EUROPEAN COMMISSION

Brussels, 21.4.2021

SWD(2021) 150 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a Directive of the European Parliament and of the Council

amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting

{COM(2021) 189 final} - {SEC(2021) 164 final} - {SWD(2021) 151 final}

Table of contents

1.Introduction: Political and legal context

1.1 How does this initiative contribute to the political priorities of the Commission and the EU?

1.2 What is the legal and policy context?

1.2.1 The Non-Financial Reporting Directive    

1.2.2 Other relevant EU legislation and policy    

2.Problem definition

2.1 What are the problems?

2.1.1 Problems and consequences from a user perspective    

2.1.2 Problems and consequences from a preparer perspective    

2.1.3 Overall consequences    

2.2 What are the problem drivers?

2.2.1 Market failures    

2.2.2 Regulatory failure    

2.3 How will the problems evolve?

3.Why should the EU act?

3.1 Legal basis

3.2 Subsidiarity: Necessity of EU action

3.3 Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved?

4.1 General objectives

4.2 Specific objectives

5.What are the available policy options?

5.1 What is the baseline from which options are assessed?

5.2 Description of the policy options

5.2.1 Standardisation options    

5.2.2 Assurance options    

5.3.3 Scope options    

5.3 Options discarded at an early stage

6.What are the impacts of the policy options?

6.1 Impacts of standardisation options

6.1.1 Analysis of impacts of Option 1: Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use)    

6.1.2 Analysis of impacts of Option 2. Develop EU non-financial reporting standards for voluntary use    

6.1.3 Comparison of standardisation options    

6.2 Impacts of Assurance options

6.2.1 Analysis of impacts of Option 1: Require reasonable assurance    

6.2.2 Analysis of impacts of Option 2: Require limited assurance    

6.2.3 Comparison of assurance options    

6.3 Impacts considering different scope options

6.3.1 Analysis of impacts of Package 0    

6.3.2 Analysis of impacts of Package 1    

6.3.3 Analysis of impacts of Package 2    

6.3.4 Analysis of impacts of Package 3    

6.3.5 Analysis of impacts of Package 4    

6.3.6 Comparison of Packages    

7.Preferred option

7.1 REFIT (simplification and improved efficiency)

8.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

1.Lead DG, Decide Planning/CWP references

2.Organisation and timing

3.Consultation of the RSB

4.Evidence, sources and quality

Annex 2: Stakeholder Consultation

Annex 3: Who is affected and how?

1.Practical implications of the initiative

2.Summary of costs and benefits

Annex 4: SME Test

Annex 5: Summary Report of SME Panel

1.Introduction

2.Demographics of the respondents

3.Current ESG practices and requirements

3.1 Practices on ESG data collection    

3.2 Publication and disclosure practices    

3.3 Requests of ESG information from stakeholders    

3.4 Time invested on ESG data processes    

4.SMEs preference on development of a non-financial reporting standard for SMEs

5.Methodology of Size Assessment

Annex 6: Implications of the Covid-19 Pandemic

Annex 7: Description Of The Non-Financial Reporting Directive

Annex 8: Examples of Non-Financial Information given in the Commission’s 2017 guidelines

Annex 9: Overview of Transposition of the Non-financial Reporting Directive by Member States

Annex 10: Relevant EU legislation and policy initiatives

Annex 11: Capital Markets Union High-Level Forum proposal for European Single Access Point.

Annex 12: Problem Definition

1.    Problems and consequences from the perspective of users of non-financial information    

2.    Problems and consequences from the perspective of preparers (reporting companies)    

Annex 13: Description of principal private international non-financial reporting frameworks and standards

Annex 14: Non-financial Reporting Requirements in Other Jurisdictions

Annex 15. Legal basis

Annex 16: Assessment of proposed policy options for other variables

1. Digitalisation

1.1 Baseline    

1.2 Proposed change: Develop EU digital taxonomy and require companies to tag reports    

1.3 Impacts of the proposed change: Develop EU digital taxonomy and require companies to tag reports    

1.4 Proposed changes compared to baseline    

2. Sanctioning regime and enforcement

2.1 Baseline    

2.2 Proposed changes: Clarify and strengthen supervisory regime of non-financial reporting    

2.3 Impacts of the proposed changes: Clarify and strengthen supervisory regime of non-financial reporting    

2.4 Proposed changes compared to baseline    

3. Reporting on intangibles

3.1 Baseline    

3.2 Proposed change: Require reporting on intangibles    

2.3 Impacts of the proposed change: Require reporting on intangibles    

2.4 Proposed changes compared to baseline    

4. Where to publish non-financial information?

4.1 Baseline    

4.2 Proposed changes: Do not allow reporting in separate report    

4.3 Impacts of the proposed changes: Where to publish non-financial information    

4.4 Proposed changes compared to baseline    

5. Materiality concept in non-financial reporting

5.1 Baseline    

5.2 Proposed change: Clarify in law when is information material    

5.3 Impacts of the proposed change: Clarify materiality concept    

5.4 Proposed change compared to baseline    

6Exemption of subsidiaries

6.1 Baseline    

6.2 Proposed changes: Clarify in law the exemption of subsidiaries    

6.3 Impacts of the proposed change: Clarify in law the exemption of subsidiaries    

6.4 Proposed changes compared to baseline    

Annex 17: Costs Analysis

Annex 18: Discarded Policy Options

Glossary

1.Introduction: Political and legal context

This impact assessment concerns a proposed initiative on annual public reporting of non-financial information by companies. It considers different policy options, taking account of the existing legal provisions introduced by the Non-Financial Reporting Directive. 1

1.1 How does this initiative contribute to the political priorities of the Commission and the EU?

This initiative is part of the Commission’s 2020 Work Programme and is one of the actions proposed by the European Commission to implement the European Green Deal. 2 The European Green Deal is Europe’s new growth strategy. It aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050. It will decouple economic growth from resource use, and ensure that all regions and citizens of the EU participate in a socially just transition to a sustainable economic system.

Private finance has an important role to play in meeting the objectives of the European Green Deal. This initiative will support sustainable private finance, by helping investors identify companies that carry out sustainable activities. 3 The Commission will present a renewed sustainable finance strategy in the fourth quarter of 2020, building on the 2018 Sustainable Finance Action Plan. 4  

This initiative also supports the current European Commission’s objective of ensuring An Economy that Works for People. It contributes to the completion of the Capital Markets Union, by enabling investors, and other stakeholders, to access comparable non-financial information from investee companies across the EU. It aims to enable SMEs to better contribute to and benefit from the transition to sustainable economy. This impact assessment takes an “SME-first” approach. A culture of greater accountability and transparency from companies regarding their impacts on society and the environment could also help to strengthen the social contract between business and citizens, and contribute to a greater sense of social fairness.

In addition, this initiative supports the objective of A Europe Fit for the Digital Age. The Commission has stated that the “twin challenge of a green and digital transformation has to go hand-in-hand”. 5 Non-financial information reported by companies should become part of the single European data space. This initiative can create opportunities for reporting companies, investors, civil society and other stakeholders to radically improve the way in which non-financial information is reported and used through the use of digital technologies.

The Covid-19 pandemic is expected to further accelerate the growth in demand for non-financial information from companies. At the same time, the economic crisis generated by the pandemic makes it ever more important to avoid the imposition of unnecessary administrative costs on business. Annex 6 summarises the implications of the Covid-19 pandemic for this initiative.

This initiative reflects the calls by the Council and the European Parliament to consider further action to improve non-financial reporting. In December 2019, in its conclusions on the Capital Markets Union, the Council stressed the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts, and called on the Commission to consider the development of a European non-financial reporting standard. 6 In its resolution on sustainable finance in May 2018, the European Parliament called for the further development of reporting requirements in the framework of the Non-Financial Reporting Directive. 7

A wide variety of different organisations and stakeholders have called for consideration of a new regulatory approach to non-financial reporting, including the International Monetary Fund , central banks in the Network for Greening the Financial System , investors, some business associations, civil society organisations and trade unions.

1.2 What is the legal and policy context?

1.2.1 The Non-Financial Reporting Directive

In 2014 the EU agreed the Non-Financial Reporting Directive (Directive 2014/95/EU), which amended the Accounting Directive (Directive 2013/34/EU). The Non-Financial Reporting Directive (NFRD) imposed new reporting requirements on certain large companies. Companies under the scope of the NFRD had to report according to its provisions for the first time in 2018, for information covering financial year 2017. This section highlights some of the main provisions of the NFRD. Annex 7 provides a full description of the NFRD.

The Non-Financial Reporting Directive at a glance

As required by the NFRD, in 2017 the Commission published non-binding guidelines for companies under the scope of the Directive. 8 In 2019, the Commission published additional guidelines, specifically on reporting climate-related information. 9 If companies use reporting frameworks, then they have to specify which frameworks they have used. The NFRD does not, however, require the use of a reporting framework or standard.

The NFRD applies to large public interest entities with more than 500 employees. 10 In practice this means that it applies to large EU companies with securities listed in EU regulated markets, large banks (whether listed or not) and large insurance companies (whether listed or not) – all provided they have more than 500 employees. The NFRD exempts the subsidiaries of parent companies from the reporting obligation, if the parent company itself reports the necessary information on a consolidated basis. We estimate that approximately 11 700 companies are subject to the reporting requirements of the NFRD. 11  

The NFRD identifies four non-financial ‘matters’: environment, social and employee matters, human rights, and anti-corruption and anti-bribery. With regard to those four matters, it requires companies to disclose information about five business concepts: business model, policies (including due diligence processes implemented), the outcome of those policies, risks and risk management, and key performance indicators (KPIs) relevant to the business. 12 Annex 8 provides illustrative examples of the kind of information that companies could be expected to disclose under the NFRD.

Companies under the scope of the NFRD are required to disclose information “to the extent necessary for an understanding of [their] development, performance, position and impact of [their] activity.” The reference to “impact” represented a significant innovation: it introduced a double materiality perspective, whereby companies have to report information not only on how non-financial issues affect the company (“outside-in” perspective), but also regarding the impact of the company itself on society and the environment (“inside-out” perspective).

The NFRD requires the auditor to check that the company has provided a non-financial statement, but does not require the auditor to assure the content of the information. However, Member States may require assurance on the content of the information reported and three Member States (Italy, Spain and France) have used this option. 

Annex 9 provides an overview of how Member States have transposed the NFRD.

1.2.2 Other relevant EU legislation and policy

The Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, together with the NFRD, are the central elements of the sustainability reporting regime that underpins the EU’s Sustainable Finance Strategy.

The Sustainable Finance Disclosure Regulation (SFDR) governs how financial market participants (including assets managers and financial advisers) should disclose sustainability information towards end investors and asset owners. 13 Financial market participants can only meet the requirements of the SFDR if they have access to adequate information from investee companies. Since the NFRD governs reporting by investee companies, there is an obvious case for ensuring alignment between the disclosure requirements of the NFRD and the SFDR.

The Taxonomy Regulation creates a classification system of environmentally sustainable economic activities with the aim of scaling up sustainable investments and combatting greenwashing of ‘sustainable’ financial products. 14 It requires companies under the scope of the NFRD to disclose the extent to which their activities are considered environmentally sustainable according to the taxonomy. Financial market participants subject to the SFDR must disclose the extent to which financial products marketed as sustainable are aligned with the taxonomy. The taxonomy therefore represents an important reference point that further strengthens the interactions between the SFDR and the NFRD.

The goal is to create a consistent and coherent flow of sustainability-related information through the financial value chain. To achieve this, consistency and alignment between the future technical standards of the SFDR and any possible standards developed under the NFRD will be especially important. Annex 10 describes in more detail the interactions between the NFRD, the SFDR and the Taxonomy Regulation, including a graphical representation of these interactions.

This initiative will also be closely coordinated with certain other Commission initiatives, including in particular:

-European Single Access Point: as part of the Action Plan on the Capital Markets Union, the Commission will put forward a legislative proposal in 2021 to set up a European Single Access Point (ESAP) – an EU-wide digital access platform to companies’ public financial and non-financial information. 15 It will facilitate access to the non-financial information that companies disclose under the NFRD, provided that such information is digitally tagged in the appropriate way.

-Sustainable corporate governance: the Commission will propose a new initiative in 2021 to embed sustainability in the corporate governance framework and foster behavioural change in companies by addressing issues such as the duty of care of company directors, the integration of sustainability into corporate strategies, the setting of science-based sustainability targets, and due diligence for environmental and human rights impacts. To ensure coherence and maximum alignment, the NFRD could mandate the disclosures that may be necessary under the proposed sustainable corporate governance initiative. 

-Pay Transparency: the Commission has adopted a proposal aimed at strengthening the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms. 16 This proposal includes requirements on certain companies to make information regarding the gender pay gap publicly available. Some of these companies may also be covered by the Non-Financial Reporting Directive (NFRD). Both initiatives will be aligned so that any public reporting on the gender pay gap pursuant to the Pay Transparency Directive by companies subject to the NFRD would be taken into account in possible standards for non-financial reporting under the NFRD.

-Green Claims Initiative: the Commission is considering a new legislative initiative to tackle false claims of environmental sustainability. Under the Green Claims Initiative, companies that voluntarily choose to make green claims would have to substantiate such claims against a standard environmental impact methodology. Environmental information published in company annual reports, which is regulated by the NFRD, does not fall within the definition of “green claims”. Any legislation of green claims would therefore not apply to the information in company annual reports. Nevertheless, to promote coherence and maximum alignment, the revision of the NFRD could as far as possible refer to the environmental impact methodologies that are likely to form the basis of any Commission initiative on green claims.

-Environmental accounting: the Commission is co-financing a new business led initiative to develop standardised environmental accounting principles within the EU and internationally. Company-level environmental accounting practices can play an important role in quantifying companies’ environmental impacts and should help to underpin the content of environmental information that they disclose under the NFRD.

Annex 10 provides a more comprehensive list of relevant EU legislation and policy initiatives, and a more in depth analysis of the interactions.

2.Problem definition

This section summarises the identified problems, and the consequences and drivers of those problems. Annex 12 provides a more detailed analysis of the problems.

In March 2021, the Commission published a Fitness Check on the overall EU framework for public corporate reporting by companies (financial reporting and non-financial reporting), together with a report on the NFRD itself as required by the review clause (Article 3) in the Directive. 17  

The deficiencies in current non-financial reporting identified in this section reflect the principal findings of the Fitness Check and the review clause report. In addition, this section extends beyond the Fitness Check and the review clause report with regard to presenting the consequences and the drivers of those deficiencies. 18 Stakeholder consultations have helped to validate the problem definition, in particular open consultations organised in 2018 for the Fitness Check and in 2020 for this review of the NFRD. Annex 2 provides a summary of all stakeholder consultations and their results.

Figure 1 - Integrated overview of drivers, problems and consequences

2.1 What are the problems?

It is useful to make a distinction between problems for users of non-financial information disclosed in company annual reports, and problems for preparers of that information (that is to say, reporting companies).

2.1.1 Problems and consequences from a user perspective

This problem analysis focusses on the primary intended users of non-financial information disclosed in company annual reports:

·on the one hand investors, including asset managers, who want to better understand the risks and opportunities that non-financial issues pose to their investments, as well as to better understand the social and environmental impacts of those investments;

·and on the other hand, non-governmental organisations, trade unions and other stakeholders, who want to better hold companies to account for their social and environmental impacts. 19  

Many investors and asset managers purchase non-financial information from third party data providers, who collect information from various sources including public corporate reports. However, investors remain the end users of this information, and third party data providers are therefore not considered primary intended users of this initiative.

Other stakeholders may also make use of non-financial information disclosed in annual reports. Policy makers and environmental agencies may make use of such information, in particular on an aggregate basis, to monitor environmental and social trends, to contribute to environmental accounts, and to inform public policy. Few individual citizens and consumers directly consult company non-financial statements, but more use such information indirectly, for example when considering the advice or opinions of financial advisers or non-governmental organisations.

The specific problems from the user perspective of non-financial information are:

a)Some companies from which users want non-financial information do not report such information.

b)Many companies that do report non-financial information nevertheless do not report all relevant information that users need or want.

c)Reported information is not sufficiently comparable.

d)Reported information is not sufficiently reliable.

e)It is hard for users to find and exploit the information they are looking for even when that information is reported.

Whether a company reports against a recognised reporting standard, and whether the reported non-financial information is assured, are useful proxies for assessing the relevance, comparability and reliability of the reported information. They therefore help to illustrate the size of the problems from a user perspective. Based on CEPS study, we estimate that only around 20% of large limited liability companies in the EU comprehensively apply recognised reporting standards, and only around 30% publish non-financial information that has been assured at least to a minimum level.

It is widely recognised that information on intangible assets is underreported, even though such assets currently represent the majority of investment carried out by the private sector in advanced economies. 20

Amongst other reasons, the lack of digitalisation of the information reported and the lack of clarity about which company in a group is required to report non-financial information, lead to problems of searchability and accessibility of the information.

These specific problems lead to the following general problem from the user perspective: users do not have access to adequate information about how non-financial issues, and sustainability issues in particular, might impact companies, or about how the company itself impacts society and the environment.

The consequences of the problems from a user perspective depend on which users are considered:

a)Investors are unable to take sufficient account of sustainability-related and other non-financial risks and opportunities in their investment decisions. This has the potential to create systemic risks that threaten financial stability. 21

b)Investors are also less able to channel financial resources to companies and economic activities that address and do not exacerbate social and environmental problems.

c)Non-governmental organisations, trade unions and other stakeholders are less able to hold companies accountable for their impacts on society and the environment. This creates an accountability deficit, and may be a contributory factor in the weakening of the social contract between business and citizens, with effects on the efficient functioning of the social market economy.

2.1.2 Problems and consequences from a preparer perspective

The specific problems from a preparer perspective are:

a)Preparers face difficulty and complexity when deciding what information to report.

b)Preparers find it difficult to get the non-financial information they need from suppliers, clients and investee companies to report adequately.

c)Preparers receive information requests from stakeholders in addition to the information they report to fulfil their legal requirements.

The general problem from a preparer perspective created by these specific problems is that preparers incur unnecessary costs associated with the reporting of non-financial information.

2.1.3 Overall consequences

The overall consequence of these general and specific problems is that the potential of the European Single Market to contribute to the objectives of European Green Deal, and to the achievement of the UN Sustainable Development Goals, is not fully exploited.

