The European Commission has officially mandated the European Financial Reporting Advisory Group (EFRAG) to provide recommendations for updating non-financial reporting standards.

In an open letter, European Commission Executive Vice President Valdis Dombrovskis issued a request for technical advice to EFRAG following the conclusion of a recent consultation for revising the Non-Financial Reporting Directive (NFRD).

This consultation was launched in December 2019 with a view to strengthening the foundations for sustainable investment in the EU.

As it stands, the European Commission is expecting the legislative proposal of the new-look NFRD to be published in the first quarter of 2021.

In the meantime, preparatory work will be carried out by a multi-stakeholder project task force, appointed by the Steering Group of the European Reporting Lab at EFRAG. A progress report will be issued by the end of October 2020.

In its current form, the NFRD has already attracted criticism from some Member States, with the French regulator (the AMF or Autorité des Marchés Financiers) taking exception to several factors of the NFRD.

These included the reliability of the information gained under NFRD and the scope of the directive itself, given that it currently focuses on the biggest companies in the EU: “The current scope of application of the directive is too limited for European companies to be able to make an effective contribution to the sustainable development objectives of the EU”.

Elsewhere, in the UK, non-governmental organisation ClientEarth responded that the NFRD could be changed to extract substantially more detailed information from reporting companies. In addition, ClientEarth pointed out that the NFRD lacked enforcement mechanisms and dissuasive penalties – in other words, levelling criticism at the directive for not doing enough to compel companies into compliance.

The issue of non-financial disclosure is extremely important as investors are increasingly becoming influenced, and motivated, by the sustainability and standards of their investments.

While more investors have come to embrace sustainability, they face a challenge in determining which companies are doing the most on ESG issues over others. According to a 2019 survey by McKinsey, 75% of investors agreed that there should be a sustainability reporting standard when it comes to companies. At the same time, 82% of investors were in favour of these companies being legally bound to issue such reports.

The current problem is companies can interpret how to report such non-financial information at their discretion, something which the European Commission ultimately hopes to improve through more rigorous reporting standards being in place across the EU.

In addition, the commission hopes such standards could also facilitate the assurance of non-financial information, its enforcement and its digitisation using taxonomy and a clearer structure when it comes to data. 

Adding further weight to the need for reform of non-financial reporting, a working group (with members including Schroders, AccountancyEurope and the WWF) recently published an open letter claiming that the Covid-19 crisis had clarified the importance of interlinking ESG perspectives.

This group added: “The objectives are clear: we now have to put in place the right tools and incentives for stakeholders from both public and private sectors to play a role. We see the revision of the NFRD as an important element in achieving this.”

When mandating EFRAG to proceed with its work on NFRD, the European Commission also made an announcement that could potentially influence the way this body develops and implements a revised NFRD.

In his letter, Dombrovskis invited EFRAG Board President and former MEP Jean Paul Gauzes – who is also chairman of the European Lab Steering Group – to consider the possible need for changes to the governance and financing of EFRAG in the context of new non-financial reporting standards.