EU Consultation Process Underway on the Non-Financial Reporting Directive
On 20 February 2020, the European Commission (the “Commission”) launched a public consultation process as part of its review of the existing Non-Financial Reporting Directive (“NFRD”) to strengthen sustainable investment in Europe.
The NFRD requires large companies to disclose certain non-financial matters as part of their annual public reporting obligations. These non-financial issues include topics such as anti-corruption, human rights, diversity, and environmental concerns.
The Consultation Process
As announced in the European Green Deal Communication, the Commission committed to review the NFRD as part of its plan to scale up sustainable finance by collecting input on possible improvements to the NFRD.
The Commission hopes that improvements to the NFRD will help ensure that investors have access to adequate non-financial information from companies, that improved transparency will hold companies accountable for their impacts on society and the environment, and that unnecessary burdens on businesses due to the NFRD can be reduced.
The consultation questionnaire can be accessed here. The questions primarily focus on exploring and assessing:
- how to ensure reported non-financial information is sufficiently comparable and reliable;
- which information users think is necessary and relevant;
- which companies investors want such non-financial information from;
- ways to ensure that such non-financial information is easily accessible; and
- how to make such non-financial reporting as easy and cost-effective for companies as possible.
Feedback from the consultation is due by 14 May 2020. After processing the information gathered from the consultation process, the Commission is expected to propose changes to the NFRD, although the time period for such revisions remains unclear.
Trends in European Sustainable Finance
The review and subsequent changes to the NFRD are aiming to improve corporate transparency and accountability in order to increase investment in sustainable finance from the private sector. Commission efforts to improve the NFRD stem from concerns relating to the increase in global temperature, depletion of natural resources and continued biodiversity loss, together with increasing forest fires, floods and other natural disasters undermining the EU’s security and prosperity.1 On 11 December 2019, the Commission announced the response to these concerns, the European Green Deal (the “Green Deal”). This sets out a plan to make the EU into a sustainable economy by cutting emissions while also creating new jobs and boosting innovation. The Green Deal is aiming to transition the EU into a net-zero carbon economy by 2050 such that economic growth is decoupled from resource use.
Meeting the objectives of the Green Deal will require additional investments across all sectors of the economy. The Green Deal also stresses that sustainability should be more broadly embedded into the corporate governance framework.
Other Steps by the Commission
In addition to the consultation process underway for larger companies, the Commission is planning to also survey small and medium-sized companies for information regarding their costs and impacts on non-financial reporting. In order to ensure that sustainable investments are mainstreamed across our financial system, the Commission is introducing a “Renewed Sustainable Finance Strategy” aimed at redirecting private capital flows towards green investments.2
On 16 January 2020, the Commission released the European Green Deal Investment Plan which acts as an enabling framework to stimulate private and public investment in support of the transformation of the EU economy to meet its environmental objectives. The European Green Deal Investment Plan aims to mobilize at least one trillion Euros of sustainable investments over the next decade.3
The NFRD consultation is yet another example of increasing company reporting obligations. Regulated companies should be prepared to comply with more stringent detail requirements around their sustainability practices. Additionally, smaller companies (those with less than 500 employees) should prepare to disclose non-financial matters and comply with increasing regulation regarding sustainability.4
4 Note: Directive 2014/95/EU of 22 October 2014, Article 19a(1)
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.