What’s in a name? The financial implications of non-financial reporting

The EU Directive on Non-Financial Reporting was adopted by the European Parliament and Council in October 2014. EU Member States have to meet the deadline of putting this directive into domestic law by 6 December 2016, and so the UK’s Department for Business, Innovation & Skills…

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April 27, 2016
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Non-financial Romeo+JulietThe EU Directive on Non-Financial Reporting was adopted by the European Parliament and Council in October 2014. EU Member States have to meet the deadline of putting this directive into domestic law by 6 December 2016, and so the UK’s Department for Business, Innovation & Skills (BIS) has been consulting over the last two months on how it proposes to do this.

What does non-financial reporting mean? In ShareAction’s view, the term is something of a misnomer. It covers the requirements for companies to report things like environmental, social, employee, bribery and anti-corruption information. It goes without saying that transparency on these issues will have significant consequences for the communities and environment in which we all live and work. However, it is also of increasingly recognised importance for the financial success of companies and investors, particularly over the medium to long term. Imagine if you had asked an investor with a stake in Volkswagen in the immediate aftermath of the 2015 diesel emissions scandal whether they thought environmental issues can affect the performance of their investments. I would put good money (€15.6 billion, perhaps, to pick a not-so-random figure) on that investor saying “yes”. Indeed, this scandal resulted in a coalition of 19 investors with over £625 billion in assets under management writing to 11 major automobile companies to call for improved reporting of their public policy interventions on emissions standards.

Ultimately, environmental, social and governance (ESG) issues produce financial risks and opportunities that companies and their investors would be wise to incorporate in their decision-making. Evaluation of the risks and opportunities associated with non-financial information is playing an increasingly central role in investors’ selection, retention and stewardship of their investments. It is also in the long-term interests of businesses to report consistently and comparably. The advantages of reporting and the underlying internal processes it entails include investor confidence and understanding, greater board effectiveness, easier access to capital and the ability to attract and retain the best talent. We need to showcase the companies doing outstanding work in incorporating the risks and opportunities associated with ESG factors into their business models. These companies should be allowed to compete on a level playing field, rewarding their long-term thinking with the enhanced reputation and market rating they deserve.

Questions asked by BIS in this consultation include whether: (a) so-called non-financial information should be reported separately from financial information; and (b) non-financial reporting requirements in the UK should be rolled back so that listed companies with fewer than 500 employees are no longer subject to them. For the sake of our communities, our environment, and the long-term productivity of our companies, investors and economy, the answer to both has to be “no”.