On 15 th of February 2016, Brussels Permanent Representation of the Federal Republic of Germany to the European Union

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1 Summary Workshop on non-financial disclosure and the Sustainability Code On 15 th of February 2016, Brussels Permanent Representation of the Federal Republic of Germany to the European Union Introduction The German Council for Sustainable Development (RNE) and the Greek QualityNet Foundation invited various stakeholders from ministries, companies and NGOs from EU member states to meet at the Permanent Representation of the Federal Republic of Germany to the European Union in Brussels to discuss practices in relation to the EU Directive on non-financial disclosure. The workshop was a follow-up of the successful European Soirée held in Berlin in January The event in Brussels provided a platform to exchange on the current status quo and to illustrate varying approaches to reporting on nonfinancial information (nfi). Based on the presentations of the approaches in different member states, participants were invited to share their experiences and to identify and discuss challenges, opportunities and concerns of the EU Directive and its implementation in the member states. The EU Directive on non-financial disclosure signifies an important stepping stone in the process of mandatory reporting. Most companies and businesses as well as other stakeholders are curiously observing on-going consultations and further steps of adaptions of the EU Directive into national law. With the Directive on non-financial disclosure, the EU tackles the important issue of climate and sustainability. In the European market, it is of great urgency to introduce a strategy to establish reliable frameworks of sustainability information reporting. Europe s responsibility now is the integration of sustainable approaches into the structure and framework of markets. The Directive represents an opportunity to shape Europe s economy in respect to social and economic issues at the same time. Moreover, Environment Social Governance (ESG) and Corporate Social Responsibility (CSR) and with it reporting on nfi are to be tackled globally and not only in the European context. Obstacles such as financial and economic crises became visible in recent years. Thus, the mechanisms of a globalized economy show the need for a global communication. With the Directive on non-financial disclosure, the EU has the possibility to encourage and enforce market relevant players to opt for sustainable corporate governance. Therefore, the workshop aimed at reaching a common understanding, which may serve as a basis for a common framework in the EU. 1

2 The transposition process The transposition process of the EU Directive in different member states brings along various challenges. Three of them were central to the discussion: 1. Qualitative reporting on nfi and best practice of collecting reliable data. 2. Ensuring the comparability in nfi reports and the implementation of a comparable reporting system. 3. Looking beyond Europe and the European market and dealing with the global value chain, especially in regard to the overall goal of achieving the Sustainable Development Goals (SDGs). Responding to these challenges, it is of high importance to work on a common understanding of implementing the Directive and allowing coherence and comparability on non-financial reporting. It is furthermore essential to offer practical guidance to companies to deal with the reporting process. The establishment of a general framework should therefore focus on comparability and simplification. The EU Directive and the Sustainability Code The EU Directive on non-financial disclosure was adopted in Member states were given a two-years implementation period to ensure a transposition into national law by the end of For companies falling under the Directive (more than 500 employees or a turnover of over EUR 100 millions), first reports on nfi will have to be transmitted in Already now, European companies rank among the most transparent in the world. Even Small and Medium Entrepreneurs (SMEs), which are not obliged to report, disclose nonfinancial information. In various member states, a national law, which obliges companies to disclose on nfi, already does exist. Currently, the European Commission is working on nonbinding guidelines, which are intended to be issued by the end of The Sustainability Code is one example for a lean reporting process on non-financial information even though the German Council for Sustainable Development (RNE) itself is not in charge of the implementation of the EU Directive in Germany. The idea of lean reporting focuses on one code with 20 different criteria linked to existing Key Performance Indicators (KPIs) (Global Reporting Initiative (GRI) or European Federation of Financial Analysts Societies (EFFAS)). It contains a mixture of qualitative and quantitative information, which should be reported. The idea is a standardized code that tackles one very important issue: comparability. The code is open to every organisational form and is based on a flexible comply or explain approach. Therefore, with 20 criteria, the threshold for SMEs is set low and facilitates the first step into the reporting process. Moreover, a training concept and the Sustainability Code toolbox help to overcome obstacles in the reporting process. German users highly accept the code because of at least five factors: It meets the EU s reporting obligations and is compatible with international standards. It is applicable for all forms of organisations. It is simple, flexible and accessible. 2