2.2 What are the problem drivers?

The drivers of the identified problems are market and regulatory failures.

2.2.1 Market failures

Non-financial information from companies can be considered a public good, since one user’s “consumption” of the information does not reduce the amount available for others. In addition, it is not possible to charge for access to publicly available non-financial information because there is an obvious free-rider problem. This leads to a supply of non-financial information that is below market demand. Although some companies would publish non-financial information in the absence of an obligation to do so (because they find it beneficial, for example in terms of reputation or access to capital), overall, in the case of an unregulated market, the supply of information is unlikely to meet users’ demand.

There has been a very significant increase in demand for non-financial information in recent years, especially on the part of the investment community. This increase in demand is driven by the changing nature of risks to companies and by growing investor awareness of the financial implications of those risks. 22 It is also driven by the growth in investment products that explicitly seek to meet certain sustainability standards or achieve certain sustainability objectives. 23  

However, market forces on their own have not so far been sufficient to ensure that companies report the non-financial information that is needed to meet the increase in demand. Recognition of this failure lies behind many of the calls for stronger policies on non-financial reporting, including regulatory action, from organisations such as central banks and the International Monetary Fund. 24 The European Securities and Markets Authority (ESMA) has recommended stronger non-financial reporting requirements as a means of addressing undue short-termism in securities markets. 25  

Market forces have catalysed the creation of a large number of non-financial reporting standards and frameworks, at international, national and sector level. 26 Furthermore, new initiatives continue to emerge. The market on its own however has not ensured that many companies fully apply any of the existing standards and frameworks. For example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are widely respected as authoritative guidance on climate reporting, but the 2020 TCFD status report suggests that significant implementation challenges remain. 27

The market on its own has also not so far been able to ensure adequate convergence and consolidation between the different frameworks and standards. There are overlaps and inconsistencies between them, including in terms of the non-financial issues they cover, and the intended audience of the disclosures they recommend. This is a significant driver of the reporting burden for preparers, and of the problems faced by users in terms of limited comparability and relevance of reported information.

2.2.2 Regulatory failure

The EU agreed the NFRD before a number of landmark EU and global policy developments, including the UN Sustainable Development Goals (2015), the Paris Agreement on climate change (2016), the EU Sustainable Finance Action Plan (2018) and the European Green Deal (2019). These more recent policy developments reflect a growing political and social awareness of the intensity of the sustainability crisis. For most sectors of the economy, including the financial sector, sustainability has clearly moved from the margins to the mainstream in a relatively short period of time. Overall, the political choices that shaped the NFRD in 2014, while valid at the time they were made, may not be appropriate in the current circumstances.

The following characteristics of the NFRD are drivers of the specific problems identified in section 2.1:

·Scope: The NFRD only ensures that large listed companies, large banks and large insurance companies disclose non-financial information, and only if they have more than 500 employees. This does not include some companies from whom users need non-financial information.

·Flexibility and lack of granularity of reporting requirements: The reporting requirements in the NFRD are high level and principles based. The NFRD does not specify in any significant detail the information that companies should disclose, and does not require companies to use a non-financial reporting standard. The accompanying guidelines are not binding, and, with the exception of the climate reporting guidelines, do not provide detailed guidance to companies. Companies therefore have considerable discretion in deciding what information to report and in the application of the materiality principle. Together, these characteristics of the NFRD help to explain why there are problems with the comparability of information, and why many companies do not disclose all information that users think is relevant. The inadequate reporting of intangible assets is at least partly explained by the fact that the Accounting Directive, even as amended by the NFRD, does not explicitly require companies to report on intangibles.

·Assurance: The statutory auditor has to verify that the non-financial statement is included in the report, but is not obliged to verify the content of the statement or the internal processes behind it. This limits the reliability of reported information.

·Location of reported information: The NFRD allows Member States to allow companies to report non-financial information in a separate report rather than in the management report. This helps to explain why many companies do not adequately address the connectivity between financial and non-financial information in their reports. Publication of non-financial information in a separate report also makes information harder to find and impacts negatively on its perceived reliability.

·Enforcement: the provisions of the NFRD are difficult to enforce. This is mainly because the disclosure requirements are high level, principles-based and flexible. Additionally, the non-financial statement falls outside the scope of supervision of some national competent authorities due to the lack of coordination between the provisions of the NFRD and the Transparency Directive. 28 The difficulty of enforcing the NFRD contributes to many of the problems experienced by users, in particular the limited comparability and reliability of reported information and the fact that much information considered relevant by users is not reported.

A comparison with EU rules for financial reporting helps to illustrate how certain characteristics of the NFRD are drivers of the specific problems identified in section 2.1. Overall, and in spite of certain specific problems, the Fitness Check on corporate reporting found that the EU framework for financial reporting broadly meets its intended objectives and ensures that users’ needs are adequately met.

Most significantly, the EU framework for financial reporting requires companies to report according to clear rules set out in the Accounting Directive, and in practice Member States require compliance with national accounting standards. In addition, EU companies listed on the EU financial markets are required by the International Accounting Standards Regulation to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The mandatory use of common financial reporting standards is a major explanation for why users face far fewer problems regarding the relevance and comparability of financial information than is the case for non-financial information. Mandatory common standards mean that companies have much less discretion about what financial information to report compared to the very considerable discretion that they have in the case of non-financial information. In the view of the European Securities and Markets Authority (ESMA), “the effectiveness of the applicable framework and the comparability of the resulting disclosures would have been greater had the [NFRD] set up or indicated a specific framework and accepted a single set of standards to report this type of information.” 29  

In addition, the EU framework for financial reporting covers all companies from which users need financial information, with no apparent gaps, and it imposes audit requirements for financial information that provide a significantly higher level of reliability than is the case for non-financial information. Finally, supervision and enforcement of non-financial information lags behind what is done in the case of financial information, and this is partly the result of differences in the respective regulatory frameworks. ESMA believes that “the optionality that characterises the non-financial disclosure requirements (e.g. in relation to the applicable frameworks, the location and timing of publication of the NFS and the assurance) does not yet allow a satisfactory convergence of disclosure practices thus undermining the consistency of supervisory approaches which is urgent to achieve in this area.”

2.3 How will the problems evolve?

Some analyses find that the quality of non-financial reporting is improving. 30 Others acknowledge that the quality of reporting is improving but conclude that these improvements are nevertheless insufficient to meet users’ needs. 31 Still other analyses find little evidence of improvement, and even some negative trends. 32 At the same time, most observers predict that the information needs of users, in particular investors, will continue to grow significantly. 33 The Covid-19 pandemic is likely to accelerate this trend (see annex 6). Overall, we conclude that the gap between the information needs of users and the non-financial information reported by companies will continue to grow.

There is little evidence to suggest that the complexity and burden experienced by preparers will diminish. Indeed responses to the public consultation indicate that for many preparers these problems are intensifying.

Section 5.1 (the baseline scenario) provides a more detailed description of the expected evolution in the case of no new policy initiative by the European Union.

3.Why should the EU act?

3.1 Legal basis

In this Impact Assessment we consider two Articles of the TFEU as legal basis for the proposed initiative. Firstly, Article 50 TFEU, the traditional legal basis for company law legislation, and in addition, Article 114 TFEU, lex generalis that applies as well with the objective of establishing or ensuring the functioning of the internal market. See further details in annex 15.

3.2 Subsidiarity: Necessity of EU action

The disclosure of non-financial information is already regulated at EU level by the Accounting Directive (as amended by the NFRD). Transparency rules are necessary to ensure investor protection and financial stability across the EU, while allowing civil society organisations and other stakeholders hold companies accountable for their impacts on the environment and society. Additionally, common rules on non-financial reporting ensure a level playing field among companies established in the different Member States. If non-financial reporting requirements are significantly different in different Member States, this would create additional costs and complexity for companies operating across borders and therefore undermine the Single Market. Member States acting alone are not able to ensure the consistency of non-financial reporting requirements across the EU.

Member States acting alone are also not able to ensure the comparability of the reported non-financial information across the Single Market. The comparability of reported information enables potential investors and other users of non-financial information such as civil society organisations to better compare companies across national borders. It is therefore important on the one hand for the free movement of capital and the Capital Markets Union, especially in light of the growing relevance of non-financial information for investment decisions, and on the other hand to enable civil society organisations and other stakeholders to compare impacts of companies in different EU Member States and better hold them accountable.

Finally, only EU intervention can ensure that companies disclose the information that investors need to comply with their own disclosure obligations under the SFDR.

3.3 Subsidiarity: Added value of EU action

As attention to non-financial reporting grows in jurisdictions around the world, it becomes ever more important for the EU to engage with its partners on the basis of a coherent and comprehensive European approach. Compared to individual action by Member States, EU intervention can ensure a strong European voice in policy developments at the global level regarding non-financial reporting. This could translate into a competitive advantage for EU companies with respect to non-EU companies, as investors’ interest in non-financial information increases. In addition, EU intervention can ensure that companies in all Member States report relevant, reliable and accessible non-financial information needed by European investors and civil society organisations.

4.Objectives: What is to be achieved?

4.1 General objectives

The general objective is – by improving EU non-financial reporting at the least possible cost – to better exploit the potential of the European Single Market to contribute to the transition towards a fully sustainable and inclusive economic and financial system in accordance with the European Green Deal and UN Sustainable Development Goals. This will be achieved by:

a)helping to reduce systemic risks to the economy resulting from the fact that many investment decisions currently do not take adequate account of sustainability-related issues;

b)improving the allocation of financial resources, so that more financial resources flow to companies and activities that address social and environmental problems and fewer resources flow to companies and activities that exacerbate such problems;

c)making companies more accountable for their impacts on society and the environment, thereby strengthening the social contract between companies and citizens.

4.2 Specific objectives

The specific objectives can be distinguished between objectives for users of non-financial information, and objectives for preparers (reporting companies).

For users, the specific objectives are to ensure that there is adequate publicly available information about the risks and opportunities that non-financial issues present for companies, and about the impacts of companies themselves on society and the environment. In order to achieve these objectives:

a)companies from which users need non-financial information should report such information;

b)companies should report all information that users consider to be relevant;

c)reported information should be comparable;

d)reported information should be reliable; and

e)reported information should be easy for users to find and exploit.

These objectives imply changing the status of non-financial information, so that over time it is more comparable to the status that the EU framework currently gives to financial information.

For preparers, the specific objective is to reduce unnecessary administrative costs associated with non-financial reporting, in particular by:

a)bringing greater clarity and certainty about the non-financial information and the methodologies behind the information they are expected to report;

b)making it easier for preparers to get the non-financial information they need for reporting purposes from their own business partners (suppliers, clients and investee companies);

c)reducing the burden created by demands for non-financial information that come in addition to the non-financial information included in company reports.

There may be trade-offs between reducing burden for reporting companies on the one hand, and meeting the information needs of users on the other hand. At the same time, the wider costs of not meeting users’ information needs – for example in terms of not contributing to the objectives of the European Green Deal – will also need to be considered.

Figure 2 - Integrated overview of specific and general objectives

5.What are the available policy options?

5.1 What is the baseline from which options are assessed?

Under the baseline, the EU would not develop any new regulatory or non-regulatory action specific to reporting of non-financial information. The existing provisions of the NFRD would continue to apply, together with the general and the climate-specific non-binding guidelines.

We predict that the baseline scenario is highly dynamic, with a very significant increase in the intensity of problems for users and preparers. The principal characteristics of the baseline scenario are:

·A very significant increase in the information needs of users. Some of this increase is the logical consequence of previously agreed EU legislation, notably the SFDR and the Taxonomy Regulation, and some would have happened in any case, due to fast-changing citizen awareness, consumer preferences and market practices, driven by the sustainability imperative. The Covid-19 pandemic will further accelerate the increase in users’ information needs (see annex 6). Users will need and expect more and better information from an increasing number of companies, especially large companies but also a growing proportion of SMEs.

·A growing gap between the information that users want and need, and the information that companies report. In the absence of widespread consensus and clear rules about what companies should report, any improvements in non-financial reporting will remain insufficient to meet the increasing needs of users. Specifically, in the absence of requirements to report in a more standardised manner, and to assure the reported information, the gap between users’ needs for relevant, reliable and comparable information and the relevance, reliability and comparability of reported information, are expected to grow. Additionally many companies from which users want information would not report, as the personal scope of the current requirements would remain the same.

·Lack of coherence with other EU sustainability disclosure regulations, which will undermine the EU’s sustainable finance objectives. Once disclosure requirements of the SFDR and Taxonomy Regulation become applicable, there will be a growing situation of incoherence if investee companies do not report the specific information that entities subject to the SFDR and the Taxonomy Regulation need in order to meet their own reporting requirements. This in turn would seriously undermine the achievement of the EU’s sustainable finance objectives.

·An increase uncoordinated in information requests to preparers. In an attempt to address the information gap, more users will directly contact companies to ask for the necessary information. Data providers will further develop their own proprietary questionnaires and data-collecting methodologies, which will involve more uncoordinated requests to companies for specific information.

·Ongoing expectations on companies to use a variety of different frameworks and standards. The proliferation of different private and public-private reporting frameworks and standards will continue and may even intensify as the value placed on non-financial information continues to grow. Different users and regulators will pressure companies to use different frameworks and standards. 34 The International Financial Reporting Standards Foundation (IFRS Foundation) is developing plans for the creation of a Sustainability Standards Board, which could be created by the end of 2021. The intention of the IFRS Foundation is, for the time being, to address climate reporting only, and to do so only from a financial materiality perspective (“outside-in” risks to the company). If the IFRS Foundation initiative is successful, it could clarify and simplify reporting expectations on companies, but only with regard to climate reporting from a financial materiality perspective. For all other sustainability issues, and for reporting on company impacts, the problems created by the co-existence of multiple different standards and frameworks would remain.

·Significant increases in costs and burden for preparers and for users. Users will have to dedicate more resources to finding and collecting the additional information that they need. Preparers will face higher costs due to the increase in uncoordinated information demands from users, due to the ongoing absence of consensus about what information they should report in order to meet users’ needs, and due to persistent difficulties in obtaining the non-financial information they need for reporting purposes from suppliers, clients and investee companies.

·An increase in the application of information technology and artificial intelligence to the field of non-financial information, but without resolving underlying problems. Current trends in the use of innovative information technology and artificial intelligence will intensify, will provide new opportunities for accessing and exploiting non-financial information, and may offset some of the predicted increases in cost and burden. However, such developments on their own will not resolve the problems faced by users if the underlying information is not relevant, comparable and reliable.

·Growing likelihood that Member States take national initiatives that undermine the Single Market. Policy-makers at national level are increasingly convinced of the need to address existing problems regarding non-financial reporting. If the EU does not act, there is a high probability that individual Member States will introduce national rules or standards that undermine the right of establishment and the free movement of capital across the EU. 35

5.2 Description of the policy options

In order to focus the impact assessment on a limited number of key variables and improve its readability, this section presents different policy options for three main variables: the standardisation of reported information, assurance requirements, and scope (i.e. which companies should report). These are the most important variables in terms of addressing the identified problems and they are also the principal determinants of costs.

Annex 16 examines policy options for a number of other variables: digitalisation, sanctioning regime and enforcement, reporting on intangibles, location of reported information, clarification of materiality concept, and clarification of exemption to subsidiaries. These are additional variables that the Commission will need to consider when formulating its proposal for this initiative, but they are less important in terms of addressing the identified problems and determining costs, and are therefore presented in an annex in order not to overburden the reader.

Table 1. Overview of which principal variables for policy options address which specific objectives

Table 2: Overview of policy options

5.2.1 Standardisation options

i) Option 1. Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use) 

According to this approach, the EU would support the development of EU non-financial reporting standards, and mandate their use by companies under the scope of the NFRD. 36

These standards would specify all information necessary to allow companies to meet the legal requirements of the NFRD, and would provide guidance on how to present this information. This means that for all sustainability matters and areas addressed in the legal provisions of the NFRD, the standards would specify disclosures, including indicators, that cover how non-financial issues affect the company’s financial performance (‘outside-in’ perspective), and how the company impacts society and the environment (‘inside-out’ perspective). For most quantitative indicators, the standards would also specify the methodology to be used. 37

The standards would cover appropriate forward-looking information, as well as information about past performance. They would specify which information companies need to report on the supply chains, taking into account their international dimension and the specificities of different geographies where relevant. Such standards would be significantly more comprehensive and more detailed than the existing guidelines on non-financial reporting published by the Commission.

These standards would take into account the information needs of investors and specialised civil society organisations. They would also take account of the needs of other potential users, such as policy-makers and statistical agencies.

Additionally, these standards would take into account the information needs of the financial sector that result from their obligation to comply with the SFDR and the Taxonomy Regulation. The EU standards would be consistent with EU non-financial reporting laws, and would specify disclosures that allow entities subject to those laws meet their legal obligations.

These EU non-financial reporting standards would build on the most widely accepted elements of the existing private standards and frameworks. It would ensure as much continuity and consistency as possible with the private standards and frameworks that some companies currently use. In addition, EU non-financial reporting standards would build on the Commission’s guidelines on reporting non-financial related information as necessary.

The standards would comprise a number of different normative documents built on a modular structure. For example, different standards might address general disclosure requirements applicable to all enterprises (e.g. description of the business model, risk management system, or due diligence) and thematic disclosure requirements (e.g. on particular environmental or social matters). Other standards might cover certain economic sectors, justified by the sustainability-related impacts and dependencies specific to those sectors.

Consistent with the “think small first” approach, the standard-setter would develop a simplified standard for voluntary use by SMEs who are not under the scope of the NFRD. The simplified nature of this standard would reflect the fact that SMEs often do not have the technical expertise nor resources necessary to prepare reports in accordance with state-of-the-art, sophisticated standards.

The standards would consider the particularities of consolidated reporting; they would ensure that information about subsidiaries is appropriately included in consolidated reporting in order to meet users’ needs. The standards setter would explore the best ways to disaggregate subsidiaries’ information, to ensure useful, efficient reporting.

An adequate degree of political and democratic oversight of the content of the standards and a coordinated approach between the different EU bodies in charge of developing the different level 2 measures of other Sustainable Finance legislation would be ensured.

