in a balanced and holistic explanation. This might be extended to replacing Article 20 and incorporating the key aspects of governance that should be reported.’
ACCA considers that the new EU legislation for this annual management report should provide the overall requirements for better corporate reporting. And this would be best supplemented by reporting standards that set out more detailed requirements.
Regarding the scope of application, ACCA believes that all listed companies have responsibility to report to their investors and should therefore be within the scope of the reporting requirements. As for large companies, ACCA believes these should generally be within scope given their impact on society in general. Regarding smaller entities, ACCA is in favour of a voluntary reporting standard for companies - including SMEs - not within the scope of this new legislation.
For ACCA, given the global basis of investment and the nature of many of the companies that will be in scope, the NFR standards, for which the European Commission aims to be a global leader, should as far as possible be developed for use and acceptance on a global level, with a transparent due process allowing all parties - including outside of Europe - to contribute, co-operate and collaborate.
Martin adds: ‘As much as possible, we’d like to see any NFR standards to be principle-based and generally applicable to the wide range of companies that will be involved. We however recognise that there may be some elements that need to be sector specific.
'The existing International Integrated Reporting Framework (IIRC) which has been applied by many leading organisations, should be a key source for the legislation and any framework standard.’
On materiality, ACCA considers that the definition in Article 2 would need to be broadened beyond its reference to the financial statements and the users would have to be extended beyond investors and creditors to include society.
Regarding the issue of assurance to be provided on the NF information reported, Richard Martin stresses: ‘We noted in our review of integrated reports from 48 leading companies that assurance over reporting outside of the financial statements is increasing even where it is on a voluntary basis. In our view, EU legislation can now progress so that for those companies within scope, assurance over the NFR should be mandatory.
'The requirement for assurance should be at a limited level, but companies would have an option to choose a reasonable level for some elements - for example some KPIs - or for the whole report.’
Richard Martin concludes: ‘Our contribution to the consultation has been sent to the European Commission, and we now look forward to contribute to the debate once the new proposals will be published.’
Details of the public consultation on NFRD can be found here