3 It is recognized as a credible business conduct on a political level. It offers a bottom-up approach with training and network partners displaying information. The Sustainability Code highly attaches value to transparency; all declarations of conformity by companies are accessible to every user. The RNE invites member states to apply the code to their needs. The RNE offers four further countries national sections of the database for national implementation of nfi with a flexible adaption of the code. The Greek QualityNet Foundation presents the first national adaption of the Sustainability Code. To enable the use of the code for different stakeholders, the code is based on the principle one code for all and therefore contains different fields and criteria as well as application levels to minimize possible thresholds. The Greek Sustainability Code gives the opportunity to grow gradually and to apply it in a comply or explain approach on different application levels. The Greek Sustainability Code will be launched April 7, 2016 in Athens. Experiences and expectations regarding non-financial information reporting During the workshop, stakeholders from Austria, France, Greece, Germany and Latvia presented the status of implementation of the EU Directive on non-financial disclosure in their respective country. The participants discussed the different challenges and concerns of the transposition of the Directive into national law and expressed further demands to the European Commission. Dialogue The facilitation of a dialogue between stakeholders is regarded as crucial. On the European level, governments tend to discuss the issue of nfi reporting in absence of non-governmental stakeholders. The possibility for direct exchange on the Directive on this platform offered by RNE was considered as urgently needed and highly welcomed. For future meetings, it was noted that the perspective and contribution by representatives of the European Parliament would enrich the discussion. Purpose / Importance of the Directive The EU Directive on non-financial disclosure gives visibility to the topic of CSR and nfi. Hence, the political goal of the EU Directive must not be forgotten: an informed decisionmaking. For this, comparability in reporting on non-financial information is urgently needed. The participants expressed concerns that the criterion of comparability is not met yet. Addressing the SDGs should furthermore be an overall purpose of the EU Directive on nfi. Business contribution, in which the EU Directive might have a large share, is needed to reach the SDGs. However, to enable a focus on this aspect, stakeholders asked for guidance of the European Commission. The question is therefore how businesses can deliver on the SDGs targets by the implementation of CSR reporting. 3

4 Quality Qualitative reporting in regard to nfi is regarded as a central aspect. The concern is raised that the EU Directive is not sufficiently addressing this issue, which could turn out to be a major disadvantage at a later stage. Two significant risks follow a poor quality reporting: the lack of comparability and a distortion of competition. Therefore, the paramount question should be, how quality standards in reporting can be reached and how it can be avoided that the effect of the Directive will only be a tool per se. To reach a qualitative reporting standard on nfi, more substantial guidance by the European Commission was requested, e.g. in the form of non-binding guidelines. It was criticized that there will be no guidelines available while the EU Directive has to be transposed into national law by member states. Moreover, a third-party validation was regarded as necessary to ensure the quality of nfi reporting. Comparability One important key factor emphasized by various stakeholders is comparability in nfi reporting. Differing national transpositions of the EU Directive makes this goal difficult to achieve. The question for a standardized code, e.g. an adaption of the Sustainability Code, was raised. The Code s idea to have one code for comparability reasons but at the same time keeping it flexible on a comply or explain basis is applied in different member states. Using the Directive as a starting point to implement a system, which allows comparability between companies in the field of sustainability can assist in the allocation of resources to exemplarily reporting companies. Working on a common understanding of how to implement the Directive, would help to foster coherence and comparability on nfi. It is furthermore considered as a main task to help companies understand the requirements and signification of their contribution to nfi reporting, to minimize thresholds and to simplify the process. To establish a general framework to allow comparability and simplification should therefore be a high priority. Challenges Challenges regarding the transposition of the EU Directive on non-financial disclosure vary between member states and their status quo of national law on nfi reporting. In member states in which nfi reporting is already mandatory and broad experiences have been made, the focus primarily lies on the adaption of national law for a full implementation of the EU Directive. This can relate to different aspects, such as the adjustment of thresholds or the materiality approach of the EU Directive. In members states without nfi reporting or no history of reporting in general, the transposition of the Directive includes a more difficult transition period, especially where businesses react negatively to the requirement of nfi reporting. Another challenge mentioned was the concern of SMEs, which are not obliged to report on nfi and act unwillingly as reporters in the supply chain to those they supply to. The EU Directive offers little guidance on this topic. In general, the EU Directive does not address the issue of value chain information sufficiently nor the resulting impact on SMEs as suppliers of Public Interest Entities (PIEs). 4