Organisations that have advanced the cause of sustainability/non-financial reporting, such as the Global Reporting Initiative (GRI), the IFRS Foundation (and/or the possible future sustainability standards board created under its auspices), the Sustainability Accounting Standards Board (SASB) and the TCFD, would be invited to work closely with the future EU standards setter. EU standards would build on the content of existing and future international standards and frameworks where appropriate. The standard-setting process would be inclusive and carried out by experts. All relevant stakeholders would be involved, including preparers (reporting companies, including SMEs) and users (the investment community, and specialists in civil society and trade unions) of non-financial information. 

EU non-financial reporting standards should ensure connectivity between financial and non-financial information, as increasingly demanded by investors. Synergies between financial and non-financial reporting are essential to ensure that investors can form an integrated view of the financial and sustainability-related risks and impacts of investee companies. The strategic importance of these synergies is growing rapidly, as the interactions between sustainability and company value become ever more evident.

Under this option, EU non-financial reporting standards could be adopted by means of delegated regulations, based on an empowerment that would be granted to the Commission in the Accounting Directive. This would permit the direct applicability of the standards, i.e. no need to wait for transposition of amendments to the Directive by Member States before adopting the delegated act, and no delay in the date of entry into application. The revision of the NFRD could specify the conditions that need to be met in order for the Commission to adopt EU non-financial reporting standards in level 2 legislation. These conditions could include the principal elements of the standards as described in this section.

ii) Option 2. Develop EU non-financial reporting standards for voluntary use

The EU would develop EU non-financial reporting standards described under option 1, but would not mandate their use.

No action will be directly required by businesses, who would be free to use this standard if they find it useful.

5.2.2 Assurance options

Most experts agree that an independent assurance services provider can only adequately check compliance of the reported information if companies report against non-financial reporting standards. The feasibility of the assurance options is therefore closely linked to the policy choice made for standardisation. 44% of respondents to the open public consultation, and 40% of preparers, believe mandatory reporting against standards is prerequisite to require assurance of non-financial information. 38

i) Option 1: Require reasonable assurance

The auditor would be required to perform a reasonable assurance engagement on the non-financial reporting. The conclusion of reasonable assurance is usually provided in a positive form of expression and states an opinion on the measurement of the subject matter against previously defined criteria. The work effort in this type of engagement is significantly higher than in a limited assurance engagement. It entails extensive procedures including consideration of internal controls of the reporting company and substantive testing. EU law imposes a reasonable assurance requirement for the audit of financial statements.

ii) Option 2: Require limited assurance

The auditor would be required to perform a limited assurance engagement on the non-financial reporting. The work in providing limited assurance engagements is less than for reasonable assurance (see option 1). The auditor performs fewer tests, providing a lower level of assurance. The conclusion of limited assurance is usually provided in a negative form of expression by stating that no matter has been identified by the practitioner to conclude that the subject matter is materially misstated.

5.3.3 Scope options

The scope options are presented cumulatively, so each option builds on the previous one. 39 The order in which the options are presented follows a logical progression, starting with companies that users are most in favour of including under scope (mainly larger companies) and gradually expanding the scope towards smaller companies. This approach allows us to analyse clearly the impacts of adding different categories of company to the scope, while keeping the presentation as clear and as simple as possible.

i) Option 1: Broaden scope to all other large public interest entities (PIEs) i.e. removal of 500 employee threshold

The personal scope would be broadened to all other large PIEs, i.e. deleting the 500 employee size threshold of the current legal provisions. This means that the size threshold delimiting the personal scope of this obligation would correspond to the definition of ‘large undertaking’ of the Accounting Directive. 40 In other words, all large PIEs as defined in the Accounting Directive would be required to comply with the requirements. 41  

ii) Option 2: Further broaden scope to all other large limited liability companies

In addition to the changes in scope indicated under Option 1, the current non-financial disclosure requirements would be extended to large companies that are not PIEs: non-listed EU companies (including large EU companies with securities only listed outside EU regulated markets) and non-EU companies with securities listed in the EU regulated markets.

iii) Option 3: Further broaden scope to SMEs with listed securities

In addition to the changes in scope indicated under Option 1 and 2, the current non-financial disclosure requirements would be extended to (1) EU SMEs with securities listed in EU regulated markets and (2) non-EU SMEs with securities listed in EU regulated markets, excluding micro-undertakings as defined in the Accounting Directive. 42

iv) Option 4: Further broaden scope to non-listed medium sized companies

In addition to the changes in scope indicated under Options 1, 2 and 3, the current non-financial disclosure requirements would be extended to non-listed EU medium-sized companies as defined in the Accounting Directive.

5.3 Options discarded at an early stage

The following options have been considered but discarded at an early stage: (1) European Transparency Benchmark; (2) Additional non-binding guidelines issued by the Commission; (3) Endorsement of an international standard; and (4) Expanding the scope to include all SMEs. Annex 18 describes each of these options and the reasons for discarding them at an early stage.

6.What are the impacts of the policy options?

We have adopted a two-step approach to assessing the impacts of the policy options. In the first step, we individually analyse the impacts of the policy options for standardisation (section 6.1) and assurance (6.2), and identify a preferred option for each of these two variables. In the second step we analyse the impacts of the policy options for scope (section 6.3), assuming the preferred policy options for standardisation and assurance. Each scope option is therefore a package that includes the preferred options on standardisation and assurance.

We have adopted this methodology because it is not possible to analyse the impacts of expanding the scope without knowing the main features of the reporting requirements that companies under scope would have to meet. This is especially the case for estimating the costs for reporting companies, since assurance and reporting standards are the two principal determinants of costs.

The policy options regarding other variables are individually analysed in annex 16, as they individually would not significantly influence the outcome of the preferred policy package. The preferred policy option for each of those variables is included in Section 7 (Preferred option).

The analysis of impacts of each option is structured as follows:

·Firstly, we analyse the effectiveness of meeting the specific objectives identified in section 4.2 regarding the provision of adequate non-financial information for users.

·Secondly, we analyse the costs of the option for different stakeholders, in particular preparers. Since the specific objectives regarding preparers are to reduce unnecessary costs, this analysis also covers the effectiveness of meeting the specific objectives from a preparer perspective. A detailed analysis of the costs and their calculations for each option can be found in annex 17.

·Thirdly, we analyse other potential significant impacts that do not directly correspond to the specific objectives identified in section 4.2.

We address the coherence with other EU policies throughout the whole analysis as appropriate.

6.1 Impacts of standardisation options

6.1.1 Analysis of impacts of Option 1: Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use)

Effectiveness in meeting specific objectives

Mandatory requirements on all companies under scope to use common EU reporting standards would contribute to meeting the specific objectives in the following ways:

·Relevance: All companies under scope would report the information that users find relevant, as defined in the common standards through a consensual approach involving representatives of all relevant stakeholder groups. In particular, this option can significantly enhance the coherence of EU sustainability reporting requirements: the common standards would ensure that all companies under the scope of the NFRD report information that financial market participants and other entities need to meet the reporting requirements established in the SFDR and the Taxonomy Regulation. 79% of financial sector respondents to the public consultation said that there was a need to better streamline the different reporting requirements.

·Comparability: Reported information would be comparable between all companies under scope of NFRD. Respondents to the public consultation highlighted comparability as being particularly important: 84% of users agreed that the limited comparability of information is a problem.

·Reliability: The use of standards would indirectly improve the reliability of information since it is easier to give effective assurance if information is reported against a standard. 43 In addition, mandatory standards would ensure the transparency and robustness of methodologies behind the disclosed information, enabling greater control and scrutiny by users themselves.

·Usability: Common standards should contribute to a more standardised presentation of information, which should mean that users experience fewer difficulties in finding the information they are looking for. Standards are pre-requisite for the digital tagging of information, so this option would also facilitate the digitalisation of reported information. 44

Overall, a requirement on companies to use mandatory EU standards would make a major contribution to the achievement of the specific objectives. It would represent a significant step in terms of making the status of non-financial information more comparable to the status that the EU framework currently gives to financial information.

There is a strong consensus amongst users and other stakeholder groups, such as policy-makers and supervisors, that the mandatory use of common standards is necessary to address the identified problems. 82% of respondents to the public consultation (including 80% of preparers) believed that requiring companies to use common standards would help to address the problems of relevance, comparability and reliability to a reasonable or to a very great extent. The percentage of social and environmental organisations believing that mandatory common standards would help to address the identified problems to a reasonable or to a very great extent was especially high (89%). 45  

Some business associations and individual companies oppose this option. Firstly, they argue that a common set of standards cannot meet the needs of a variety of different users who demand different kinds of information. However, the information needs of users are converging. This is most evident in the case of information about adverse impacts of companies, where the information needs of investors, civil society, trade unions, and also policy-makers and statistical agencies, are increasingly similar. The standardisation process itself should further contribute to such convergence. This option would in any case not prevent companies from publishing additional communication material for specific audiences if they see value in doing so.

Secondly, some business associations and individual companies argue that a mandatory reporting standard would not be sufficiently flexible to allow them to report the information that they think is relevant. However, even if one objective of requiring the use of common standards is indeed to reduce the discretion of companies in deciding what to report, common standards would be based on the principle of materiality and would guide companies on how to apply that principle. It would therefore ensure all relevant information is reported but would not require companies to report information that is not relevant to their particular circumstances. 46  

Costs analysis

Costs for preparers. The annual incremental costs of reporting against EU non-financial as a consequence of this new requirement would be approximately EUR 210 million. 47 Additionally, one-off incremental costs would amount to EUR 29 million. These costs are not very high because around 50% of companies under the NFRD are already reporting against comparable detailed standards.

On average, the estimated annual costs of reporting against EU standards for an individual company would be approximately EUR 106 000. 48 This estimation is based on the current reporting practices assessed in CEPS study (see annex 17). At the same time, reporting costs for companies are expected to decrease in the medium term due to the following three factors:

-If more adequate information was publicly available, the number of requests for additional information should decrease. 49 As a result, costs associated with meeting multiple different users’ demands would be reduced in the medium term. 50 In addition, if EU standards were applied by companies in the world’s largest market (as a minimum by those subject to the NFRD), there would be less incentive or need for users to ask for additional information according to other standards or formats. 51  

-Companies would have greater clarity and certainty about what information to report, reducing any inefficient investment in time or resources in trying to understand how best to comply with EU legislation. 52  

-Companies would face reduced costs from trying to get the necessary information from suppliers and clients, to the extent that those suppliers and clients are also required to use EU standards. Likewise, companies operating across different Member States would see a reduction in the overall costs of reporting of the group, given that requirements would be aligned throughout the EU.

Costs for users. If many of the largest EU companies reported against EU standards, more relevant and comparable information would be publicly available for users. Costs associated with trying to find adequate information would be reduced. Specifically, investors would rely on rating agencies and data providers to a lesser extent, if more standardised information was publicly available, and would trust more the underlying source of the information. 53 59% of users who replied to the open public consultation face difficulties finding the reported information.

Costs for the EU. The EU would incur certain costs for developing the EU reporting standards. 54 These costs would be limited if the work was done in partnership with organisations active in non-financial reporting. Additionally, mechanisms could be set up to draw upon private sources of finance, while ensuring proper governance structures, limiting the impact on the EU budget. 55  

As a result of these reporting requirements, ESMA’s enforcement priorities would further expand towards non-financial reporting and it might dedicate additional resources to ensure supervisory convergence in the area of non-financial reporting.

Costs for national authorities. Costs of enforcement activities by national authorities could slightly increase due to the resources needed to check compliance against a more detailed set of requirements. 56 At the same time, national authorities would gain clarity about what information companies should report according to the NFRD, which could translate into costs savings.

Other economic, environmental, social and fundamental rights impacts

·Company impacts on the environment, society and fundamental rights. Companies that are required to report against standards will have to identify and report on their most significant non-financial risks, dependencies and impacts, and explain how they manage them. This discipline will have an indirect beneficial effect on the environment, society and fundamental rights, to the extent that it affects company decisions and the way companies behave. These impacts would be biggest in the case of companies that have not previously used standards, which is approximately 50% of companies under the scope of the NFRD. There is, however, mixed evidence about the extent to which reporting requirements on their own will induce companies to mitigate and avoid their negative impacts, especially in comparison to policies and regulations that effectively price negative externalities. 57

·Company resilience. To the extent that reporting against a standard raises company awareness of sustainability-related risks and improves the way in which risks are managed, this option should help to make companies more resilient. It would, for example, enhance company awareness of dependencies on natural capital. This impact will be biggest for companies under scope that have not previously used reporting standards or have not fully applied them. 58  

·Better policy on the environment, society and fundamental rights. Availability of better non-financial information for policy-making, can inform policy actions that lead to positive environmental, social and fundamental rights impacts (e.g. environmental agencies and national environmental accounts).

·Competitive advantage for more sustainable companies. Equal transparency requirements on companies reporting according to the NFRD would allow front runners in terms of performance regarding sustainability issues to be more easily identifiable. This could give them a competitive advantage, for example in terms of reputation, or to attract capital in the context of the Sustainable Finance agenda. This option also sets a more level playing field between companies under the scope of the NFRD, compared to the current situation in which companies that report the best quality and most relevant information incur higher reporting costs than other companies.

·International competitiveness of EU companies. Under this option there is a risk that EU companies incur higher reporting costs than non-EU companies. However, given the increasing interest of global investors and other stakeholders in sustainability-related information, some global companies are likely to decide voluntarily to align some elements of their non-financial reporting with the mandatory EU standards, and other jurisdictions are already introducing requirements or policy initiatives in the field of sustainability-related disclosures (see annex 14). 59 Furthermore, the competitive situation of EU companies is likely to be enhanced in the longer term if EU standards shape global alignment and possible future global standards. By taking a leading role in this respect the EU and its companies could benefit from first-mover advantage.

·Risk of international fragmentation. In response to the public consultation, many respondents, including European Supervisory Authorities, the European Central Bank and some Member States stated that the ultimate goal should be global non-financial reporting standards. There could be a risk that the development of EU standards leads to global fragmentation. However, this risk can be mitigated by ensuring that EU standards incorporate and build upon existing international standards and frameworks. In addition, the EU can foster discussions on global coherence through the International Platform on Sustainable Finance. Annex 18 explains the reasons for not requiring EU companies to use an international standard.

·Knock-on effects on SMEs: Making the use of standards mandatory for companies under the scope of the NFRD would increase the number of companies that seek detailed information from their suppliers or clients, which would include SMEs. While this phenomenon is to some extent an inevitable part of the transition to a sustainable economic system, it can also create administrative burden for SMEs. On the other hand, SMEs that do not provide certain non-financial information may suffer negative consequences in terms of access to finance and to commercial opportunities. The availability of simplified standards for voluntary use by SMEs, which is an integral part of this option, would aim to provide an effective solution and facilitate SMEs’ participation in the transition to a sustainable economy. 60  

·Single Market. Risks to the Single Market from Member States endorsing different non-financial reporting standards would be significantly reduced, and probably removed altogether.

·The quality of ESG ratings. Improving the quality and comparability of published information could improve the reliability and quality of ESG ratings. It would improve clarity about the underlying data used for different methodologies by different third parties.

6.1.2 Analysis of impacts of Option 2. Develop EU non-financial reporting standards for voluntary use

The impacts described in this section are highly dependent on the extent to which companies use the EU standards on a voluntary basis. Companies may continue to use different standards or no standard at all.

Effectiveness in meeting specific objectives

This option would address problems regarding relevance, comparability, reliability and usability amongst those companies that decide to fully apply the standards. A plausible scenario would be as follows:

·Companies under the scope of the NFRD that currently use standards (approximately 50%) would be likely to use the new EU standards. However, as is the case with current standards, only a small minority of these companies would fully apply the standards, while most would use the EU standards selectively, possibly in conjunction with other standards.

·Companies under the scope of the NFRD that do not currently use standards (50%) would be less likely to use the EU standards immediately, but a significant proportion may nevertheless begin to do so in the medium to long term, especially if pressured to do so by supervisors, investors and other stakeholders. However, most of these companies will apply the EU standards selectively, and some companies under scope will use no standards at all.

In such a scenario, this option would make a moderate contribution to achieving the specific objectives but could not ensure that any of the objectives are fully met. The principal limitations would be that a) not all companies under scope would use the standards, even if the number increases over time, and b) only a minority of companies using the standards would apply them fully, while most would use them selectively.

Costs analysis

Costs for preparers. The reporting requirements would remain the same and therefore incremental costs of reporting due to EU intervention would be zero. Reporting companies that voluntarily decide to report against EU standards might incur higher costs. Nevertheless, because of the voluntary character of the standards, companies would only use the standards if they consider the benefits of doing so are higher than the costs.

This option could result in some of the medium-term costs savings identified for option 1 (reduction in demands to companies for additional information, greater clarity about what to report, and better information from suppliers and clients). However, any such benefits are highly dependent on the degree of uptake of the voluntary standards.

On the other hand, there would be a risk that voluntary EU standards would be perceived as another standard to add to the list of voluntary (private) standards already in existence. It would therefore run a significant risk of adding to the confusion, and adding to the administrative burden and costs for companies.

Costs for users. The reduction in costs for users associated with trying to find adequate information would not be as significant as according to Option 1, as it would depend on the degree of uptake of the EU standards by reporting companies.

Costs for the EU. Costs for the EU would be the same as the ones presented under Option 1 (section 6.1.1).

Other economic, environmental, social and fundamental rights impacts

·International competitiveness of EU companies. Because the use of standards is voluntary, this option would create a low risk of competitive disadvantage for European companies compared to non-EU companies that are not subject to similar reporting requirements. European companies could take account of the reporting done by their international competitors when deciding whether and to what extent to use the EU standards. On the other hand, the EU would be in a less strong position in any global negotiations on alignment of standards, and the EU and its companies would not benefit fully from first-mover advantage.

·Risk of international fragmentation. The risk of international fragmentation exists for this option as it does for the mandatory standards option, and it can be mitigated in the same way.

·Single Market. The risks to the Single Market from Member States endorsing different non-financial reporting standards would probably be reduced, since if a Member State wanted to endorse a standard it would probably, but not inevitably, choose the new EU standards. However, this option also creates a new risk: the very existence of high quality EU standards may tempt some Member States to make the EU standards mandatory at national level, thereby introducing new barriers to the Single Market so long as other Member States do not do the same.

As for the mandatory standards option, this option could also have impacts regarding a) company resilience b) better public policy on the environment, society and fundamental rights, c) company impacts on the environment, society and fundamental rights, d) knock-on effects for SMEs, and d) the quality and consistency of ESG ratings. However, these impacts will only materialise to the extent that companies use or fully apply the standards on a voluntary basis. 

