Brussels. Speaking in his personal capacity at an event in Brussels on Tuesday, Nicolas Bernier Abad, policy officer at the European Commission (EC), referred to the so-called ‘comply or explain’ approach as "pure jargon" which means different things to different people.
Bernier Abad, who belongs to the EC’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, was explaining the impact of the Non-Financial Reporting Directive (NFR Directive), a text on which he has been working for five years.
At the event, organised by ACCA, ecoDA and ECIIA, Bernier Abad described the NFR Directive as a pro-business and pro-transparency legislation aimed at improving business reporting.
Public Interest Entities (PIEs) with more than 500 employees are affected by the new EU disclosure requirements.
PIEs are listed companies; insurers and credit institutions (listed or not); and other companies designated by member states. The EC estimates that 6,000 companies might be subject to the legislation.
The NFR Directive mandates that a non-financial statement should be included in management reports disclosing information in four areas: environmental matters; social and employee matters; human rights; and anti-corruption and bribery issues.
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"The European legislation is not [based on] comply or explain, it sets a pro-business disclosure requirement."
As such Bernier Abad said the concept of comply or explain is "useless", "means nothing" and "doesn’t have any legal value".
Bernier Abad made his point further explaining that during the whole law making process of the NFR Directive, he has attended many meetings where the comply or explain approach has been discussed, and where participants asked: ‘what if we don’t feel like disclosing non-financial information.’
"Well, why don’t you apply that to your financial reporting? And then if you don’t feel like disclosing your loss that particular year, you only disclose profits. That’s the equivalent. And it’s so illogical and so unreasonable," he said.
He added that avoiding to disclose climate change risks, or corruption and bribery issues to stakeholders does as much sense as avoiding to talk about profit and loss.
It’s unavoidable and for that reason, he said, the ‘comply or explain’ expression is "pure jargon".
The EC has issued a consultation seeking views from stakeholders to draft non-binding guidelines to help clarify the scope and other details of the legislation.
For instance, Bernier Abad also said that there is no such a thing as a new separate non-financial report being imposed by the NFR Directive.
"This legislation doesn’t create a non-financial report. It’s about adding content to the management report."
In addition from a preparer’s perspective, the disclose requirements would not mean that every single subsidiary have to produce a report. According to Bernier Abad, that would be comprised in the report of the parent company.
This interpretation seemed to contradict Richard Howitt’s understanding of the text. The British MEP said:
"There is the potential in the report for it to be a non-financial statement that is separate from management report. That’s my understanding of the text. But some member states might choose to have separate reports."
Bernier Abad also expressed that the NFR Directive is not restrictive in the way companies have to report the required non-financial information.
"When it comes to financial reporting, we believe we can point to the standards that are generally accepted today. But when it comes to non-financial reporting, we cannot, because it’s impossible."
At the panel discussion held during the event, Noémi Robert, FEE senior manager, highlighted the importance of keeping the materiality and consistency of disclosed non-financial information.
Similarly Howitt underscored the importance for investors of having comparable information in the field of non-financial reporting.
However during the last few years endless initiatives in the field of sustainability have come up with a profuse list of frameworks and standard-setting proposals.
Given the lack of a global or regional standard-setting authority in the sustainability space, these actors might be seen as competitors for influence and adoption of their proposals at a time when non-financial reporting is becoming compulsory.
As the NFR Directive leaves leeway and flexibility when it comes to prepare this information, it is expected that the issues of comparability, materiality and consistency will be raised by stakeholders in the consultation.
The deadline to comment is 15 April.