Non-financial reporting regulations – Reporting opportunity or legislative burden?
12 April 2017
It doesn’t seem like a year ago since we were drafting our response to BIS’ consultation on the UK implementation of the EU Non-Financial Reporting Directive. And yet here we are 12 months later with the non-financial reporting regulations now in place in the UK. But how many companies have really started to think about the implications of these?
Last week we held a roundtable which brought together clients, investors, the FRC and our internal experts to explore the new regulations and the practicalities of implementing them. We had a really interesting and interactive discussion covering the specifics of the regulations as well as a broad range of other related topics. What was immediately apparent was that, whilst the regulations may have gone under the radar of most, the ongoing public debate around trust, governance and stakeholder accountability has increased the profile of non-financial reporting and the regulations themselves.
Some of the key topics of conversation included:
- Regulation over guidance - it was generally acknowledged that the regulations, with a couple of exceptions (impact of a company’s activity in relation to the non-financial matters and reporting of anti-bribery and anti-corruption matters - see our recently published in-brief ), mirror what quoted companies have already in the form of the strategic report regulations and supporting guidance. A number of the requirements were already reflected in the guidance so will a shift to regulation really have much of an impact?
- Materiality - the regulations define the matters that should be considered as a minimum and ‘to the extent necessary’ but is the reality that it simply adds pressure to 'cover the bases'? There was general agreement that only the most material information should be disclosed but how do you determine materiality and which stakeholders should be considered in your materiality assessment?
- Placement of the information - does the regulation require the inclusion of a separate non-financial information statement? Does it require additional principal risks or encourage careful consideration of the existing risk management process? How will the regulations work in practice with the existing annual report and will it be at the expense of a compelling, integrated narrative?
- Measurement - with the regulation’s emphasis on ‘impact’ and ‘outcome of policies’ will users be looking for more quantitative data/indicators to support the narrative?
- Readiness - How embedded are policies into the organisation and what due diligence takes place to monitor them? If they are still in their infancy how should this be conveyed in the annual report?
It was clear from the discussion that the impact of the regulations could be more significant than attendees first thought. So it was encouraging to hear investor views that corporates’ efforts would not be wasted given the importance placed on the annual report and non-financial information in long-term investment decisions.
The discussion could have easily carried on further into the morning, which highlighted to me just how engaged the companies and investors in the room were with this topic. Yet what remained clear to me was that if the regulations were to have a positive impact on companies and the quality of their reporting, an engaged board and senior sponsor is essential.
While the regulations alone may not achieve this, placing them in the context of the wider stakeholder agenda and ongoing focus from BEIS and the FRC around governance, stakeholders and S.172, we firmly believe that the importance of non-financial reporting won’t go away.