6.1.3 Comparison of standardisation options

The analysis of options is summarised in tables 3 and 4. The scores for effectiveness directly reflect the analysis carried out in previous sections 6.1.1-6.1.2, whereas efficiency considers the costs associated with each option in relation to its effectiveness and other positive impacts (benefits). Compared to the baseline scenario, Option 1 would increase the amount of comparable, reliable and relevant information available from companies, very significantly contributing to several of the objectives of this initiative (most effective). Option 2 is less effective as it cannot guarantee that companies would publish information according to standards, and therefore cannot significantly contribute to the identified objectives. Costs under Option 2, mainly costs for the EU as preparers would not be required to report against standards, would not be justifiable given the limited and uncertain effectiveness of this option. This option does not significantly reduce the risk of increasing unnecessary costs on preparers in the medium term and other negative impacts identified in the baseline scenario.

Although Option 1 presents the highest costs, it achieves the best efficiency, as it presents the greatest benefits in terms of effectiveness and other positive impacts and would reduce unnecessary costs for preparers in the medium term. Additionally, significant improvement in the usability of reported information is only granted by Option 1; only if the use of reporting standards is mandatory, the amount of information reported that users consider not to be relevant would be significantly reduced. The availability of simplified standards would help SMEs to address the increase in uncoordinated demands for information that SMEs will face as a result of general market developments and as a result of the SFDR and the Taxonomy Regulation.

With regard to coherence, although Option 2 contributes to enhance coherence with other EU policy objectives, Option 1 is the only one that guarantees this consistency.

Table 3 - Comparison of standardisation options

Table 4 - Comparison of standardisation options in terms of impacts on different stakeholders

6.2 Impacts of Assurance options

6.2.1 Analysis of impacts of Option 1: Require reasonable assurance

Effectiveness in meeting specific objectives

This option would very significantly contribute to achieving the specific objective regarding the reliability of reported non-financial information. It would mean that non-financial information and financial information are assured to the same level. This option can also contribute, although to a lesser extent, to the specific objectives regarding the comparability and relevance of reported information.

However, the effectiveness of this option is currently limited by certain aspects:

·Reporting practices are not yet well developed in most companies, with relatively weak internal control systems for non-financial reporting that suggest that reasonable assurance would not be immediately appropriate or possible at this stage.

·The relative immaturity of the assurance market for non-financial information, especially if compared to the assurance market for financial information. There is some doubt about the ability of the assurance market to immediately meet the demand for reasonable assurance, especially if the EU were to decide to bring a significant number of additional companies under the scope of the reporting requirements (see section 6.3).

·The absence of a commonly agreed assurance standard for the assurance of non-financial information. A majority of both users (75%) and preparers (71%) responding to the public consultation believed that such a standard would be necessary.

There is consensus amongst most respondents to the open public consultation that assurance is needed for non-financial information, with the exception of some preparers who consider that companies should be left to choose whether they will assure or not their reported information. Overall, respondents were evenly divided as to whether the EU should require limited or reasonable assurance, if it were to introduce stronger audit requirements. Although 51% of users favoured a reasonable assurance requirement (compared to 31% who preferred limited), only 35% of preparers agreed with this approach. Many respondents noted that the maturity of non-financial reporting is far from the maturity of financial reporting and that a reasonable assurance requirement would only be a valuable and reliable option over time, when reporting and assurance practices have further evolved.

Costs analysis

Costs for preparers. The estimated total annual incremental costs for companies in scope of the NFRD resulting from the requirement to perform a reasonable assurance engagement on non-financial reporting would be approximately EUR 280 million. These incremental costs do not include costs from companies already doing reasonable assurance on non-financial information, and considers a lower increase in costs for companies already doing limited assurance than for those that would be required to start from scratch. For companies in Spain, Italy and France, where assurance is mandatory, limited assurance is the common practice. This cost estimate also assumes companies currently doing limited or reasonable assurance would continue doing so.

The estimated average annual costs of performing reasonable assurance for an individual company subject to the NFRD go from EUR 96 000 for companies not reporting against detailed standards to EUR 125 000 for companies reporting against detailed standards. 62 The cost of assurance, especially reasonable assurance, was a common point raised by many categories of respondents to the public consultation, being a major concern for preparers.

Other economic, environmental, social and fundamental rights impacts

-

-Resilience of companies. A reasonable assurance requirement would translate into more rigorous reporting processes within the company, as auditors would help companies identify any flaws in their internal controls, methodologies for data collection and reporting or in the identification of material risks and impacts.

-Single Market. A requirement for reasonable assurance, the highest level of assurance, would avoid obstacles to the Single Market resulting from different levels of assurance requirements in different Member States.

-Connectivity and consistency between financial and sustainability information. Auditors are already required to audit financial statements, to ensure their consistency with the management report and to check compliance of the management report with applicable legal requirements. A large number of respondents to the public consultation believe that auditors are best placed to provide assurance on non-financial information, while a smaller number stated that this should not necessarily be the case. This policy option allows to ensure the connectivity and consistency between financial and sustainability reporting, as the third party that verifies sustainability information would also have an understanding of the financial performance of the company.

-Risk of concentration of the audit market. This requirement would contribute to a certain extent to maintain the current situation of concentration in the audit market.

-Assurance of non-financial information would facilitate supervision of non-financial reporting by national competent authorities. 63

6.2.2 Analysis of impacts of Option 2: Require limited assurance

Effectiveness in meeting specific objectives

This option would contribute to achieving the specific objective regarding the reliability of reported non-financial information. Currently, the non-financial statement is explicitly exempt from the requirement to have an auditor’s opinion on the information in the management report. Therefore, making limited assurance of non-financial information mandatory would be a significant step to improve the reliability of reported information. It would also contribute, although to a lesser extent, to the specific objectives regarding the comparability and relevance of reported information. However, the effectiveness of this option in the case of all three of these specific objectives (reliability, relevance and comparability) is restricted by the nature of the assurance requirement, as limited assurance ensures the reliability of information to a lesser extent than does reasonable assurance.

52% of preparers favoured a limited assurance requirement (compared to 35% who preferred reasonable), but only 31% of users agreed with this approach.

Costs analysis

Costs for preparers. The total estimated annual incremental costs for companies in scope of the NFRD resulting from the requirement to perform a limited assurance engagement on non-financial reporting would be around EUR 80 million. 64 These incremental costs do not consider costs from companies already assuring non-financial information. This is the case for companies in Spain, Italy and France, where assurance is mandatory, and for companies that voluntarily verify non-financial reporting in other member states. This cost estimate also assumes companies currently doing limited or reasonable assurance would continue doing so.

The estimated average annual costs of performing limited assurance for an individual company subject to the NFRD go from EUR 56 000 for companies not reporting against detailed standards to EUR 75 000 for companies reporting against detailed standards. 65  

Other economic, environmental, social and fundamental rights impacts

To a lesser extent than the reasonable assurance option, this option could also have impacts regarding a) company resilience, b) reduction of risks to the Single Market, c) connectivity and consistency between financial and sustainability information, (d) risk of concentration of the audit market and e) facilitation of supervision.

6.2.3 Comparison of assurance options

The analysis of options is summarised in tables 5 and 6. The scores for effectiveness directly reflect the analysis carried out in previous sections 6.2.1-6.2.2, whereas efficiency looks at the costs associated with each option in relation to its effectiveness and other positive impacts.

In terms of effectiveness, option 1 contributes to a greater extent than option 2 to meeting the identified objectives. However, in a context where reporting practices are not very advanced and the assurance market of non-financial information is not mature enough, costs for preparers would probably outweigh the benefits of this option in the short term. Therefore, the most efficient option with regard to assurance in the short term would be option 2 (require limited assurance).

In the absence of a complete set of assurance standards, a significant number respondents to the open public consultation, both users and preparers, preferred a gradual approach starting with a requirement for limited assurance and then moving to a system with reasonable assurance in the longer term. 66 A review clause to analyse whether conditions have been met for a transition towards a requirement for reasonable assurance would accommodate these concerns while enabling the initiative to maximise its contribution to the objective of improving the availability of reliable information in the medium term. The review would need to assess conditions such as how advanced reporting and assurance practices are in the market, and, although not an absolute condition for requiring a reasonable assurance engagement, the availability or not of assurance standards in the market.

Therefore, given that option 1 would be the most coherent and efficient option in the medium term, a phase-in approach towards reasonable assurance is the preferred policy option. Requiring limited assurance and having a review clause to analyse whether conditions have been met for a transition towards a requirement for reasonable assurance allows for a phase-in approach with regard to costs for preparers, and for an assessment of the maturity of the industry in the medium term, significantly contributing to the specific objectives of the initiative.

In order to reduce the risk of concentration in the audit market, Member States could decide to allow other third party assurance services providers to provide the opinion on sustainability reporting.

Table 5 - Comparison of assurance options 67

Table 6 - Comparison of assurance options in terms of impacts on different stakeholders

6.3 Impacts considering different scope options

In this section we analyse the impacts of the expansion of the scope of the NFRD to additional categories of company, assuming the preferred options for standardisation (mandatory use of EU standards for companies under the scope of the NFRD) and assurance (limited assurance requirement with review clause to possible reasonable assurance requirement at a later date). 69 As explained at the start of section 6, we have adopted this approach because it is not possible to analyse the impacts of expanding the scope, in particular the costs, without knowing the main features of the reporting requirements that companies would have to meet.

Each scope option analysed in this section is therefore a package that includes the preferred options on standardisation and assurance. We could theoretically have analysed other possible packages that combine different scope options with non-preferred policy options on standardisation and assurance. In particular, in an effort to balance benefits and costs, we could have analysed packages that expand the scope but do not require the use of EU standards and/or do not require any assurance. We have discarded such packages because we concluded that the identified problems can only be effectively addressed if reporting companies are required to report against standards and to seek at least a minimal level of assurance. We concluded that it would not be realistic to require more companies to report without ensuring they report comparable and reliable information, and therefore we have not analysed packages that reflect such a scenario.

For the sake of clarity and to avoid repetition, this section does not include an analysis of the effectiveness and impacts of the preferred options for standardisation and assurance. Their contribution to the objectives of this initiative, and all their impacts (positive/negative), would apply to all additional companies brought into scope, and therefore would be overall greater the more the scope is broadened. The assessment of the costs for preparers of the different scope options takes into consideration the preferred options for standardisation and assurance.

All companies under the scope of the (revised) NFRD will be required according to the Taxonomy Regulation to calculate and disclose the extent to which their activities substantially contribute to one of the EU environmental objectives as defined by the taxonomy. The Services of the European Commission are preparing a staff working document that will contain proper cost estimates of the Delegated Act that will specify this disclosure requirement in more detail (to be adopted by mid-2021). Annex 3 includes a preliminary, illustrative estimation of the magnitude of these costs for preparers.

Table 7. Overview of packages

6.3.1 Analysis of impacts of Package 0

This package would require all companies currently under the scope of the NFRD to report against EU standards and to seek limited assurance. 70 It would have a major impact on improving the relevance, comparability and reliability of reported information, consistent with the analysis in sections 6.1 and 6.2, but only for companies currently under the scope of the NFRD. It would not help to address the problem that some companies from whom users want non-financial information do not report such information.

Compared to the baseline scenario, the estimated annual incremental recurring costs of this package for companies would be approximately EUR 400 million. 71 This results from considering the annual incremental costs of reporting according to EU standards (approx. EUR 210 millions) and requiring limited assurance (approx. EUR 190 millions). 72 Additionally, companies would incur approximately EUR 30 million incremental one-off costs.

6.3.2 Analysis of impacts of Package 1

Effectiveness in meeting specific objectives

This package contributes to meeting users’ needs for information from all other large PIEs in addition to the ones already in scope. These additional companies are listed companies, banks and insurance companies with under 500 employees that qualify as ‘large’ according to the criteria of the Accounting Directive. 73  

There are 1 150 such companies, of which only about 20% currently report non-financial information on a voluntary basis.

The co-legislators decided to treat these PIEs differently from other larger PIEs when they agreed the NFRD in 2014, principally in order to mitigate the overall cost implications. However, in view of the growth of users’ needs for non-financial information since 2014, the inclusion of these companies under scope would now make a significant contribution to the effectiveness of the initiative. A large majority of users responding to the public consultation (70%) were in favour of including all large PIEs under scope.

These companies are already defined in EU law as public interest entities, and there is by definition a public interest in ensuring that they disclose non-financial information. The additional listed companies that would come under scope account for 13% of all EU listed companies. This package is therefore important in terms of meeting the information needs of financial market participants: it enables them to better understand the risks and opportunities of potential investments, and to meet their own disclosure requirements under the SFDR.

Costs for preparers

This package would add EUR 100 million in annual incremental recurring costs compared to package 0. It would also add EUR 20 million incremental one-off costs compared to the previous package.

6.3.3 Analysis of impacts of Package 2

Effectiveness in meeting specific objectives

This package includes a broader range of companies under the scope of the NFRD compared to the extension in scope described in package 1, and therefore contributes to meeting users’ needs for information to a greater extent. Specifically, this package would add the following categories of companies:

-Large non-listed EU companies (including large EU companies with securities only listed outside EU regulated markets). The expansion of scope to large-non listed companies is driven mainly by concern for the impacts and accountability of such companies, including through their supply chains. Civil society organisations are strong supporters of bringing large non-listed companies under the scope of the NFRD. Whether or not a company has listed securities is not a determinant of its social and environmental impacts. All large companies should in this respect be subject the same requirements to report publicly about their impacts.

-Large non-EU companies with securities listed in EU regulated markets. The expansion of scope to large companies not established in the EU but listed in EU regulated markets is driven by two main concerns. Firstly, financial market participants need information from such companies to understand the risks and impacts of their investments, and to meet their own disclosure requirements under the SFDR. Secondly, it would create a more level playing field between EU and non-EU listed companies, in terms of administrative burden and accountability for social and environmental impacts.

In response to the public consultation, the overwhelming majority of users supported the expansion of scope to both these categories of company.

This package would add an additional 35 300 companies to the scope compared to the previous package. 74 Of these companies, about 24% currently report non-financial information on a voluntary basis, and only about 14% report against recognised standards.

The additional companies added under this package represent 27% of the total turnover of all EU limited liability companies. This package therefore significantly increases the proportion of private economic activity that would be subject to non-financial reporting requirements, so making a major contribution to improving the accountability of companies for their impacts.

Costs for preparers

This policy option would add EUR 2,9 billion in annual incremental costs compared to package 1. It would also add EUR 600 million incremental one-off costs compared to the previous package.

6.3.4 Analysis of impacts of Package 3

Effectiveness in meeting specific objectives

According to this package the scope of the NFRD would be further broadened to include SMEs listed in EU regulated markets in addition to the categories of companies defined in Package 2.

Information from listed companies is especially important in terms of meeting investors’ needs, especially given the new requirements on financial market participants coming from the SFDR. There is a risk that if SMEs do not report the information needed by investors subject to SF legislation, they will be excluded from investments regulated by these SF legislation. This package therefore enables SMEs participation in the transition to a sustainable economy in the context of other EU Sustainable Finance legislation (SF legislation).

Investors in principle need equal information from all listed companies. 75 Therefore, listed SMEs would be required to report against the full set of EU standards and to perform limited assurance of their reports, ensuring consistency between financial and non-financial reporting requirements and bringing greater coherence to the corporate reporting legal framework.

Listed SMEs comprise 26% of all listed companies in the EU. Their inclusion under the scope would therefore be highly effective in terms of meeting investors’ needs. This package would ensure that companies that represent almost 100% of the total EU market capitalisation, report relevant, comparable and reliable non-financial information. A significant majority of users responding to the public consultation (74%) favoured extending the scope to listed SMEs. SMEs themselves were divided as to whether they should be brought into the scope or not.

This package would add an additional 1 050 companies to the scope compared to the previous option. Of these companies, only 5% are estimated to be already reporting non-financial information.

Costs for preparers

This package would add EUR 40 million in annual incremental costs compared to package 2. It would also add EUR 10 million incremental one-off costs compared to the previous package.

There could be a risk that these costs would discourage SMEs from listing, which would be contrary to the objectives of the Capital Markets Union. However, the costs of non-financial reporting are very low compared to the overall costs of listing for SMEs. A requirement to report non-financial information is therefore not likely to make the difference between an SME deciding to list or not. 76 Additionally, issuers more concerned about costs of listing than about broadening their investor base, would remain free to choose to list on Multilateral Trading Facilities (MTFs) or SME growth markets.

Moreover, the costs for listed SMEs of not disclosing non-financial information will be high in terms of probable exclusion from investment portfolios. This is especially true once the SFDR comes into force, since financial market participants may simply chose not to invest in companies from whom they cannot easily obtain the non-financial information that they need for their own reporting purposes. Even not considering the impacts of the SFDR, the use of non-financial information in investment decisions is becoming mainstream to an extent that companies not disclosing such information will face increasing challenges in accessing financial markets. If listed SMEs do not report similar information to other listed companies, then the benefits to them of listing will be much reduced.

Information from listed companies is especially important in terms of meeting investors’ needs, especially given the new requirements on financial market participants coming from the SFDR.

Positive impacts such as SME participation in the transition to a sustainable economy in the context of other EU Sustainable Finance legislation (SF legislation) feature as well in the assessment of the effectiveness of the options. There is a risk that if SMEs do not report the information needed by investors subject to SF legislation, they will be excluded from investments regulated by these SF legislation. There is therefore a strong link between the inclusion of listed SMEs under the scope of the NFRD and the first question on coherence

6.3.5 Analysis of impacts of Package 4

Effectiveness in meeting specific objectives

Under this package the non-financial disclosure requirements would be further extended to non-listed EU medium-sized companies. A majority of users who replied to the open public consultation supported the mandatory use of simplified standards by SMEs. Given the challenges that medium sized enterprises would face to report against a complete set of standards, this option would require reporting against the simplified SME standards described in section 6.1.1. A minority of the SMEs that replied to the open public consultation and the SME Panel survey, favoured a requirement on SMEs to report against simplified standards.

This package would add an additional 160 200 companies to the scope compared to the previous option. These additional companies represent 9% of the total turnover of all limited liability companies. This package would therefore represent a further significant increase in the proportion of private economic activity that would be subject to non-financial reporting requirements, contributing to improving the accountability of companies for their impacts.

