On 26 November, Accountancy Europe discussed how to ensure high-quality non-financial information (NFI) reporting and assurance, in hopes of achieving more reliability, better confidence in markets and progress on the global sustainable finance objectives.
This debate took place as the European Commission (EC) is revising the Non Financial Reporting Directive (NFRD) to improve disclosures on NFI at the EU level. In his keynote speech, Alain Deckers (DG FISMA, European Commission) provided insights into the upcoming NFRD revision.
“If we were to move towards integrated reporting, then it makes sense for both financial information and non-financial information to be audited or assured in an integrated manner. In such a case, the logical candidate for the job would be the audit profession…”
The NFRD is linked to other European legislative initiatives, which create their own requirements, such as the Sustainability-Related Disclosures Regulation (SRDR) for financial market participants or the EU Taxonomy Regulation. There is a need for close coordination to ensure that the information disclosed by an investee company under the NFRD corresponds to the disclosure requirements that investors need to comply with.
@Alain_Deckers at our #NFIassurance webinar: the direction for NFI assurance should be towards an integrated report and then integrated audit. And the audit profession is well placed to provide such services.
NFRD reporting obligations should be broadened to a wider range of companies than it is now, even though it is unlikely that all SMEs will fall under its scope. Double materiality could be used as a criteria to enlarge the scope. For example, with a financial materiality lens, it could make sense to include those companies that are within the investment universe, in particular financial market participants under the scope of the SRDR.
The responses to the EC consultation on the NFRD revision demonstrated a strong support for the use of commonly used reporting standard. The current ‘alphabet soup’ of NFI reporting standards creates a difficult situation for companies, investors and other users. In the EU, a future reporting standard would need to fit and be consistent with a wider European legislative framework to ensure that the information needs are fulfilled. However, markets are global and companies operate globally, and this is why the EU should also pursue international convergence.
Equally, the responses to the EC consultation on the NFRD revision have demonstrated strong support to more rigorous NFI assurance requirements. Environmental, social and governance (ESG) information is becoming as important for investment decisions as financial information: 80% of investor decisions are based on NFI. The added value of assurance is to ensure that the NFI disclosed by companies is reliable. Reporting standards can play an important role in ensuring reliability of information. Adoption of a common reporting standard in the EU could facilitate both NFI assurance and supervision.
.@Alain_Deckers opens @AccountancyEU event with:
– It is not clear what companies need to disclose in order to comply with the law
– Lack of specificity in companies’ non-financial reporting
– Clear message public consultation: move towards the use of common #standards in the EU
ESG requirements have a competitive edge for companies . #NFIassurance will help improve the quality of #ESG information shared and build trust with stakeholders. Some of the interesting points raised at today’s NFI assurance webinar @AccountancyEU.
The panellists reflected on the path to high-quality NFI reporting and assurance, focussing on practical challenges and benefits in this area. Panellists agreed that independent external assurance over NFI brings value.
From the accountancy profession’s perspective, Julien Rivals (ESG Assurance TF Chair and Co-Head Integrated Performance, Deloitte) noted questions on which we should reflect on when exploring NFI assurance for the revision of the NFRD:
Where does assurance add value? Why do we want to have assurance over NFI: for compliance with regulation purposes, to fight greenwashing, to bring trust to the financial market participants, bring confidence to decision-makers and top executives? The reason should be clear upfront.
What do we want to assure? It is necessary to clearly define the subject matter.
How do we want to provide assurance, what level of assurance (limited or reasonable)?
Who should and will provide assurance, is there a need for new skills, independence rules and professional standards?
From the investor perspective, Angélique Laskewitz (Executive Director, VBDO) noted that good reporting is crucial for transparency, and that standards are needed if companies are to be benchmarked for their performance. Investors are not in a position to compare companies’ performance, due to a lack of globally accepted standards.
“[…] 75% of investors say there is significant value in independent external ESG assurance [….] For investors to understand a company’s resilience, they should have an insight into ESG risks and how the company intends to manage those risks. Assurance is needed to address the key risks: reputational and financial; and increase the transparency to support the flow of capital to green behaviour and projects.”
– Angelique Laskewitz
Patrick de Cambourg (Chair, European Lab Project Task Force on EU non-financial reporting standards) highlighted some of the characteristics of NFI in order to allow for proper assurance. He noted that mandatory assurance is a huge plus and that reasonable assurance should be the end goal. Assurance is a key factor for quality reporting and quality is essential for credibility.
“…. in the EU, we have a broader spectrum of stakeholders to take on board. And we have an underlying definition of double materiality which is key. So you have to be credible not only vis-à-vis financial investors but also with other stakeholders…”
– Patrick de Cambourg
From a business perspective, Maria Alexiou (ESG Senior Advisor, Titan Cement International) explained the journey of Titan Cement International. She noted, as the company’s value is in constant improvement, it only made sense to ask for independent reasonable assurance on how a company performs against its own commitments.
However, Maria stressed that achieving quality reporting and assurance thereon can be a long journey. In the long run, high-quality NFI assurance will give certain feedback with qualitative standards to the stakeholders to let them compare and benchmark corporate performance year on year to see whether the commitments and expectations are really met. Reporting standards, no matter how good they are, won’t be able to give all the answers to what each company should be doing in each sector.
In her closing remarks, MEP Sirpa Pietikäinen (EPP/Finland) stressed the importance of treating ESG data at the same level as financial information, as ESG is essential core information to assess a company’s performance. She also noted the need for comparable information amongst companies from the same sector. A harmonised framework is also of strategic importance, but the question remains who is best placed to achieve this, and how much flexibility we should give to the market. Furthermore, information needs to be audited, e.g. at least with KPIs or indicators. Assurance should be provided on a report that would integrate both financial and non-financial information.
Welcome & scene setting: Towards reliable non-financial information across Europe
Noémi Robert, Director, Accountancy Europe
Keynote speech ( Followed by Q&A)
Alain Deckers, Head of Unit, Corporate reporting, Audit and Credit Rating Agencies, DG FISMA, European Commission
Panel discussion: how to ensure high quality NFI assurance
Julien Rivals, ESG Assurance TF Chair and Co-Head Integrated Performance, Deloitte
Maria Alexiou, ESG Senior Advisor, Titan Cement International and Member of the Board, CSR Europe
Patrick de Cambourg, Chair, European Lab Project Task Force on EU non-financial reporting standards (PTF-NFRS)
Angélique Laskewitz, Executive Director, VBDO
Sirpa Pietikäinen, MEP (EPP, Finland), European Parliament