Navigating the new world of non-financial disclosure

A directive obliging UK companies to include environmental and other information in annual reports will make sustainability a bigger priority for business leaders and investors alike

This post first appeared on the ENDS report

As of January 2017, more than 6,000 companies in Europe are preparing to comply with a new European directive on non-financial reporting, a major milestone in the path towards integrating sustainability, environmental and other non-financial disclosure into financial reporting.

Last year several countries across Europe, including the UK, Denmark, France and Italy, transposed into national law the Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups – also known as the NFR Directive.

This directive will be a gamechanger in increasing transparency and keeping companies accountable for their actions. It covers a variety of topics: environmental matters, social and employee aspects, respect for human rights, anti-corruption and bribery issues and diversity on the board.

The directive affects companies across Europe with 500 or more employees, mandating them to disclose information about their policies, the material risks associated with their actions and their initiatives impacting the environment, as well as other, human capital-related issues. While the directive provides clauses about where companies could report their non-financial information, the UK regulation goes further and mandates for it to be included in the annual report.

In the UK, the directive has been transposed with an amendment to the Companies Act 2006, now known as the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016. Companies with fewer than 500 employees, which were already captured by the Companies Act 2006 will continue as before.

So, what changes for companies that were already disclosing this kind of information in annual reports? What we saw before the directive is hundreds of companies disclosing only part of the information now required, and sometimes not in the most useful way for investors to make decisions.

The Climate Disclosure Standards Board was created ten years ago to close this gap. We developed a framework to report climate change and environmental information to help companies provide clear, concise and consistent information to investors through their mainstream report, integrating the organisations’  environmental performance with their overall business strategy.

Last year we released the EU environmental reporting handbook to help firms navigate the requirements of the NFR Directive and use a series of case studies to show best practices and practical examples of what an integrated reporting of financial and non-financial information looks like.

For instance, we included the 2014 annual report of healthcare company AkzoNobel. The report clearly showed how the firm’s core principles and values were also reflected in indicators and performance areas, including a detailed outline of which sustainability topics the company focuses on – rating them according to their importance – and mapping each topic against qualitative and quantitative information. This allows investors and stakeholder to clearly  understand how sustainability becomes part of the company’s business strategy.

It’s important to show how your business’s impacts and dependencies on nature affect how you will create value in the future.

A recent report by the TEEB for Business Coalition showed that the global top 100 environmental externalities are costing the global economy around $4.7 trillion a year. Businesses have a unique opportunity to prove they are ready to tackle this issue.

As global markets and regulators move to deliver on the promises of the Paris Agreement, companies need to ensure they are best placed to make best use of opportunities the low-carbon economy is creating.