User demand for non-financial information is currently lower for non-listed medium-sized companies than it is for listed companies and for large companies. Individually, medium-sized enterprises tend to have less significant impacts on society and the environment than larger companies.

Costs for preparers

This policy option would add EUR 3,6 billion in annual incremental costs compared to the previous option. It would also add EUR 830 million incremental one-off costs compared to the previous package.

Table 8 - Overview table of companies covered in different packages

6.3.6 Comparison of Packages

Each package contributes to a greater extent than the previous one to meeting the initiative’s objectives: the more companies that are included under the scope of the NFRD, the greater the number of companies that are guaranteed to report relevant, comparable and reliable information. Therefore, package 4 is the most effective of the policy options.

The overall costs incurred by preparers also increase the more the scope is broadened. Package 0 presents the lowest costs for preparers, and package 4 the highest costs. Conversely, the costs for users in terms of accessing the information that they need are highest in package 0 and lowest in package 4.

To find an appropriate trade-off between effectiveness and costs (i.e. to find the most efficient package) it is necessary to consider from which categories of company users are most in need of relevant, comparable and reliable information. The results of the public consultation and the SME panel clearly show that the priority for users is to receive information from large companies and from listed companies, and that user demand for information reduces with the size of the company.

Packages 0, 1 and 2 do not expand the scope to all large and listed companies, which significantly reduces their effectiveness in addressing the identified problems. In terms of the number and importance of companies brought under scope, the additional effectiveness of package 1 is only marginal compared to package 0. Package 2 is significantly more effective because it ensures that all large companies are under scope, but it does not include all listed companies. Package 3 expands the scope to all large and all listed companies, thereby ensuring that the most important categories of company from a user perspective report relevant, reliable and comparable information. In particular, information from listed companies is especially important in terms of meeting investors’ needs, especially given the new requirements on financial market participants coming from the SFDR. Package 4 is more effective still, although user demand from non-listed medium-sized companies is lower than it is for large and listed companies.

This analysis suggests that the principal choice from the point of view of efficiency is between package 3 and package 4. The total costs for preparers of package 4 are more than two times higher than for package 3. Although package 4 is more effective than package 3 in meeting users’ needs, the increase is effectiveness is not proportionate to the increase in costs, mainly because users do not prioritise information from non-listed medium sized companies. We therefore conclude that package 3 represents the best trade-off between effectiveness and costs, and is the most efficient package.

All packages are coherent with different EU initiatives. The availability of a voluntary simplified standard for SMEs out of the scope of the NFRD is a proportionate measure coherent with the SME Strategy that would give SMEs the opportunity to report in a standardised manner, mitigating any knock on effects as a result of this invite, and to participate in the transition to a sustainable economy. The different packages contribute also to ensuring consistency of the overall assurance framework of annual corporate reporting and to ensuring consistency with other sustainable finance legislation by considering the disclosure requirements of these laws in the standards setting process. However, package 3 stands out as being the most coherent, as it does not impose disproportionate burden on SMEs, coherent with the SME Strategy, 77 while still ensuring that information from a great number of investee companies is available for investors subject to other SF legislation. It enables the participation of SMEs in in the transition to a sustainable economy in the context of other EU Sustainable Finance legislation and it ensures consistency between financial and non-financial reporting requirements, translating into greater coherence of the corporate reporting legal framework. 78 The analysis of all packages is summarised in tables 9 and 10.

Table 9 - Comparison of packages 79

Table 10 - Comparison of packages in terms of impacts on different stakeholders

7.Preferred option

The preceding section (section 6.3.6) compares the five packages considered in this impact assessment. It explains why package 3 represents the best overall trade-off between effectiveness and costs, and is the most efficient package in the medium term. Package 3 is therefore the preferred policy option regarding the three principal variables and it comprises the following options:

-Standardisation: all companies under the scope of the NFRD would be required to report against EU standards. For the standardisation variable the principal trade-off is between the high effectiveness and the high costs for preparers under the mandatory standards option, and the low effectiveness and low initial costs for preparers under the voluntary standards option. The mandatory standards option is the most efficient option because it is the only option that would adequately contribute to the objectives of the initiative (effectiveness) and because the dynamic baseline suggests that preparers would face significant costs increases even under the voluntary standards option.

-Assurance: all companies under scope of the NFRD would be obliged to seek limited assurance for reported non-financial information, while the NFRD would include a review clause to explore the need to move to reasonable assurance in the medium term. For the assurance variable the principal trade-off is between higher effectiveness and higher costs for preparers under the reasonable assurance option, and lower effectiveness and lower costs under the limited assurance option. The limited assurance option, with a review clause for a possible move to reasonable assurance in the future, is the most efficient option because it is nevertheless significantly more effective than the baseline in terms of ensuring that reported information is reliable, and because it avoids for the time being the higher costs for preparers of reasonable assurance. This is especially important in the context of the economic crisis created by the Covid-19 pandemic. In addition, there are concerns about whether reporting and assurance practices would be sufficiently mature to meet the demand for reasonable assurance in the short term.

-Scope: all large EU limited liability companies, and all companies with securities listed on EU regulated markets, would be brought under the scope of the NFRD (approximately additional 37 500 companies). For the scope variable, the principal trade-off is between a wide scope that brings higher effectiveness but also higher costs for companies, and a narrower scope that is less effective but also brings lower costs. As described in section 6.3.6 the most efficient option is the extension of the scope to all large companies and to SMEs listed on EU regulated markets, but not to all medium-sized companies. 83  

Trade-offs and preferred options for the three main variables

The preferred option is proportionate and does not go beyond what is necessary to achieve the objectives. In particular, it would only impose new reporting obligations on the companies from whom users most need information, and imposes no new obligations on the great majority of SMEs. At the same time, a simplified voluntary reporting standard for SMEs will better enable SMEs to participate in and contribute to the transition to a sustainable economy. In addition, there is a gradual approach to the introduction of assurance requirements, beginning with a limited assurance requirement and a provision for moving to reasonable assurance at a later date.

The preferred option is adapted to the new circumstances created by the Covid-19 pandemic. It meets the information needs of users, which are expected to intensify further as a result of the pandemic, while also paying very close attention to costs for preparers in the context of the current economic crisis. Companies subject to any new reporting requirements under the revised NFRD would not have to dedicate resources to meeting those requirements until 2022 at the earliest.

With the regard to the other variables, presented and analysed in annex 16, the preferred option would also include:

-Digitalisation: companies in scope of the NFRD would be required to tag their reports to allow for machine readability of non-financial information.

-Sanctioning regime and enforcement: for listed companies, the remit of the powers of supervisory authorities with regard to non-financial reporting would be clarified in law. Equivalent sanctions between listed and non-listed companies would also be specified.

-Intangibles: in addition to the non-financial matters identified in the NFRD, reporting on intangibles would be required.

-Where to report: all required non-financial information should be disclosed in the company’s management report.

-Materiality: the legal requirements would specify in more detail when companies should consider non-financial information material (double materiality).

-Exemption for certain subsidiary companies: Subsidiaries exempted from the reporting obligations according to the NFRD would be required to publish the consolidated management report of their parent company containing sustainability information, and to refer to it in their individual management report. EU standards would ensure that information about subsidiaries is included in consolidated reporting appropriately to meet users’ needs.

The preferred option adequately meets the objectives identified in section 4.2, both for users and for preparers of non-financial information. It will improve EU non-financial reporting at the least possible cost and meet the general objective of better exploiting the potential of the European Single Market to contribute to the transition towards a fully sustainable and inclusive economic and financial system in accordance with the European Green Deal and UN Sustainable Development Goals. The preferred option will: reduce systemic risks to the economy created by investments that take insufficient account of non-financial risks; enable higher financial flows to companies and economic activities that address and do not exacerbate social and environmental challenges; and strengthen the social contract between companies and citizens by making companies more accountable for their impacts on society and the environment. For preparers, it will minimise unnecessary costs associated with non-financial reporting. It will ensure a high degree of coherence between sustainable finance reporting requirements by aligning the requirements of the NFRD with those of the SFDR and the Taxonomy Regulation.

These preferred changes would require the proposal of a Directive amending the Accounting Directive (as amended by the NFRD), the Transparency Directive, 84 and the Audit Directive to address the specific changes proposed for the variables of standardisation, assurance and scope. Specifically, greater coherence between all reporting requirements in the Accounting Directive would be ensured. Additionally, based on an empowerment granted to the Commission in the Accounting Directive, the Commission would adopt EU non-financial reporting standards by means of delegated regulations. This would permit the direct applicability of the standards, i.e. no need to wait for transposition of the level 1 by Member States in order to adopt the delegated act, and no delay of the date of entry into application. Possibly, this policy option would also require amendments to the Delegated Regulation 2019/815 supplementing the Transparency Directive with regard to regulatory technical standards on the specification of a single electronic format (ESEF Regulation) for the adoption of the accompanying IT taxonomy that would allow the digital tagging of reports.

7.1 REFIT (simplification and improved efficiency)

Simplification to the existing legislation will be achieved in the sense that EU law will impose clearer reporting requirements, according to the preferred policy option. This will allow for better and more efficient reporting by companies, ensuring that the objective of the law of making adequate information publicly available for users is met. Although costs for reporting companies will increase as a consequence of the detailed requirements, it is important to emphasise that these costs will increase very substantially even if the EU takes no action. Most companies can expect to receive a significant increase in demands for non-financial information in the coming years. The preferred policy option should provide an orderly and efficient solution, based on building consensus around the essential information that companies should disclose, as opposed to an uncoordinated and costly increase in demand for non-financial information, with investors and other stakeholders asking for different information in different formats across different Member States.

In addition, the proposed revision of the NFRD would reduce costs for users of non-financial information. Improvements in the relevance, comparability, reliability and accessibility of the reported information should enable users to exploit non-financial information more efficiently and in more powerful ways. The proposed revision of the NFRD will also lower compliance costs for entities subject to the reporting requirements of the SFDR and the Taxonomy Regulation as well as future Ecolabel for financial products. Without improvements in reporting from investee companies, client companies and supplier companies, entities subject to the SFDR and the Taxonomy Regulation will incur significantly higher costs to find and aggregate the information they need to meet their own legal requirements.

Although costs will overall increase as a result of this initiative, the following table highlights elements of the preferred package which improve its efficiency and/or reduce associated costs.

8.How will actual impacts be monitored and evaluated?

To monitor progress towards meeting the specific objectives, the Commission services will explore the possibility of organising periodic surveys of users and preparers. The surveys would gather data on (1) users’ perceptions of the evolution of non-financial reporting, in particular with respect to the specific objectives identified in section 4 and whether those objectives are being met, and (2) the costs and benefits of non-financial reporting from a preparer perspective. Such surveys will be dependent on the availability of financial resources.

Progress towards meeting the specific objectives can also be monitored through analyses of:

-the ratings of company transparency on non-financial issues carried out by certain rating agencies and data providers, in particular whether such ratings show a positive trend over time;

-the extent to which ESG scores that in principle measure the same things vary between different rating agencies and data providers, and in particular whether they start diverging less. Lower levels of divergence might be indicative of more comparable underlying data being reported by companies. 89  

Monitoring progress towards meeting the general objectives is by definition considerably more complex, since it is methodologically difficult to distinguish the impacts of the proposed revision of the NFRD from other possible causes. Nevertheless, the Commission services propose to monitor progress regarding the general objectives by:

-Monitoring trends in investments in companies that carry out sustainable economic activities; 90  

-Engaging with banking supervisors and other relevant stakeholders to assess whether systemic risks to the financial system are being reduced as a result of investors taking better account of sustainability risks.

It may also be possible to use the proposed surveys of users and preparers to gather evidence about whether stakeholders perceive that companies are more accountable for their social and environmental impacts.

In addition, different stakeholders, including civil society organisations, rating agencies, business organisations and public authorities are likely to publish reports that monitor developments in corporate non-financial reporting and that will be a useful complement to monitoring carried out by the Commission services.

Annex 1: Procedural information

1.Lead DG, Decide Planning/CWP references

This Impact Assessment Report was prepared by Directorate C " Financial Markets " of the Directorate General "Directorate-General for Financial Stability, Financial Services and Capital Markets Union" (DG FISMA).

The Decide Planning reference of the "Initiative on the review of the Non-Financial Reporting Directive" is PLAN/2019/6123.

This initiative is part of the Commission’s 2020 Work Programme 91 and is one of the actions proposed by the European Commission to implement the European Green Deal. 92

2.Organisation and timing

Several services of the Commission with an interest in the initiative have been involved in the development of this analysis.

Three Inter-Service Steering Group (ISSG) meetings, consisting of representatives from various Directorates-General of the Commission, were held in 2020.

The first meeting took place on 21 January 2020, attended by DG ENV, CLIMA, JUST, GROW, ECFIN, EMPL, TRADE, ENER, SJ and the Secretariat General (SG).

The second meeting was held on 23 April 2020. Representatives from DG ENV, CLIMA, JUST, GROW, ECFIN, EMPL, DEVCO, TRADE, ENER, AGRI, SJ, JRC and the Secretariat General (SG) were present.

The third meeting was held on 23 July 2020 and was attended by DG ENV, CLIMA, JUST, GROW, ECFIN, EMPL, DEVCO, TRADE, ENER, AGRI, SJ, JRC, EEAS and the Secretariat General (SG). This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board on 9 September 2020.

The meetings were chaired by SG.

DG FISMA has considered the comments made by DGs in the final version of the IA. In particular, it has simplified the structure of the policy options, reduced the length of the report and clarified the links with other EU legislation and initiatives. The analysis of impacts and the preferred option takes account of the views and input of different DGs.

3.Consultation of the RSB

The Impact Assessment report was examined by the Regulatory Scrutiny Board on 7 October, 2020. The Board gave a positive opinion with reservations, following which the Commission addressed the Board’s comments in the final version of the Impact Assessment.

4.Evidence, sources and quality

The impact assessment draws on an extensive amount of desk research, external studies, studies carried out on behalf of the Commission, interviews, experts’ workshops, meetings with stakeholders, open public consultations, staff working documents, opinions and advice by the supervising authorities, academic research papers and other. The material used has been gathered since the Commission Services started monitoring the implementation of the NFRD in 2018. This material includes but is not limited to the following:

-External studies or reports: “Undue short-term pressure on corporations”, European Securities and Markets Authority (ESMA), December 2019 ; “2019 Research Report: An analysis of the sustainability reports of 1000 companies pursuant to the EU Non-Financial Reporting Directive”, Alliance for Corporate Transparency, 2020 ; “In Balance 2019 - Survey of value creation and follow-up to the Non-Financial Information (Disclosure) Decree”, Dutch Authority for the Financial Markets (AFM), December 2019 ; “Compliance by Belgian listed companies with the requirement to publish a non-financial statement”, Belgian Financial Services and Markets Authority, March 2019 ; “Integration of Sustainability into Corporate Governance: A survey of financial firms’ public sustainability information”, Finansinspektionen (Swedish Financial Supervisor), November 2018 ; Ensuring the relevance and reliability of non-financial corporate information: an ambition and a competitive advantage for a sustainable Europe, Patrick de Cambourg, May 2019 .

-A workshop on the application of the materiality principle under the Non-Financial Reporting Directive was held on 11 November 2019 with the participation of 13 representatives of preparers, investor, auditors, supervisor and academics.

-A workshop on assurance of sustainability information was held on December 2019 with the participation of 15 representatives of preparers, auditors and accountants, national governments and policy makers, assurance standard setters and oversight bodies.

-A virtual exchange with preparers of non-financial information (companies and business organisations from different sectors) to discuss the issues of costs of non-financial reporting for preparers. The meeting was held on11 May 2020.

-A virtual meeting to discuss the revision of the Non-Financial Reporting Directive with civil society organisations took place on 12 May 2020. More than 20 organisations including standard-setters, human rights and justice, disability people, environment and corporate transparency organisations have the opportunity to express their views.

-A virtual meeting with 8 representatives of trade unions to discuss the revision of the NFRD and to hear their views and concerns. The meeting was held on 15 May 2020.

-A targeted survey to SMEs, managed by the European Enterprise Network (EEN), which was open to receive responses from 3rd March 2020 through 27th May 2020. The SME Panel Consultation comprised thirteen questions that aimed to provide a good understanding of the current views and experiences of SMEs around non-financial information processes and requirements. The survey provide 348 responses of micro companies (58% of total), small companies (27%), and medium companies (15%) across the EU and the United Kingdom.

-Two (virtual) meetings with Member State representatives in the Accounting Regulatory Committee, to gather the views of regulators at national level on the revision of the NFRD.

-A meeting with SMEs representatives in the context of the COSME Programme.

-An Open online public consultation . The consultation document was published on 20 February 2020; due to the corona virus pandemic, the deadline for responses was extended by one month, to 11 June 2020. A total 588 organisations and persons responded to the consultation. Individual companies were the biggest single group of respondents (32%), followed by business associations (20%) and non-governmental organisations (14%). The remainder represented citizens (8%), public authorities (7%), academic and research institutions (6%) and trade unions (3%). The consultation consisted of 45 questions divided into 8 thematic sections including quality and scope on non-financial information, standardisation, application of the principle of materiality, assurance, digitalisation, structure and location of non-financial information, personal scope and simplification of administrative burdens. A Feedback Statement providing an overview of the contributions to this public consultation was published on the Commission’s website. We do not have identified any campaigns or similar action with major impact on statistical results on the open public consultation.

-A study commissioned by DG FISMA on the implementation of the NFRD (consortium led by Economisti Associati), presents data from companies regarding current reporting practices under the NFRD, including the costs of such reporting and associated assurance of reports, and the impacts of the new requirements on company behaviour.

-A study commissioned by DG FISMA on sustainability ratings and research (consortium led by SustainAbility Institute, ERM) provides information about the trends and business models in the market for sustainability rating agencies and data providers, including information about the extent to which public disclosures are a source of data in the market of sustainability rating agencies and data providers and about the process of compilation and assessment of non-financial information by third party data and ESG rating providers. 93

-An open online public consultation on corporate reporting. Previous consultation activity carried out by the European Commission in 2018. DG FISMA organised an open online public consultation on corporate reporting whose results enabled the Commission to gather data and views on the problems that need to be addressed with regard to non-financial reporting.

-A targeted online consultation on climate-related reporting, organised before the issuance in June 2019 of new guidelines for companies on how to report climate-related information. The results of this survey are an important complement to the sources of information for this initiative.

