In the past months, there has been quite some noise about corporate reporting. There’s nothing unusual about that, as many companies publish their annual report in the first months of the calendar year. But this year, there seems to be more discussion about non-financial (or sustainability) reporting. Part of this is caused by the new EU Directive on Non-Financial Reporting. But it’s also driven by the ever-increasing number of companies seeing true value from integrating sustainability factors into how they assess and report on their performance.
Complying with the EU Directive on Non-Financial Reporting
Assuming that transparency about sustainability topics will lead to better performance, the EU adopted a directive on non-financial reporting. By now, it has been transposed into national legislation in nearly all EU countries. It applies to all listed companies, banks and insurance companies with over 500 employees. As of the 2017 reporting cycle, it requires disclosure on select non-financial topics to provide stakeholders a more complete picture of a company’s sustainability approach and performance. So what are the topics to be included? At a minimum, it should cover the company’s approach, the risk assessment, as well as the results and key performance indicators regarding:
- environmental matters;
- social and employee aspects;
- respect for human rights;
- anti-corruption and bribery issues;
- diversity on boards of directors.
The directive is not very prescriptive in how to report on these topics. If companies cannot (yet) report on these topics, they can simply explain why not. And companies are free to choose how they structure this information and where they publish it. This can be part of the annual report or in a separate report. Unlike financial reporting, the data does not need to be externally assured. But the accountant does need to check whether the relevant information has been disclosed and whether any of it conflicts with other information provided.
Complaining about the reporting burden
An estimated 6000 European companies fall under this new EU directive. So perhaps you’d expect quite some sighs and complaints. Yet most of these companies already disclose their sustainability efforts on their websites, in separate sustainability reports or integrated into their financial reporting. Does this mean the directive will have no effect? Fortunately not. The voluntary practice on sustainability reporting has yielded positive results so far. But there are also quite some companies that seem to tick the box on sustainability reporting, yet have not truly integrated sustainability into their strategy. They report on what’s easy to collect, or on things that at first glance may make them look good. For these companies, meeting the requirements of the EU directive could be a challenge. As they may not yet have policies, targets, and results in the areas listed above, the new legislation does indeed increase their reporting burden.
Exploring the value of integrated thinking
Many of the companies embarking on the transparency journey have found opportunities to improve their impact and their companies in parallel. The companies that benefit most are the ones that really try to understand what their materials topics are. These are the topics to include in their reporting, but more importantly, to focus on in their strategy. In a materiality assessment, a company assesses the impacts – both positive and negative – that their business can have on society at large. From their own perspective, but also through the eyes of their stakeholders.
From this analysis, they begin to understand how the relevant social, environmental and economic factors work together, ideally to create value for shareholders, stakeholders, and society simultaneously. An in-depth materiality analysis provides the foundation for an integrated strategy with clear focus areas, each with their own goals and action plans. This strategic integration exercise is useful for all companies, not just the ones covered by the EU directive.
Explaining your focus, dilemmas, and results
Once you’ve chosen the focus for your strategy and reporting, be ready to explain and communicate it. This may include why you’ve decided not to include some of the topics included in the topics listed above. In your reporting cycle (and most likely elsewhere), get ready to share the achievements from your integrated strategy, yet also be ready to share what dilemmas you’ve faced and on which topics you’ve not yet reached your goals. An honest account of your performance will build trust with your external stakeholders, and is a great way to engage your internal stakeholders – your employees – to celebrate success and to find better ways to reach your business and sustainability goals.
Interested in finding out what non-financial or sustainability reporting could do for your company? Or in a quick-scan on whether your reporting is compliant with the new EU directive? Please get in touch via [email protected].
Written by Marjolein Baghuis (@mbaghuis) for Change in Context, published simultaneously on TheTerrace.nl. To read about interesting people, book reviews and other posts about change, communications and sustainability, please subscribe.