The EU’s Non-Financial Reporting Directive of 2014 is a victory for Corporate Social Responsibility (CSR) advocates. The question remains, though, whether these reporting requirements, currently being implemented across Europe, will lead to relevant and reliable reporting about environmental and social impacts of business that is necessary to promote sustainability.
Investors, consumers, public entities and businesses themselves increasingly state that they are interested in prioritizing sustainability in their decision-making. For these market actors to be able to choose which businesses to invest in, buy products from or do business deals with, relevant and reliable information about the environmental and social impacts of business is necessary.
A regulatory framework needs to be developed that allows to monitor and integrate information about systemic risks, long-term corporate risks, as well as intangible resources and non-financial capitals. Reporting models that include ESG factors such as the IR Framework developed by the International Integrated Reporting Council (IIRC) and the G4 Sustainability Reporting Guidelines provided by the Global Reporting Initiative (GRI) provide detailed metrics against which to report.
However, there is significant flexibility for companies to disclose relevant information (including reporting in a separate report), and they may also rely on international, European or national guidelines (e.g. the UN Global Compact, the OECD Guidelines for Multinational Enterprises, ISO 26000). The reporting is ordinarily left to voluntary and discretionary measures. This provides the basis for a lack of comparability, lack of consistency and uncertainty in benchmarking, which defeats the objective of the reporting requirements. Global principles for financial reporting, including US GAAP and IFRS, still consider environmental and social information as an add-on to financial accounting.
The EU Accounting Directive 2013/34/EU sets out basic rules on non-financial reporting. It includes new rules concerning extractive industries and logging in primary forests to improve the transparency of payments made to governments all over the world by these industries and to promote the adoption of the Extractive Industries Transparency Initiative (EITI). The Directive was amended by Directive 2014/95/EU on non-financial and diversity information. These Directives include the requirement for large listed and financial businesses to report on their business model, and the encouragement of due diligence processes across global value chains with the aim of identifying and dealing with risks concerning the performance, position and impact of the business activity. It also includes a requirement to disclose in their management report relevant and useful information on their policies, main risks and outcomes on environmental matters, social and employee aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors.
The potential of the EU Directives to promote sustainability depends on how they are implemented by Member States and applied by businesses. The limitation of the Directives to the largest EU businesses and the lack of clear requirements for enforcement of the reporting requirements and the verification of the reported information risks undermining the aims of the initiative.
SMART analyses international and European reporting requirements and national and business best practices with the aim of identifying how to realise the potential of reporting for sustainable business.