-Target survey on due diligence requirements through the supply-chain organised in 2019 by consultants contracted by DG JUST.

The material used to inform this impact assessment comes from reputable and well-recognised sources that act as benchmarks and reference points for the topic. Findings were cross-checked with results in different publications in order to avoid biases caused by outliers in the data or vested interests by authors. 

Annex 2: Stakeholder Consultation

I.Introduction

As highlighted in the Consultation strategy , the objective of the consultation activities is to gather data and stakeholder views for the review of the Non-Financial Reporting Directive.

Specifically, the consultation aims to:

-Firstly, gather the views of preparers, users, and other important stakeholders on different policy options, including the scope for cost reduction and simplification measures.

-Secondly, gather data that can be used to better assess the costs and benefits of different policy options.

-Thirdly, gather additional knowledge about certain specific issues, such as: the application of the materiality principle in non-financial reporting; the assurance of non-financial information; the particular situation of SMEs; and the digitalisation of non-financial information.

This consultation strategy built on previous consultation activities carried out by the European Commission. In 2018 DG FISMA organised an open online public consultation on corporate reporting whose results enabled the Commission to gather data and views on the problems that need to be addressed with regard to non-financial reporting.

Moreover, the results of two others surveys are an important complement to the current consultation strategy. On the one hand, a targeted online consultation on climate-related reporting organised before the issuance in June 2019 of new guidelines for companies on how to report climate-related information. On the other hand, a target survey on due diligence requirements through the supply-chain organised in 2019 by consultants contracted by DG JUST.

Finally, DG FISMA published an open online public consultation on a Renewed Sustainable Finance Strategy on 8 April with a deadline for stakeholder responses by 15 July. Their results are being analysed and will be also considered.

II.Stakeholder groups covered by the consultation activities

According with the consultation strategy , the primary stakeholders concerned by the Non-Financial Reporting Directive can be divided as follows:

·The preparers of non-financial information, i.e. the companies that already publish non-financial information or that may do so in the future. SMEs are also relevant stakeholders independently of whether they are subject to non-financial disclosure requirements at EU level. This is because companies that fall under the scope of the NFRD may request additional non-financial information from their suppliers and clients, including SMEs.

·The direct users of non-financial information published by companies comprise two major groups: i) financial sector institutions and investors, who require such information to assess the related financial risks and opportunities, and ii) civil society organisations and trade unions, who require such information to monitor the social and environmental performance of companies and hold them accountable for their impacts. Few individual citizens and consumers directly consult company non-financial statements, but more use such information indirectly, for example when considering the advice or opinions of financial advisers or non-governmental organisations.

Most financial sector companies such as banks and insurance companies are likely to be both preparers and users of non-financial information.

Other important stakeholder groups concerned by the Non-Financial Reporting Directive are national regulators and supervisory authorities, assurance providers, sustainability rating agencies and research and data providers, reporting frameworks and standard-setters, academics, and researchers, and policy makers.

All relevant stakeholders, particularly key stakeholders — preparers and users of non-financial information — provided relevant input for the revision of the Directive, particularly on proposals for improving existing rules.

III.Consultation activities and other information sources

The services of the European Commission have used a wide range of methodologies to build this consultation strategy, including open public consultation, surveys, workshops, meetings and interviews. In particular, DG FISMA employed the following activities:

·The Inception Impact Assessment for the revision of the Non-Financial Reporting Directive was published on 30 January with a deadline for stakeholder comments by 27 February. The Commission received 78 responses to the inception impact assessment. The biggest number of responses came from non-financial sector companies and business associations, representing about 43% of responses. Financial sector companies and associations (including insurance) represented about 16% of responses, and non-governmental organisations and trade unions 14%.

· Open online public consultation : The consultation document was published on 20 February 2020; due to the corona virus pandemic, the deadline for responses was extended by one month, to 11 June 2020. A total 588 organisations and persons responded to the consultation. Individual companies were the biggest single group of respondents (32%), followed by business associations (20%) and non-governmental organisations (14%). The remainder represented citizens (8%), public authorities (7%), academic and research institutions (6%) and trade unions (3%). The consultation consisted of 45 questions divided into 8 thematic sections including quality and scope on non-financial information, standardisation, application of the principle of materiality, assurance, digitalisation, structure and location of non-financial information, personal scope and simplification of administrative burdens. A Feedback Statement providing an overview of the contributions to this public consultation was published on the Commission’s website. We do not have identified any campaigns or similar action with major impact on statistical results on the open public consultation.

·Consultants contracted by the Commission (CEPS) conducted a targeted survey addressed to all companies currently under the scope of the Non-Financial Reporting Directive. The survey collected data from companies regarding current reporting practices under the NFRD, including the costs of such reporting and associated assurance of reports, and the impacts of the new requirements on company behaviour. Follow-up interviews with different stakeholder groups were carried out to confirm the conclusions obtained.

·Consultants contracted by the Commission (consortium led by SustainAbility) conducted an online survey and interviews with the 219 respondents from 14 Member States regarding ESG ratings. The main stakeholder groups included asset managers and asset owners, benchmark administrators, ESG rating agencies and data providers and companies. Users of ESG data were asked about sources and quality of corporate non-financial information. Companies were asked about their opinions regarding the process of compilation and assessment of non-financial information by third party data and ESG rating providers.

·The European Commission deployed a targeted survey to SMEs, managed by the European Enterprise Network (EEN), which was open to receive responses from 3rd March 2020 through 27th May 2020. The SME Panel Consultation comprised thirteen questions that aimed to provide a good understanding of the current views and experiences of SMEs around non-financial information processes and requirements. The survey provide 348 responses of micro companies (58% of total), small companies (27%), and medium companies (15%) across the EU and the United Kingdom.

·The services of the Commission organised stakeholder workshops and meetings to gather views, knowledge and data on specific issues, and to gather the views of different stakeholder groups in more detail. These activities have provided an opportunity to go into greater depth on particular points and to exchange and compare viewpoints in a dynamic setting.

1)A workshop on the application of the materiality principle under the Non-Financial Reporting Directive was held on 11 November 2019 with the participation of 13 representatives of preparers, investor, auditors, supervisor and academics.

2)A workshop on assurance of sustainability information was held on December 2019 with the participation of 15 representatives of preparers, auditors and accountants, national governments and policy makers, assurance standard setters and oversight bodies.

3)A virtual exchange with preparers of non-financial information (companies and business organisations from different sectors) to discuss the issues of costs of non-financial reporting for preparers. The meeting was held on 11 May 2020.

4)A virtual meeting to discuss the revision of the Non-Financial Reporting Directive with civil society organisations took place on 12 May 2020. More than 20 organisations including standard-setters, human rights and justice, disability people, environment and corporate transparency organisations have the opportunity to express their views.

5)A virtual meeting with 8 representatives of trade unions to discuss the revision of the NFRD and to hear their views and concerns. The meeting was held on 15 May 2020.

Two virtual meetings took place on 24 April and 23 June 2020 with Member State representatives in the Accounting Regulatory Committee and the Audit Regulatory Committee, to gather the views of regulators at national level on the revision of the NFRD.

A virtual meeting with the Member States Expert Group on Sustainable Finance was held on 13 May 2020 to gather views and concerns of their members on the revision of the NFRD.

A meeting with SMEs representatives was held in the context of the COSME Programme on 5 February 2020.

IV.Impact of the Covid-19 pandemic on stakeholder consultation

The Covid-19 pandemic probably reduced the number of stakeholders directly responding to online surveys. The number of respondents to the online public consultation (just under 600) was somewhat lower than predicted. At the request of a number of stakeholders, the services of the Commission extended the consultation period from 3 months to 4 months, in an attempt to compensate for the effects of the pandemic.

The number of SMEs responding to the SME Panel survey (348) was significantly lower than predicted. In some Member States, the members of the European Enterprise Network decided not to promote the survey to SMEs because of the pandemic. The duration of the survey was extended by one month to enable more SMEs to respond.

Other consultations activities were not significantly impacted by the pandemic. In the case of the meetings with preparers, with civil society organisations, with trade unions and with Member States, the virtual format of the meetings may have enabled more people to participate.

V.The results of stakeholder consultations

The first section of this chapter analyses the results by stakeholder group and highlights their views on the potential changes to the NFRD, especially scope, assurance, and the obligation to use a standard. The second section is structured according to some of the key issues that emerged from the consultations.

Section 1: Analysis of results per stakeholder group

A.Preparers of non-financial information

Standards. Many preparers consider that development of common non-financial reporting standards would help them to know exactly what they should report and to better meet users’ expectations, reducing any inefficient investment in time or resources in trying to understand how best to comply with the EU law.

However, some preparers consider that as companies report different information to a wide range of different stakeholders, it is unrealistic to expect that one standard can meet all stakeholder demands. Some companies and business associations have pointed out that they should have flexibility to report on the sustainability information considered material/relevant, taking into account their specificities. This is emphasised more in some Member States, such as Germany, than others.

Reporting companies also complain about the burden of having to respond to additional information requests from sustainability rating agencies and data providers, even if they publish a non-financial statement in compliance with the NFRD. In this respect, some preparers pointed out that standards would increase the information publicly available in the market and they would reduce these additional information requests.

Consultant activities such as open public consultation and CEPS study shows that the majority of reporting companies use multiple standards and frameworks at least to a certain extent incurring higher costs the more standards and frameworks they follow. Most preparers stressed that the design of any possible common European non-financial reporting standards should build on existing standards and frameworks, such as the GRI, SASB and the TCFD.

Multinational companies stated that different reporting formats, content requirements and deadlines imposed by individual Member States create an additional burden. They stressed the need to promote the establishment of international (global) non-financial disclosure standards. If this would not be possible, they think that the EU should cooperate with other major jurisdictions and non-EU investors to make sure that possible EU standards are widely recognised.

Assurance. Many preparers agreed that assurance is needed to improve the reliability of non-financial information. However, many preparers also consider that companies should be left to choose whether or not they will assure their reported non-financial information.

Most preparers raised concerns over the cost of assurance. According to them, the costs of assurance should be representative and reflect the substance of what is being assured in the reports.

On the other hand, there is currently a lack of expertise and experience in the assurance of non-financial information. Some preparers consider that the immaturity of the assurance market for non-financial information could increase their costs. For this reason, most preparers generally prefer a limited level of assurance.

Some preparers stressed the need of consistent assurance requirements for non-financial information across the Member States and across companies. This would allow a level playing field within the EU.

Scope. Many preparers raised concerns about administrative costs of reporting non-financial information. Regarding the scope of the NFRD, they consider that the guiding principle to add additional categories of company should be to focus on those companies from whom users most need non-financial information. 

According to business associations and companies, the very challenging economic situation caused by the pandemic COVID-19 means it would be even more necessary to ensure the proportionality of reporting requirements and avoid excessive administrative burden, especially in the case of SMEs.

Preparers from financial sector need to have access to the data from their counterparties to manage ESG risks and to understand the impact of their lending and investment decision on ESG aspects. In this respect, they argue that SMEs should be considered in a proportionate way and the NFRD should define clear proportionality criteria to delimit to which SMEs the reporting obligations apply.

Concerning listed SMEs, some argued that they should not be subject to the obligatory reporting at all, as it may discourage SMEs from listing and push listed ones from the regulated markets due to additional burden and costs. Others argued that all listed SMEs or at least listed SMEs from the high-risk sectors should be required to report non-financial information.

The SME panel consultation provided a good understanding of the current views and experiences of SMEs around non-financial information processes and requirements. Regarding the possible development of a non-financial reporting standard for SMEs, most SMEs or organisations that represent SMEs believe that having a simplified standard or reporting format would help, while most of them think that such standards should be voluntary.

Some preparers stressed the need to ensure sufficient time for collection and analyses of data from the supply chain companies as well as subsidiaries, and argued for a difference between the deadline for financial and non-financial reports.

B.Users of non-financial information

Standards. The majority of users believe that a common reporting standard would be useful to address the challenges regarding comparability, reliability and relevance of information.

They also stated that the revision of the NFRD must consider sector specific standards and strategic KPIs. Most users responding to the open public consultation agreed that the non-financial reporting standard should include sector-specific elements. They also proposed that companies should set targets and forward based objectives on specific strategies (e.g. EU Green Deal, Sustainable Development Goals) for users to see an evolution against such objectives and help improve the comparability process.

Some civil society representatives commented that because companies have a lot of flexibility when reporting non-financial information, the current reporting practice is to be of “picking and choosing” what to disclose. For this reason, they favour a more prescriptive standard that would help to reduce the reporting gap. They also mentioned the need for better mechanisms to ensure completeness of non-financial information.

Most users stressed that a wide range of stakeholders should be involved in the standard setting process. For example, trade unions considered that their expertise on working conditions is key for the drafting of NFI standards and they should be included in their setting process.

Assurance. According to users, both investors and civil society, assurance would increase the level of confidence of the stakeholders in the disclosures of an entity. Most users are more in favour of reasonable assurance to allow for reliability of the reported information. However, considering the lack of maturity of the non-financial information framework some of them would support a limited assurance requirement in the short term.

Some civil society organisations pointed out that an assurance requirement would improve the resilience of companies, as auditors would help them to identify any flaws in their internal controls, methodologies for data collection and reporting or in the identification of risks.

Scope.    Most users, including both investors and civil organisations, believed that the revision should broaden its scope of the NFRD to include all large companies whether listed or non-listed. According to many investors, a broad scope is important in terms of meeting the information needs of financial market participants: it enables them to better understand the risks and opportunities of potential investments, and to meet their own disclosure requirements under the SFDR. Civil society organisations are strong supporters of bringing large non-listed companies under the scope of the NFRD. They point out that whether or not a company has listed securities is not a determinant of its social and environmental impacts. All large companies should in this respect be subject the same requirements to report publicly about their impacts.

Trade union representatives shared the importance of companies disclosing information about their supply chains and subcontracting chains in Europe and beyond, whenever labour and human rights are at risk. Similarly, it is relevant for trade union and civil society representatives to have non-financial information presented on a country-by-country basis so they may assess which companies (and where) engage with sustainable practices.

A significant majority of users responding to the public consultation favoured extending also the scope to listed SMEs.

Section 2: Key issues that emerged from the consultation

Cost versus benefits, especially in light of the Covid-19 pandemic.

Many companies and business association raised concerns on the administrative costs of preparing non-financial information. Moreover, some of them stressed that companies are currently focusing their efforts on dealing with the deep crisis cause by the COVID-19. Then, any initiatives, which would disproportionally increase the administrative burdens and costs for companies, especially for SMEs, should be avoided.

Many users, both investors and civil society organisations, argue that we need to compare the costs of a revised NFRD with the future costs that companies would incur anyway if the EU does not act. They argue that theirs needs for non-financial information are likely to grow significantly in the coming years, so that companies will in any case face increasing costs for collecting and reporting this kind of information even if the EU does not revise the NFRD.

According to many stakeholders, the COVID-19 pandemic has underlined the importance of transparent reporting of the non-financial risks facing entities, including the resilience of their business models and global supply and value chains, and the interconnected role that financial and non-financial information play in achieving that goal.

Coherence of disclosure requirements. Most stakeholders, especially from the financial sector, stressed that EU legislation regarding reporting and disclosure should be coordinated, avoiding gaps and overlaps. They argued that the revised NFRD should be aligned with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.

In this respect, some financial sector companies stressed the need to ensure that investee companies report the necessary information for financial sector companies to be able to meet their own future reporting obligations under the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy regulation.

According to some financial sector representatives, there is a timing mismatch between the application deadlines for the legislative measures, such as the SFDR and the Taxonomy Regulations and the foreseeable timing of the first non-financial reporting cycle under the revised NFRD.

Many stakeholders such as academics, credit rating agencies and business associations consider that common definitions of the environmental matters based on the six objectives set out in the Taxonomy Regulation would be helpful to streamline definitions and ensure, at least regarding these matters, the coherence between the NFRD and the SFDR.

Digitalization. Many stakeholders believe that developing non-financial information standards and making non-financial information machine-readable and easily accessible via an EU central access point would enhance its searchability, readability and comparability. They underline in any case the difficulty of enabling the machine-readability of information when it is of qualitative or narrative nature. They believe that, to be fully usable, machine-readable non-financial information would require prior standardisation, i.e. non-financial reporting standards and preferably sector-specific KPIs. Some stakeholders flag the risk of having digitalisation driving the standard setting as this may entail poorer or misleading information.

A majority of stakeholders support an IT format as a way to enable machine readability, even if some see it as an intermediate step. Civil society supports IT formats such as CSV, XML, JSON or XSLX. Many others, including business, would rather support tagging techniques, XBRL and ESEF being the most cited ones, with taxonomies to be derived from non-financial information standards. Public authorities generally eye the extension of the ESEF once it has been evaluated. Interoperability is a key concern. This could be achieved with an EU (or global) common standard, but several stakeholders, especially academics or citizens, are wary of the fact that this might stifle innovation.

Materiality assessment process. The open public consultation show a strong support among stakeholders for a requirement on companies to disclose their materiality assessment process. Moreover, some supervisory authorities considered that the future standards for non-financial information should provide details on how to perform the materiality assessment specifically in relation to each of the non-financial matters – environment, social and employee issues, human rights, anti-corruption and bribery.

Location of reported information. There is moderate support for requiring all information to be disclosed in the management report.

Some stakeholders, mainly preparers, think that it is convenient that both financial and non-financial information is published in the management report as it provides a better understanding of the company´s overall performance and strategy. However, some also argue that it should not be required and expect the market to regulate itself. As it is costly and challenging to implement this approach for companies not already doing so, some preparers propose they should be able to continue choosing how to publish their information over a transition period, with the ambition to integrate all reporting in the long term.

Some stakeholders – mostly users, but also preparers – consider that EU legislation should provide for a harmonized rule and provide for the location of non-financial information in the management report. Some argue that the non-financial information should be in a specific section within the management report to allow easy access to the information and strengthen the links between non-financial and financial information. They argue that this approach might be justified by the interactions between financial and non-financial information and the increased importance of non-financial information in the stakeholder’s decision process.

Conclusion

Different stakeholder groups expressed general agreement with the problem definition as defined in the Inception Impact Assessment, both from a preparer perspective (reporting companies face costs, complexity and multiple demands for information) and from a user perspective (reported non-financial information does not adequately meet user needs). However, users tend to have stronger views on the severity of the current problems compared to preparers.

