The European Commission (EC) is planning to update its non-binding guidance on how to implement the Non-Financial Reporting Directive and set out proposals for consultation in June 2020. The directive, which affects about 6000 companies in Europe, sets out how organisations can effectively communicate the environmental, social and ethical impacts of their behaviour to stakeholders.
Any new guidance is likely to aim at strengthening the link between the existing directive and the recommendations of the Task Force on Climate-related Financial Disclosures and a forthcoming taxonomy of sustainable economic activities, delegates heard in October at a meeting organised by DG FISMA — Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).
Delegates heard how businesses in different countries had sought to implement the directive. In Germany, for example, companies had used a broad variety of formats to report non-financial data. In addition, 81% of companies had their statements audited with limited assurance, with only half publishing an audit certificate in this area, according to a recent study. A separate study examining 80 companies based in France, Germany and the UK, suggested that while almost all reported on their non-financial reporting policies, there was a lack of connection between the policies and outcomes, key performance indicators and risk .
Finally, the EC presented the results of its own initial consultation on how the directive is being implemented. “Some factors are affecting the effectiveness of the directive include the flexibility of the framework, the materiality definition and the assurance process of the information,” according to Tom Dodd, the B3 policy case officer for corporate transparency.
“While the implementation of the directive is still in its early phases across Europe, it is already clear that companies are struggling with the providing assurance that the data that goes into their non-financial reports is robust and reliable,” Farid Aractingi, ECIIA President, says. “That is clearly an area that internal auditors can help with because of their unique oversight role in their organisations.”
ECIIA has already advocated to DG FISMA that businesses adopt the three lines of defence model of corporate governance. Under the model, the first and second lines of defence are responsible for internal controls and risk management, while internal audit provides independent assurance that those systems are well-designed and functioning properly. “The model puts internal auditors in an ideal position to assist companies in ensuring accuracy in non-financial reporting,” Aractingi says.