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About the proposed Directive of the European Commission in relation to the publication of "Non-financial Information": some questions (and answers)

On many occasions, we, the authors of this article, have spoken out about the need for a common European framework on non-financial information based on international standards - which would permit certain flexibility in companies depending on their size, sector and specific circumstances - in the conviction that the absence of that framework could bring more disadvantages than advantages. The multiplication of different national legislations (or regional ones in the case of Spain) could represent an obstacle to market unity for those companies that operate at European level. In the end, excessive regulation is just a negative for competitiveness as the total absence of it.

 

For this reason, we must study in detail the fact that, on 16 April, the European Commission presented a legislative proposal to modify Directives 78/660/EEC[1] and 83/349/EEC[2] of the Council with regard to the disclosure of non-financial information about the diversity of boards of directors by certain large companies and certain groups. On this website, you can find all the documents related to this proposal.

 

In this article, we aim to answer some of the main questions that might arise in relation to this proposed Directive for European companies (and, therefore, Spanish ones) with regard to the publication of non-financial information.

 

1. What do we mean when we talk about 'non-financial information'?

 

Put simply, we could say that non-financial information is everything which is not financial information. It is a broad term applicable to all the information for shareholders and other stakeholders which is not defined by an accounting standard or a calculation or a measure based on an accounting standard.

 

Though there is no generally accepted definition, the term 'non-financial information' is used to refer to concepts such as the environment, society and good governance, ethics, human resources, sustainability, responsible investment or extra-financial information.

 

2. What has been happening in Europe up to now?

 

In some EU countries, different regulatory options have been adopted, with different scopes in relation to non-financial information.

 

The most paradigmatic cases are those of Denmark and France, which have standards in this regard which may be considered flexible as they follow the principle of “comply or explain” or “inform or explain". However, the Danish law has greater adaptability, as it enables companies to decide which matters to inform about (with the advantages and disadvantages that it might bring).

 

3. Specifically, what does the Commission's proposal consist of?

 

The Commission's proposal has taken these two models (the Danish one and the French one) into account and has created a new model with its own personality, which appears to be an intermediate approach, flexible in nature, and also following the principle of comply (inform) or explain. Its basic lines are:

 

The legislative proposal does not cite any example of a national framework. However, the press release distributed by the Commission cites the German Sustainability Code (DNK) approved by the Council for Sustainable Development (RNE).

 

Likewise, among the international frameworks, it does not include the work of the IIRC about Integrated Reports. However, in "frequently asked questions” the Commission indicates that it is following the work of the IIRC with great interest. In this regard, on 16 April the IIRC presented a consultation draft of the integrated reporting framework.

 

With regard to the currently existing obligations in Spain regarding this matter, the following note can be consulted here.

 

  • If they are necessary for the adequate understanding of the situation and evolution of the company, the relevant non-financial KPIs for the type of business will be included.
  • If a company already issues a report which includes this content for the same period (for example, a sustainability or CSR report), based on an international, European or national framework, it is not necessary to include the above information again in the management report (except the KPIs), it being sufficient for this report to form part of the management report.

 

4. What type of companies will be affected by the new European Directive?

 

In principle, companies with over 500 employees (average number during the financial year) and which also exceed a certain financial threshold (a balance sheet total of €20 M or net turnover of €40 M), will have to report non-financial aspects. This would affect approximately 18,000 European companies (of which 2,500 are already transparent in regard of these matters). In Spain, we could be talking about around 1,200 companies.

 

5.  What procedure begins now and when could the new Directive come into force?

 

The scenario envisaged by the Commission itself is that in 2016 these regulations will be approved by the Council and by the European Parliament and transposed into the internal legislation of each Member State. This would mean that companies would be obliged to present the new information in management reports in 2017. All of this taking into account the fact that elections to the European Parliament will take place between 22 and 25 May 2014.

 

6.  What can companies do before the entry into force of the Directive?

 

In response to this draft directive, companies have two alternatives: either simply wait until the initiative takes shape and is transferred into our legal system, and then apply it; or take steps to "get ready", implementing non-financial information and processes in preparation for the entry into force of the new Directive.

 

In what ways can companies 'get ready'? Though many companies are already well advanced in the requirements that would emanate from the European Directive, readiness requires more cross-departmental, fluid work between the departments that carry out the CSR function and the financial and risk departments. In any case, it should be remembered that Spanish companies in general are already well advanced in this process.

 

7.  How will companies be able to report the non-financial information?

 

In principle, there are two systems which companies could opt for in order to make progress in the fulfilment of the future Directive:

 

  • A specific report which, once the Directive comes into force, will be appended to the management report.
  • Inclusion of additional non-financial information in the Management Report.

 

We could say that, in essence, when it comes to being transparent, companies have as many alternatives as stakeholders. If, with the publication of non-financial information, we want to establish channels for dialogue with the stakeholders (not just the shareholders), they must be taken into account when it comes to taking a decision in this regard. But that will be the subject of another article.

 

In later posts, we will give our opinions about the reporting options that companies could choose or the alternatives of the different states of the EU in order to adapt their national legislations, or not, to the new proposals presented in this draft Directive.

 

By Jesus de la Morena (Partner of Garrigues) and Alberto Andreu (Telefónica Global Director of Corporate Reputation and Responsibility)


[1] Fourth Directive of the Council, of 25 July 1978, on the annual accounts of certain types of companies (78/660/EEC).

 

[2] Seventh Directive of the Council, of 13 June 1983, on consolidated annual accounts (83/349/EEC).

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