5 Demands Guidance for qualitative reporting, not only of political but also technical kind, is regarded as necessary. It was stated on a rather critical note that the European Commission passes the Directive without providing practical guidelines in time for companies to be able to establish adequate reporting systems. Although the European Commission is working on non-binding guidelines on nfi reporting, stakeholders criticize the point of time of delivery: The European Commission will only make the guideline available after member states have already had to transpose the Directive into national law. The mere listing of existing frameworks that could be applied for nfi reporting did not appear to be sufficient to the participants. Furthermore, the aspect of the cost of transposition and the possible planning on funding the process by the EU was raised. Another concern relates to the target group of the Directive. It was noted that the structure of the target group (companies with more than 500 employees or a turnover of over EUR 100 millions) is too restricted. It was demanded that the target group should be extended. Concerns of Companies Reporting on non-financial information has been very prominent on the companies agenda in the last couple of years and the landscape of nfi reporting has become very complex and sophisticated. Standard frameworks such as GRI or the Sustainability Code are supplemented by topic specific standards (e.g. related to carbon, human rights, etc.). The Code is in this respect perceived as beneficial because it offers a wider solution instead of a highly specified framework, being therefore the instrument of choice for many companies. However, nfi reporting is not considered as the only tool to reach transparency in the field of sustainability. Instead, companies complement tools such as communication between consumers e.g. via social media, peer to peer discussions, rating agencies, or labelling. Therefore, for companies, transparency does not only imply reporting and sustainability performances should not only be judged by nfi reporting factors. The Directive is appreciated and viewed as a game changer by many companies because they benefit from sustainable corporate governance. However, there is a danger lying in the lack of coherence in non-financial reporting. The question of how member states are addressing the issue of coherence within the transposition of the EU Directive is therefore central in the discussion. The Directive is seen as a positive driver to deepen practices and policies of sustainable corporate management. Reporting on nfi can be of a significant advantage to companies in terms of market differentiation. The growing interest of clients, consumers and therefore also investors in sustainability can mean a market advantage and reputation gain to companies. The EU Directive can hence be seen as a driver for companies to disclose information on ESG with the probable incentive to invest in sustainable corporate management. How current reporting practices can be further developed in order to help companies deepen their commitment to sustainability should thus be tackled more intensively. 5

6 From a different perspective, the EU Directive and with it the mandatory reporting on nfi, can also have negative aspects. It can be argued that the market regulates itself and implements nfi reporting in time when it is needed. Thus, the biggest driver for sustainability reporting is the value chain and retailers demanding nfi. A standardized code is rejected from this point of view because every company should be able to choose the framework, which fits best to their needs. On a contrary position, it was observed that experience of the last decades has shown that the market does not have any intrinsic interest in non-financial reporting and therefore the EU Directive is a welcomed tool to foster reporting activities. In respect to already existing regulations in different member states, especially SMEs need better guidance in reporting practices. In comparison to bigger companies, which are mostly familiar with reporting, SMEs do not have the same experience. Nevertheless, some of the larger companies would prefer to rely on European guidelines. Ideally, EU guidelines could therefore be a means to complement national guidelines. This does not mean to reinvent reporting tools but to offer guidance relating specifically to the EU Directive and assistance on which information is expected from companies and how it should be given. The challenge of information overload is also a concern for companies. Especially with a comply or explain approach, an overload of information is at risk when reporting on both - stating implemented measures and explaining missing information. Closing Remarks The idea of the Sustainability Code offered by the RNE is to empower stakeholders with a tool to engage in sustainable corporate governance. The Code provides a simple, flexible and accessible approach. The feedback of companies on the Sustainability Code stresses that it triggered an intrinsic process, which goes beyond mere business reporting. More than one quarter of companies, which apply the Code have been non-reporters before. The Sustainability Code is a work in progress: the discussion is still on going on how more effort can be put into the often-raised question of materiality and how far the Code can get to the question of supply chain reporting. The RNE therefore invites member states to make use of the open tickets of the Sustainability Code toolbox for national adaption to enhance further strategic development on sustainable corporate governance. In a broader context, the EU Directive stands in line with the implementation of the SDGs. Non-financial information reporting is a very useful tool to steer effective sustainable action in general and in relation to corporate government in particular. Thus, the consolidation of transparency is of high priority and the EU Directive on non-financial disclosure accounts as a step in this direction. The dialogue will be continued at a Multistakeholder Forum in Frankfurt/Main, Germany on 12 th and 13 th of April The Forum will tackle questions of future prospects of the Sustainability Code and its revision according to the new reporting requirements and the integration of business relevant Sustainable Development Goals. 6