Non-financial reporting, stage two: changing human behaviour

Dr Jarlath Molloy, CDSB’s Technical Working Group member, writes about the real challenge companies face with the new requirements deriving from the EU Non-Financial Reporting Directive.

The new requirements on non-financial reporting will be the cause of some soul searching in offices across the European Union over the next 12 months. Following on the transposition of the EU Non-Financial Reporting Directive, we are likely to see many companies looking at the issues addressed for the first time and turning to their professional advisors for guidance. While the consultants will help dot the i’s and cross the t’s, will anyone be able to say that the new requirements have changed anything?

It takes a lot of effort to pass new laws and regulations; without strong advocates for meaningful and sustainable non-financial management and reporting it would never have happened. However, advocates of non-financial reporting complacently think they’ve won the battle on why the regulations matter, and are now focused on the how to turn these into action. Getting governments to force companies to respond was only stage one: we now need to prepare for stage two. 

Beyond the corporate leaders already ahead of the curve on non-financial reporting, for example members of the World Business Council on Sustainable Development, the majority of companies will be reviewing this concept seriously for the first time in 2017. From their perspective, it’s just the latest addition to the long series of regulations that we have seen in recent years, e.g. Carbon Reduction Commitment, Energy Savings Opportunity Scheme, EU Emissions Trading Scheme, mandatory GHG reporting, Modern Slavery Act, Gender Pay Gap, etc. How seriously will they take it with Brexit on the horizon and suggestions of a regulation bonfire thereafter? 

There now needs to be coordinated action to lock in the potential of the new non-financial reporting requirements, as part of an effective stage two. The European Commission and the UK Financial Reporting Council will release their guidance in the next few months, but it is expected that they might take a hands-off approach.

There now needs to be coordinated action to lock in the potential of the new non-financial reporting requirements, as part of an effective stage two. The European Commission and the UK Financial Reporting Council will release their guidance in the next few months, but it is expected that they might take a hands-off approach. What is happening in the meantime? Are the big accounting firms telling their employees to proactively engage with their clients and explain what is driving non-financial performance? Are the various professional bodies pushing their thinking out on the evolution in reporting performance? Are advocates for good corporate governance engaging individual directors on Boards? Or are the conversations little more than lip service - with firms just focusing on minimum compliance?

In all the discussion about process, methodology and reporting, we’re forgetting that the hardest change to achieve of all is human behaviour.

Advocates for non-financial reporting need to step up their engagement again and directly support companies. The NGO community have a role to explain and engage the corporate sector to deliver the real change they advocated for. It is naive to believe every company with more than 500 employees will have the expertise, resources and willingness to adopt this new non-financial performance vision because there’s a new reporting requirement.

Consider a CEO or CFO of one of these large companies. They have presumably worked hard to secure their position and have established strong personal relationships with those around them, including their leadership teams, the Chair of the Board, the Chair of the audit committee, the Directors on the Board, investors and other key stakeholders. Unless they are already personally interested in CSR or non-financial reporting, there is little chance it will be high on their priority list, whatever their external comms department may suggest.

Unless competitors receive accolades from engaging with CSR or non-financial reporting and the CEO feels they’re falling behind, or unless there’s a big stakeholder push driven by shareholders or customers as part of a CDP initiative, or the external Board directors start asking awkward questions, it’s unlikely the CEO or CFO will have an epiphany. Who from within the company is going to stick their neck out and advocate for improved non-financial performance with their CEO or CFO if there’s no real culture or framework to support this? 

The real engagement needs to happen in company boardrooms and in the audit sub-committees. Unless the advocates for better non-financial performance share their vision and the means to achieve it with the leadership of these companies, the outcome of the new non-financial reporting requirements will be mixed and a missed opportunity.

Opinions expressed in this blog may not represent the collective view of the Technical Working Group or CDSB’s Secretariat.