Some of the main ways in which stakeholder views have influenced the impact assessment are as follows:

1. SMEs: With the exception of listed SMEs, the preferred policy exclude SMEs from the scope. We consider that a requirement on all SMEs to report non-financial information would have been disproportionate. However, stakeholder consultations also stressed that it was important to support SMEs as active participants in and contributors to the transition to a sustainable economic system, and that the provision of some non-financial information by SMEs is likely to be important in that context. Partly for this reason, the preferred option includes the development of a voluntary standard for SMEs.

2. Alignment of sustainability reporting obligations: stakeholders raised concerns about the alignment of the NFRD reporting requirements with the SFDR and the taxonomy. They also stressed the importance of aligning EU reporting requirements as far as possible with existing global standards and frameworks used in the market. These considerations have strongly influenced the policy options regarding the development of EU non-financial reporting.

3. Costs versus benefits in the context of Covid-19: stakeholder consultations revealed that the Covid-19 pandemic both increases the need for better non-financial reporting while at the same time making it especially important to avoid unnecessary burden and administrative costs for preparers. This has influenced the analysis of the trade-offs regarding the costs and benefits of different policy options. On the one hand, it reinforces the costs of non-action and the baseline scenario, and of the voluntary standards option that would not adequately address identified problems. On the other hand, it has also influenced consideration of the costs for preparers of different policy options: it has influenced the relative assessment of possible requirements for limited assurance or reasonable assurance, and has also influenced the analysis of different scope options, to ensure that the proposal focuses on those companies from whom users most need non-financial information.

Annex 3: Who is affected and how?

1.Practical implications of the initiative

According to the preferred policy option, a more harmonized legal framework for non-financial reporting would be established at EU level. The adoption of delegated regulations for the adoption of EU reporting standards would ensure harmonised regimes across Member States and comparable disclosures, as provisions would be directly applicable to companies. Changes to other variables would be done via amendments to different EU directives and would guarantee minimum harmonization across the EU. These changes would be limited and Member States would need to transpose them into national legislation. Reporting companies would need to adjust their reporting practices to changes in the resulting national frameworks and in the delegated regulations adopted.

This option is broadly supported by relevant stakeholder groups such as investors, supervisors, Member States and industry stakeholders. Reporting companies (preparers) present more divergent views on the benefits of the initiative. This option fits with the Council’s conclusions on the CMU in December 2019, where the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts was stressed, and the Commission was called to consider the development of a European non-financial reporting standard; 94 and with the European Parliament’s resolution on sustainable finance in May 2018, which called for the further development of reporting requirements in the framework of the Non-Financial Reporting Directive. 95

2.Summary of costs and benefits

Benefits and costs of the preferred policy option for each category of stakeholders have been summarised in table 1.

Main benefits refer to users, who would enjoy access to public reliable, comparable and relevant non-financial information presented in a digitalised manner. On the one hand, investors would be able to take sufficient account of the risks and opportunities that affect investee companies stemming from sustainability matters, and the social and environmental impacts of their investments. On the other hand, civil society organisations would be able to hold companies more accountable for their impacts on society and the environment, thereby strengthening the social contract between companies and citizens.

This will help to improve the allocation of financial resources, so that more financial resources flow to companies and activities that address social and environmental problems and fewer resources flow to companies and activities that exacerbate such problems; and would reduce systemic risks to the economy resulting from the fact that many investment decisions currently do not take adequate account of sustainability-related issues, especially environmental and climate matters.

Additionally, reporting companies will get clarity about the reporting obligations and the kind of information they need to report, and standardised public information will reduce the amount of ad hoc requests they receive from different users, resulting in a reduction of the unnecessary costs in which companies incur today. However, overall administrative costs will inevitably increase for preparers, as an increasing number of companies would be required to report in a more detailed manner. Users, on the other hand, will experience costs savings, as a result of adequate information being publicly available in a digital manner.

Table 1– Impacts on different stakeholders of preferred policy option compared to baseline

Tables 2 and 3 present the benefits and costs deriving from the specific actions that will be undertaken in order to implement the preferred option. Benefits and costs are described for different categories of stakeholders. In some cases, the benefits of concrete actions could only be described in qualitative terms. The contribution of the specific actions to the general objectives could not be quantified as there are methodological limitations in quantifying the general objectives themselves. Annex 1 presents the main sources used for gathering this evidence. The following tables will therefore mainly follow a descriptive approach, specifying the concrete actions along with their benefits and costs.

Table 2– Overview of benefits: preferred option

The following table presents the total costs of the preferred option. Costs for preparers have been based mainly on data collected via the survey and interviews carried out by CEPS in their study on the NFRD. Costs for the EU and national administrations build on the cost-benefit analysis for the Regulatory Technical Standard on the European Single Electronic Format. 101 See all detailed cost analyses in annex 17.

Companies in particular would also incur costs as a result of the reporting requirements of the Taxonomy Regulation. Although we do not have final calculations of these costs yet, a preliminary, illustrative estimation of their magnitude is included in the draft staff working document that will accompany the Delegated act on a climate change mitigation and adaptation taxonomy. 102 The final calculation of these costs will be presented in the Impact Assessment of the Delegated Act that will specify the taxonomy disclose requirement on NFRD companies in more detail (to be adopted by mid-2021).

Table 3– Overview of costs: preferred option

Annex 4: SME Test

Annex 5: Summary Report of SME Panel

1.Introduction

As part of the consultation strategy for the revision of the Non-Financial Reporting Directive (NFRD) (2014/95/EU) 106 , the European Commission deployed a targeted survey to micro, small, and medium enterprises (SME) referred to as the “SME Panel Consultation” or “Panel”, which was managed by the European Enterprise Network (EEN). The SME Panel was open to receive responses from 3rd March 2020 through 27th May 2020.

For purposes of this document, the Panel will be referred to as the “survey” and it comprised thirteen questions that aimed to provide a good understanding of the current views and experiences of SMEs around non-financial information processes and requirements.

In order to present the results of the survey, this document summarises the responses provided by 371 companies across the EU. The responses provided by 17 companies showed such companies to be large undertakings; likewise, the size of six respondents could not be determined. Both groups were therefore excluded from the graphs, analysis, and narrative presented here, which is meant to understand the context of SMEs only. This leaves a total of 348 respondents whose replies are analysed in this report. Section 5 provides more information on the criteria used to classify companies as micro, small or medium.

2.Demographics of the respondents

The 348 respondents to the survey are located across 20 different Member States (MS) of the European Union and the United Kingdom. 78% of the responses to the survey belong to organisations from Portugal, Romania, Bulgaria, Spain, Poland, and Italy. Other MS represented to a smaller extent are Slovakia, Hungary, Czech Republic, Ireland, Sweden, Lithuania, Latvia, and Germany, among others. The survey also received 3% of responses (i.e. 9 responses) from the United Kingdom.

The respondents to the survey were segmented by size of the company according to the Accounting Directive 107 . The survey’s population is comprised as follows: micro companies (58%), small companies (27%), and medium companies (15%). Table 1 provides a detailed overview of the number of respondents to the survey classified by size.

Table 1

On 26th November 2019, the European Commission published through DG GROW the annual report on European SMEs 108 which provides, among other things, information on the number of SMEs in the European market. Figure 1 shows the distribution of SMEs that responded to the survey (blue) and the estimated distribution of SMEs in the EU28 for 2018 according to the annual report on European SMEs (orange). The observed distribution of respondents in the consultation differs from that of the market as a result of targeting the survey to larger SMEs (i.e. medium and small companies), as they are more likely to be impacted by the NFRD.

Figure 1

The survey also identified whether or not respondents are listed on regulated financial markets. 3% of the respondents identified themselves as listed, whereas 96% of the respondents declared not to be listed (Figure 2). A study carried out by CEPS shows that around 0,02% of the SMEs in the EU27 are listed on a regulated market.

Figure 2

As observed in Figure 3, 163 SMEs (47%) responded that they are part of the supply chain of a large company while 174 SMEs (50%) are not part of the supply chain of a large company. When looking at the sizes of SMEs (Figure 4) who are part of large companies’ supply chains, it may be observed that medium and small sized companies are more likely to be part of the supply chain of a large company (66% and 58% respectively) than are micro sized companies (37%).

Figure 3

Figure 4

The respondents to the survey have business activities in different sectors as described by the NACE codes. Most respondents identified themselves to have business activities in multiple sectors simultaneously. The top 3 sectors represented in this analysis are: 1) C Manufacturing, 2) S Other service activities, and 3) M Professional, Scientific and Technical activities. Figure 5 shows the percentage of any given sector in relation to the total number of respondents. No SME described itself as being involved in sectors: “T Activities of Households as Employers […]” or “O Public Administration and Defence […]”.

Figure 5

3.Current ESG practices and requirements

3.1 Practices on ESG data collection

From the total 348 SMEs who replied to the survey, 291 companies (i.e. 82%) declared they collect data on at least one of ten issues related to ESG matters, as proposed in the survey. 109  

The issues on which SMEs replying to the survey most commonly collect data are: employee training (64%), accidents and/or sick leave (60%), energy use (51%), water use (47%), and percentage of women and men in the workforce (46%). A small number of respondents to the survey also collect data on other matters different from the options available in the consultation; these responses include but are not limited to, data protection, worker needs and satisfaction, and nutrition. Figure 6 provides a visual representation of this distribution.

Figure 6

The respondents to the survey collect data, on average, on 4 different issues. As shown in Figure 7, 16% of the respondents do not collect data on any issue, 13% collect on 4 issues, and 11% collect data on 6 issues.

Figure 7

From the responses to the survey, it is observed that the likelihood to collect ESG information increases for medium size companies (98% collect at least some data) compared to micro companies (77%). Similarly, the number of issues on which companies collect data tends to increase with the size of the company. For instance, on average medium sized companies collect data on 6 different ESG issues whilst micro sized companies collect data on 3 issues. Table 2 provides an overview, by size, of the total number of SMEs collecting ESG issues and of the average number of issues on which data is collected for the total population.

Table 2

Below, Figure 8 illustrates in further detail the individual issues of ESG information on which different size SMEs collect data 110 .

Figure 8

3.2 Publication and disclosure practices

Respondents to the survey were asked whether they make any reference to their ESG policies, performance, or commitment, if any, on their company website. Also, SMEs were asked if they ever share any ESG related information through social media.

As it is shown in Figure 9, 52% of the respondents to the survey do not make any reference to ESG policies or performance on their website. Combined, 34% of the respondents either make a general statement or publish detailed information on their ESG policies and commitments.

Figure 9

Medium sized companies are more likely than small and micro sized companies to either make a general statement (34%) or publish detailed ESG information (28%) in their websites. Comparably, 24% of small sized companies make general statements and 9% publish detailed ESG information in their websites, while 19% of micro companies make general statements and 8% publish detailed ESG information in their websites.

Figure 10

Regarding the practices of the respondents of sharing ESG information via social media, 59% indicated that they never share ESG data through social media, 35% share ESG information sometimes, and 6% of the respondents often share ESG information through social media. Similar to the behavior observed in the publication of ESG data on companies’ websites, medium-sized companies are more likely to share ESG information through social media. However, similar percentages of micro (4%), small (7%), and medium (6%) companies often share ESG information through social media.

Figure 11

3.3 Requests of ESG information from stakeholders

The survey included questions to understand how different SMEs’ stakeholders (e.g. SME’s customers, insurance companies, banks, NGOs, etc.) interact with them regarding requests for ESG information. From the total 348 respondents, 169 companies (48%) indicated they have been requested to provide ESG data by at least one stakeholder group. Figure 12 shows the ratio of companies from the total number of respondents who receive requests for ESG information from different categories of stakeholders.

The stakeholders who most frequently require ESG data from SMEs are: companies to which SMEs provide goods or services (28% of respondents receive such requests), public administration when applying for funds (25%), and insurance companies (18%). A small number of SMEs also indicated that organisations who provide certification services and public administration for purposes other than releasing funds, also request ESG data.

Figure 12

The respondents to the survey receive, on average, requests for ESG data from 1 stakeholder. As shown in Figure 13, 51% of the respondents (179 SMEs) do not receive any requests for ESG data from stakeholders.

Figure 13

Similar to what was observed regarding the collection of ESG data, the size of an SME and the number of stakeholders requesting ESG data seem to be related. For instance, 80% of medium sized companies (Figure 14) receive requests to share ESG data; that percentage decreases to 45% for small sized companies (Figure 15) and 42% for micro sized companies (Figure 16). In contrast, the average number of stakeholders who request ESG data from the SMEs does not change significantly according to the SMEs size. Table 3 illustrates an overview, by size, of the total number of respondent SMEs who receive requests to disclose ESG data and of the average number of stakeholders requesting such data. 111

Table 3

Figure 15

This section reviews the relation between SMEs who are part of the supply chain of large companies and the requests they receive from companies to whom they provide services or goods.

Regardless of their size, 43% (70 SMEs) of the respondents who are part of the supply chain of a large company indicate they receive requests to disclose ESG data from companies to which they supply goods or services. In comparison, only 15% (26 SMEs) of the respondents who are not part of the supply chain of a large company receive requests to disclose ESG data from companies that they supply. As it may be seen in Figure 18, medium SMEs in the supply chain of large companies are more likely to receive requests for ESG information from their customers. 76% of the medium sized respondents who are also part of a large company supply chain receive requests from their customers, compared to 36% and 33% for small and micro sized SMEs respectively.

Figure 15

Figure 16

3.4 Time invested on ESG data processes

Respondents to the survey were asked about the estimated amount of time they spend in responding to ESG information requests or publishing such information about their operations. 112 52% of the respondents to the survey (184) responded to this question. As observed in Figure 20, around 36% of those responding to the survey use between zero and 0.25 employee days per month for these tasks. 48% of the companies surveyed did not provide an answer because they do not publish ESG data and do not receive ESG data requests from stakeholders.

Figure 17

Figure 20 shows how the average number of issues on which ESG data is collected interacts with the monthly amount of time related to the ESG activities. It may be observed that when the number of issues on which data is collected increases, so does the amount of time used to respond to the requests.

Figure 18

As part of the data collection process, some SMEs may ask their own business partners, especially suppliers, to disclose some ESG information. In general, most respondents to the survey do not ask their suppliers for ESG information (72%) and very few do request such information (16%).

Figure 19

4.SMEs preference on development of a non-financial reporting standard for SMEs

Currently, SMEs and larger companies do not have a unique set of standards to follow. One of the questions in the survey is for SMEs to share their views on what would they would prefer regarding standards for reporting social and environmental information.

The results of the survey show most SMEs (68%) would welcome the development of a simplified standard 113 for SMEs to be used either in a voluntary basis (53%) or a mandatory basis (15%). 30% of the respondents state there is no need for a reporting standard for SMEs.

Figure 20

When looking at the respondents’ size (Figure 24) it is observed that slightly more small and medium SMEs prefer either a voluntary or mandatory standard, compared to micro companies.

Figure 21

5.Methodology of Size Assessment 

The size used (micro, small, and medium) in the charts of this document corresponds to the size of undertakings as described in Article 3 of the Accounting Directive (2013/34/EU) 114 . For this purpose, companies were assessed according to their responses to the following criteria:

I)the number of employees,

II)net turnover,

III)and balance sheet total.

Companies belong to a size category when at least two out of three of their responses to the criteria meet (or exceed) a given threshold (Examples 1 and 2). In some cases, the information provided by respondents is not sufficient to allocate them to a size category as per the Accounting Directive. Such organisations are deemed as “undetermined” (Example 3). See Table 4 for examples of such scenarios.

Table 4

Annex 6: Implications of the Covid-19 Pandemic

 Summary

The Covid-19 pandemic directly underlines the exposure of companies to non-financial risks. It has also lead to increased stakeholder attention to the impacts of companies, especially regarding workers and supply chains. The pandemic will therefore further accelerate the growth in demand for more and better non-financial information from companies. At the same time, the economic crisis generated by the pandemic makes it ever more important to avoid the imposition of unnecessary administrative costs on business.

Impact of Covid-19 on the problem definition

The Covid-19 pandemic directly underlines the exposure of companies to non-financial risks. This is especially the case of companies whose business models are dependent on the global movement of goods and persons. Companies can expect that investors and supervisors will now require significantly enhanced reporting about such risks. This change will materialise at the very least from the 2021 reporting cycles, and for many companies it is already a reality.

Some observers predict that the pandemic will in particular lead to a greater demand for social and worker-related information. 115 To date the investment community has tended to pay more attention to environmental information, especially climate-related information, and governance than to social information. It is notable that the European Investment Bank and the European Bank for Reconstruction and Development have published new guidelines regarding the sustainability risks of investments in the context the pandemic, and both have a strong emphasis on the social and worker-related issues, including workers in supply chains. 116  

A number of recent analyses have suggested that the pandemic will drive the growth of ESG investing. For example, a JP Morgan survey of investors found that 55% of them see the pandemic as a positive catalyst for ESG investing in the next three years, while only about a quarter (27%) expect a negative impact and 18% believe it will be neutral. 117 A study published by the European Capital Markets Institute finds that “companies integrating an ESG approach recognised by investors and ESG funds have been more resilient in the crisis”, and goes on to conclude that “investors’ taste for ESG has not lessened during this crisis – quite the opposite, in fact.” 118  

More generally, the pandemic may contribute to a greater awareness of the complex interactions between environmental degradation, social problems and the health of the economy. 119 One informed analyst has stated that “the pandemic and the health crisis now ravaging all continents has put the spotlight on vulnerabilities and our dependence on the natural environment. It drives home the message that markets do not operate in isolation, but instead are embedded in societies and the natural environment. This realization will fundamentally change our long-term risk perspective and the way we prepare for the looming climate crisis.” 120  

If the pandemic indeed contributes to a further growth in ESG investing and to an acceleration of the paradigm shift towards a sustainable economy, then it will further accelerate the growth in demand for more and better non-financial information from companies on the part of the investors and other stakeholders.

Impact of Covid-19 on the policy options

The pandemic does not substantially alter the identification or definition of the available policy options. It does however influence the assessment of the costs and benefits of the policy options.

On the one hand, assuming that the pandemic increases the needs of users for better non-financial information, the disadvantages of non-action and the baseline scenario will increase. On the other hand, the economic crisis generated by the pandemic makes it ever more important to avoid the imposition of unnecessary administrative costs on business. In this respect, much will depend on the pace of economic recovery, since companies subject to any new reporting requirements under the revised NFRD would not have to dedicate resources to meeting those requirements until 2022 at the earliest.

Annex 7: Description Of The Non-Financial Reporting Directive

In 2003 the “Accounts Modernisation Directive” (Directive 2003/51/EC, second Accounting Directive) introduced a requirement on companies to include “information relating to environmental and employee matters” in their management reports, to the extent necessary for an understanding of the company’s development, performance or position. Member States were able to exempt SMEs from this obligation.

Around the same time and in subsequent years, a number of Member States (including Denmark, France, Spain, Sweden and the UK) introduced non-financial reporting requirements at national level that went beyond the requirements of the Accounts Modernisation Directive.

In 2014 the EU agreed the Non-Financial Reporting Directive (Directive 2014/95/EU), which amended the Accounting Directive (Directive 2013/34/EU). The Non-Financial Reporting Directive (NFRD) imposed stronger non-financial reporting requirements on certain large companies.

Companies under the scope of the NFRD had to report according to its provisions for the first time in 2018, for information covering financial year 2017. Most companies have therefore now completed three reporting cycles under the NFRD.

The Non-Financial Reporting Directive at a glance

Guidelines accompanying the NFRD

As required by the NFRD, in 2017 the Commission published non-binding guidelines for companies under the scope of the Directive, to facilitate the reporting of relevant, useful and comparable non-financial information. 121 In 2019, as part of the Sustainable Finance Action Plan, the Commission published additional guidelines, specifically on reporting climate-related information. 122

Scope (which companies)

The NFRD applies to large public interest entities with more than 500 employees, and to public interest entities that are parent companies of a large group with more than 500 employees. 123 In practice this means that it applies to large EU companies with securities listed in EU regulated markets, large banks (whether listed or not) and large insurance companies (whether listed or not) – all provided that the entity has more than 500 employees. 124 Likewise, it also applies to EU companies with securities listed in EU regulated markets, banks (whether listed or not) and insurance companies (whether listed or not) which are parents of large groups with more than 500 employees. 125  

The NFRD exempts the subsidiaries of parent companies from the reporting obligation, if the parent company itself reports the necessary information on a consolidated basis.

Taking account of how Member States have transposed the Directive, we estimate that approximately 11 700 companies are subject to the reporting requirements of the NFRD. Not taking account of national transposition, about 2 000 companies are under scope of the NFRD.

Location (where should the information be disclosed?)

The default location of the non-financial statement is in the management report, therefore as an integral part of the company’s annual report. However, the NFRD allows Member States to allow companies to publish the necessary non-financial information in a separate report, and most Member States have used this option.

What information?

The NFRD identifies four non-financial ‘matters’: environment, social and employee matters, human rights, and anti-corruption and anti-bribery. 126 With regard to those four matters, the NFRD requires companies to disclose information about five business concepts: business model, policies (including due diligence processes implemented), the outcome of those policies, risks and risk management, and key performance indicators (KPIs) relevant to the business. The non-financial information that companies should disclose according to the NFRD can be visualised by cross-referencing the four non-financial issues with the five business concepts, as shown in the table below.

Graphic representation of non-financial information according to the
Non-Financial Reporting Directive

If a company does not have a policy on one or more of the non-financial issues identified, it should explain why.

The reference to policies in the NFRD includes an obligation to disclose due diligence processes implemented by the company. Due diligence in this context refers to the process by which companies identify, prevent, mitigate and account for how they address actual and potential adverse impacts in their own operations, their supply chain and other business relationships. 127

The reference to risks specifically includes risks related to the company’s business relationships. Business relationships include, but are not limited to, supply-chains. In practice, therefore, the NFRD requires companies to report relevant risks related to their supply-chains.

In the case of the financial sector, the concept of business relationships includes relationships with organisations financed by the financial sector company in question, and therefore extends to the social and environmental impacts of the activities financed.

Annex 8 provides a list of illustrative examples of the kind of information that companies could be expected to disclose under the NFRD, taken from the Commission’s 2017 Guidelines on Non-Financial Reporting.

The NFRD specifies that the non-financial statement should include information on the environment, social and employee matters, human rights, and anti-corruption and anti-bribery, “as a minimum.” In principle, therefore, companies should disclose information on other non-financial issues if they consider such information to be material (see explanation on materiality below). Information about intangible assets is an example of the kind of non-financial information that companies are not explicitly required to include in their non-financial statement. International Accounting Standard 38 defines an intangible asset as “an identifiable non-monetary asset without physical substance.” Typical examples of intangible assets include intellectual property, software, customer retention, brand value and reputation, and human capital. Investments in intangible assets often do not qualify to appear in a company’s financial accounts, and this is rarely compensated by adequate reporting on such assets in other parts of the annual report, including the non-financial statement. 128 Some information relating to intangible assets could coincide with the list of issues explicitly recognised in the NFRD. This is especially the case for employee matters, which will may have links with human capital as an intangible asset. 129 However, information about other intangible assets, such as customer retention, does not coincide with the list of non-financial issues explicitly recognised in the NFRD.

Materiality

A company under the scope of the NFRD is required to disclose information “to the extent necessary for an understanding of [its] development, performance, position and impact of its activity.” The reference to “impact” represented a significant innovation compared to the Accounts Modernisation Directive. It introduced a double materiality perspective, whereby companies have to report information not only on how non-financial issues affect the company, but also regarding the impact of the company itself on society and the environment. 130  

The NFRD leaves very considerable flexibility to companies to judge what information is in fact necessary for an understanding of their development, performance, position and impacts. The Directive itself provides no further clarification, and few Member States have introduced further specifications when transposing the Directive. The guidelines issued by the Commission to accompany the Directive do nevertheless provide some non-binding guidance on what information to report.

Article 2 of the Accounting Directive, which the NFRD did not amend, defines “material” in relation to financial statements, with no reference to non-financial information: “the status of information where its omission or misstatement could reasonably be expected to influence decisions that users make on the basis of the financial statements of the undertaking.”

Provisions regarding reporting standards and frameworks

If companies use national, EU or international reporting frameworks to prepare their non-financial statement, then the NFRD requires them to specify which frameworks they have used. The NFRD does not, however, require the use of a reporting framework. The great majority of Member States have decided not to go beyond the minimum requirements of the NFRD in this regard. Spain is an example of a Member State that has gone beyond the minimum NFRD requirements: Spanish law requires companies to use a non-financial reporting standard (without specifying which), and to disclose key performance indicators that are consistent with the Global Reporting Initiative.

Audit and assurance

The NFRD requires the auditor to carry out an existence check: the auditor must verify that the company has provided a non-financial statement in the management report (or has published non-financial information in a separate report if the Member State allows that option). Some Member States (Italy, Spain and France) have introduced stronger assurance requirements than the existence check specified in the NFRD and require the verification of the content of the information reported by an independent assurance service provider.

Transposition

Annex 9 provides a complete overview of how Member States have transposed the NFRD. In general, most Member States have transposed most provisions by staying close to the original wording of the Directive. Only in exceptional cases have Member States further specified or strengthened the reporting requirements set out in the Directive.

Annex 8: Examples of Non-Financial Information given in the Commission’s 2017 guidelines

The guidelines published by the Commission in 2017 contain examples of the kind of non-financial information that companies might report. The guidelines provide examples structured by:

·key reporting principle

·business concept

·non-financial issue

They also provide additional examples specifically relating to supply-chains and conflict.

1.Illustrative examples structured by key reporting principle

2.Illustrative examples structured by business concepts

3.Illustrative examples structured by non-financial issue (or “matter”)

4.Illustrative examples for additional issues (supply chains and conflict minerals)

Annex 9: Overview of Transposition of the Non-financial Reporting Directive by Member States

Annex 10: Relevant EU legislation and policy initiatives

This annex describes the most relevant existing and upcoming EU legislation and policy initiatives, and how they interact with the Non-Financial Reporting Directive. It is divided into two parts: part A addresses the interaction between the NFRD and other legislation and initiatives in the field of sustainable finance, while part B looks at interactions beyond sustainable finance.

A.Interaction between the NFRD and other legislation and initiatives in the field of sustainable finance

The Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, together with the NFRD, are the central elements of the sustainability reporting regime that underpins the EU’s Sustainable Finance Strategy. The figure below represents the interactions between these pieces of legislation.

Interaction between NFRD, SFDR and Taxonomy Regulation

The NFRD (represented in blue in the figure) governs reporting by companies to a variety of stakeholders, including financial market participants and end investors. As shown in the graphic sometimes the flow of non-financial information will be directly from the investee company to the end investor. More often, however, the flow of information will be from the investee company to a financial market participant (including assets managers and financial advisers), and then from the financial market participant to the end investor.

The Sustainable Finance Disclosure Regulation (SFDR, represented in orange in the figure) governs how financial market participants should disclose sustainability information towards end investors and asset owners.

The Taxonomy Regulation (represented in green in the figure) creates a classification system of sustainable economic activities. It requires companies under the scope of the NFRD to disclose the extent to which their activities are considered environmentally sustainable according to the taxonomy. Financial market participants subject to the SFDR must also disclose the extent to which financial products marketed as sustainable are aligned with the taxonomy.

Consistency and coherence

Financial market participants will require information from investee companies in order to meet their disclosure requirements under the SFDR. Since the NFRD governs disclosures by investee companies, there is an obvious case for ensuring the consistency of the disclosure requirements between the NFRD and the SFDR. The goal is to create a consistent and coherent flow of sustainability-related information through the financial value chain.

Respondents to the open public consultation carried out in preparation for this initiative strongly endorsed the need for better alignment between different pieces of legislation on sustainability-related disclosures. 79% of financial sector respondents believed that such alignment was necessary, while only 3% of respondents believed that the alignment between the different pieces of legislation currently works well.

If reporting standards were to be developed as described in section 5.2.1 of this impact assessment, then those standards would be the vehicle for ensuring that investee companies report the information that financial market participants need to meet their own disclosure requirements under the SFDR. The revised NFRD should specify that this is as one of the necessary conditions for the adoption of non-financial reporting standards into EU law.

The SFDR disclosure requirements regarding adverse sustainability impacts will be specified in a Regulatory Technical Standard that the European Supervisory Authorities are currently developing. Consistency and alignment between that RTS and any possible standards developed under the NFRD will be especially important. The final version of the RTS will be available in the first half of 2021, which means that any organisation working on the development of European non-financial reporting standards will be in a position to ensure that such standards fully cover the information that financial market participants need in order to comply with the RTS.

Financial market participants under the SFDR and investee companies under the NFRD are both required to disclose the extent to which their products or activities respectively are sustainable as defined by the taxonomy. The taxonomy therefore provides a common reference point that supports alignment between the SFDR and the NFRD. In response to the open consultation, a significant majority of respondents (69%) said that the legal provisions related to reporting on environmental matters should be structured according to the six objectives of the Taxonomy Regulation. The proportion of financial sector respondents who held this view as even higher (81%).

The precise content and methodology of the taxonomy-related disclosures of companies subject to the NFRD will be specified in a Delegated Act of the Taxonomy Regulation that the Commission should adopt by mid-2021. This Delegated Act will therefore also be available in good time for it to be considered appropriately in potential non-financial reporting standards that might be developed under the NFRD.

The taxonomy sets performance thresholds (referred to as ‘technical screening criteria’) for economic activities which: (1) make a substantive contribution to one of six environmental objectives; (2) do no significant harm (DNSH) to the other five environmental objectives; and (3) meet minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights). These performance thresholds should be taken into account in any potential non-financial reporting standards developed under the NFRD, with the aim of achieving as much consistency as possible and reducing unnecessary burden on companies. The revised NFRD should specify that this is as one of the necessary conditions for the adoption of non-financial reporting standards into EU law.

The performance thresholds regarding minimum safeguards are defined in the Taxonomy Regulation itself, and are therefore already known. The performance thresholds regarding substantial contribution and DNSH are defined for two environmental objectives (climate mitigation and climate adaption) in a Commission Delegated Regulation [Publication Office: please fill in number of Regulation as per footnote]. 131 They are therefore already known and can be taken into account during any standard-setting process under the NFRD.

The performance thresholds regarding substantial contribution and DNSH for the other four environmental objectives identified in the taxonomy will defined in a Delegated Act that is scheduled for adoption by the end of 2021. Depending on the start date of any process to develop potential NFR standards, the preparation of this Delegated Act could run in parallel for a period time with the standard-setting process. However the Delegated Act would in any case be adopted well before any NFR standards are complete, so there should be no significant obstacles to taking account of the content of the Delegated Act in the NFR standards.

The table below summarises the different aspects of the SFDR and the Taxonomy Regulation, including Delegated Acts, that would need to be considered in potential non-financial reporting standards under the NFRD.

The following arrangements have ensured and will continue to ensure adequate coordination between the possible development of NFR standards on the one hand, and the SFDR and the Taxonomy Regulation on the other hand:

·The mandate of the EFRAG Task Force on the preparation of possible NFR standards specifically required the Task Force’s recommendations to be consistent with the SFDR and the Taxonomy Regulation. 132 .

·The three European Supervisory Authorities responsible for drafting the Regulatory Technical Standards under the SFDR are part of the EFRAG Task Force. This ensures direct interaction between the authorities developing the RTSs for the SFDR and the experts carrying out the preparatory work for possible EU non-financial reporting standards.

·The Platform on Sustainable Finance is carrying out technical work to advise the Commission on the further development of screening criteria under the Taxonomy Regulation. The chair of the Platform nominated a representative from the Platform to be a member of the EFRAG Task Force. The Chair of the EFRAG Task Force will also participate in plenary meetings of the Platform as necessary. In addition, there are already two experts who are members of both the Platform and the Task Force.

Double materiality

Both the NFRD and the SFDR apply a double materiality perspective, meaning that entities subject to either of these two pieces of legislation have to consider both the outside-in risks that sustainability issues create for the company or the investment, and inside-out sustainability impacts of the company or the investment itself. Since the taxonomy defines activities that make a substantial contribution to environmental objectives, it is highly relevant in the case of disclosing the sustainability impacts of companies and investments.

In the case of the NFRD, the double materiality perspective is expressed through the existing requirement on companies to report information “to the extent necessary for an understanding of [their] development, performance, position and impact of [their] activity.” If reporting standards were to be developed as described in section 5.2.1 of this impact assessment, then those standards would further specify what information is considered material from both materiality perspectives.

By introducing the additional obligation on companies to report their alignment with activities that qualify as sustainable according to the taxonomy, the Taxonomy Regulation is consistent with and reinforces the NFRD requirement on companies to report about their impacts.

In the case of the SFDR, the double materiality perspective is expressed through the requirement on financial market participants to disclose how they integrate sustainability risks in their decision-making processes (outside-in risks) and to disclose their adverse sustainability impacts (outside-in impacts). In addition, if a financial market participant markets a financial product as having sustainability objectives or sustainability characteristics, then it must justify that claim by disclosing the alignment of the investments underlying the financial product with activities that qualify as sustainable according to the taxonomy.

Entities subject to both the NFRD and the SFDR

Some entities in the financial sector will be subject to both the NFRD and the SFDR. Typically this is the case of banks or insurance companies with more than 500 employees that also carry out asset management activities. It is also the case of a very small number of asset management companies with listed securities. The NFRD covers reporting on all activities of such entities, including lending, whereas the SFDR only covers asset management and investment-advice activities.

Currently there are approximately 300 entities that will be subject to the NFRD and SFDR. If the scope of the NFRD were to be broadened as described in section 7 (preferred option) of this impact assessment, then approximately 700 entities would be subject to the NFRD and SFDR disclosure requirements.

The burden on such entities is dependent on the extent to which the disclosure requirements of the NFRD and the entity-level disclosure requirements of the SFDR are aligned, especially with regard to individual indicators. If there is no or little alignment, then there is a risk that such entities will be obliged to disclose different information in an incoherent manner under each piece of legislation even though the underlying sustainability matters in question (environment, human rights etc.) are the same. If there is a high degree of alignment between the SFDR and the NFRD, then these entities will in principle be able to use the same underlying set of information for both disclosure exercises, thereby keeping administrative burden to a minimum. The development of EU non-financial reporting standards as described in section 5.2.1 would provide the opportunity to achieve the necessary alignment of the disclosures required under the NFRD with the Regulatory Technical Standards under the SFDR being developed by the European Supervisory Authorities.

Interaction with other sustainable finance legislation and initiatives

In addition to the SFDR and the Taxonomy Regulation, the NFRD also interacts with the Capital Requirements Regulation and with work on Green Bonds Standards, with the Eco-label for financial products, and with EU climate benchmarks.

Regarding the Capital Requirements Regulation (CRR), some banks will be subject to both the NFRD and article 449a of the. Article 449a of the CRR requires large listed banks to disclose information on ESG risks, including physical risks and transition risks.

The definition of large banks in the CRR is narrower than in the Accounting Directive/NFRD, and therefore there are currently only approximately 50 entities that will be subject to both the NFRD and the CRR ESG risks disclosure requirements. Broadening the scope of the NFRD as described in section 6.3 of this impact assessment, would not significantly affect the number of banks subject to both the NFRD and CRR ESG risks disclosure requirements.

The burden on such entities is dependent on the extent to which the disclosure requirements of the NFRD and CRR are aligned. If there is a high degree of alignment between the ESG disclosure requirements in the CRR and the NFRD, then these entities will in principle be able to use the same underlying set of information for both disclosure exercises, thereby administrative burden would be minimal. The EBA is developing a technical standard implementing Article 449a disclosure requirements. Detailed cooperation between the EBA and the possible future standards setter would ensure such alignment.

Detailed descriptions of legislation and initiatives in the field of sustainable finance

More thorough descriptions of all relevant sustainable finance legislation and initiatives are provided below.

B.Interaction between the NFRD and other legislation and initiatives

This section describes a number of other existing and forthcoming initiatives that are relevant to the revision of the NFRD:

·Sustainable Corporate Governance Initiative

·Pay Transparency

·Green Claims Initiative

·Environmental Accounting

·Eco-management and audit scheme (EMAS)

·Emissions Trading System

·Late Payments Directive and Directive on unfair trading practices in business-to-business relationships in the agricultural and food supply chain

Annex 11: Capital Markets Union High-Level Forum proposal for European Single Access Point.

The Capital Markets Union High-Level Forum published its final report in June 2020. The report contains the following specific recommendation for the creation of an EU-wide digital access platform (EU Single Access Point, or “ESAP”) to companies’ public financial and non-financial information: