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Good Practices in Business Model, Risks and Opportunities Reporting in the EU

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on 2021-10-14

A new report by The Project Task Force on Reporting of non-financial risks and opportunities and linkage to the business model (PTF-RNFRO), a project of the European Corporate Reporting Lab @EFRAG (European Lab), which was established by the European Financial Reporting Advisory Group (EFRAG) was released on 4 October, 2021. Some of the interesting parts of the report are listed below.

The comprehensive report not only describes the current state of corporate disclosures but also lists good reporting practices and examples.

"Some of the identified good practices may go beyond what would be expected to be within the requirements of the Sustainability Reporting Standards that are being developed, which are meant to provide a baseline of the expected reporting by all companies. However, companies can learn from the PTF- RNFRO identified examples of good reporting practices and use these to improve their current reporting for the benefit of users and other stakeholders", says Jean-Paul Gauzès, European Lab Steering Group Chairman and EFRAG Board President in his foreword.

Alain Deckers, European Lab Steering Group Vice-Chairman and European Commission DG FISMA, Head of the Corporate Reporting, Audit and Credit Rating Agencies Unit: "The findings of this report strengthen the call for the development of reporting standards that will give companies clarity on what and how to report. In this way, the PTF-RNFRO report supports and contributes to EFRAG’s work on Sustainability Reporting Standards. By identifying good reporting practices and providing tips, this reportgives companies useful tools to start reflecting on how to improve reporting on their business model as well as risks and opportunities, even before the CSRD enters into force and the accompanying EU reporting standards are developed and adopted."

From NFDR to CSRD

The NFRD has been the main legal requirement, to date, for the reporting of sustainability information in the EU. The NFRD is intended to be recast and revised by the proposal for a CSRD14. The NFRD identifies sustainability issues including the environment, social and employees, human rights, bribery, and corruption, along with a requirement to disclose information about their business model, policies (including implemented due diligence processes), outcomes, risks and risk management, and key performance indicators (KPIs) relevant to the business. In its current form, the NFRD does not introduce or require the use of a non-financial reporting standard or framework, nor does it impose detailed disclosure requirements such as sector-specific indicators. However, the NFRD requires companies to disclose both how sustainability issues may affect the company, and how the company affects society and the environment – referred to as double materiality.

Sustainability as restraint or opportunity?

Generally, the PTF-RNFRO identified less mature reporting of sustainability opportunities compared to sustainability risks, possibly suggesting that sustainability is perceived as a restraint on the business rather than an opportunity for growth and development of the business. Stakeholder feedback shows an increasing recognition that sustainability is a relevant and necessary component of business models, but the leap is still to be made by some to move from construing it as a cost or risk rather than as an opportunity that brings potential new areas of growth.

The challenge of taxonomy alignment

Although a majority of respondents to the PTF-RNFRO survey considered the application of the EU Taxonomy to investments as an opportunity to review/enhance their business models, only a few of the reviewed companies report on their current alignment with the EU Taxonomy or describe a future plan for its implementation.

Utility of data and disclosures is still low

Disclosures on sustainability risks and opportunities have limited utility for users (investors and analysts) due to inadequate disclosure on the future cash flow implications of achieving sustainability targets and strategy. Inadequate disclosures can mask how an entity’s future cash flows are affected by changes to the business model, either positively or negatively.

Limited link between financial and non-financial objectives

The link between sustainability strategies and companies’ financial objectives is quite limited. Many companies tend to only report through a general qualitative statement or objectives associating their strategy with the Sustainability Development Goals of the United Nations General Assembly (SDGs), and a few report other factors such as adding value to specific stakeholders.

Focus on Assurance

"It does not depend only on certain stakeholders such as investors to be clearer about their information requirements or for preparers to provide more quantitative and linked disclosures. It also depends on those setting and enforcing the rules along with assurance providers who need to play their role to drive better reporting outcomes", as noted by the PTF-RNFRO Chairs Dawn Slevin and Mario Abela.

"Assurance is necessary to provide confidence to users that the corporate reporting process and controls produce information that is reliable, accurate and complete and the appropriate principles as specified by the selected reporting standards, guidance and frameworks have been properly applied. It was observed that there are large differences in the scope of assurance and application of assurance standards. Furthermore, the wording of the assurance report varied significantly across assurance providers11. During the stakeholder-outreach interviews, assurance providers underlined the need to standardise the criteria of the assurance process for all sustainability matters", as noted in the report.

Verifiability will be supported by evidence of assurance and can be demonstrated by disclosure of methods used to determine disclosed data. As outlined in the report, "Third-party assurance of sustainability data reported is common practice in over 95% of reviewed companies. In addition, we found that, for the reviewed companies, there is diversity in the location of reporting sustainability risks and opportunities that are linked to the business model. The annual, integrated and sustainability reports are the most common reports with this information."

Very important information on "Assurance" was given in Chapter 7.7 in the main report: "As the interviews with stakeholders demonstrated, there is still a degree of scepticism about the ‘green’ claims being made by companies in their management or other reports. As one academic put it: “Imprecise statements. Unfair statements. Out of context statements. Non- material statements” and this echoed the comments made by a number of stakeholders. Accordingly, there is considerable scope to build trust and credibility in reporting. The role of assurance is not just about building credibility amongst stakeholders but there is a direct benefit to the company in improving their systems and processes to be able to transition to sustainability being seen as a cost to an opportunity to identify new sources of value. Assurance has already been made mandatory in some Member States and the proposal for a CSRD extends limited assurance over all the management reports across the EU and that development has the potential to significantly enhance the quality of reported information. A considerable challenge for assurance providers is to ensure that the claims being made – on both financial and sustainability reporting information align. The lack of alignment at present raises doubts for stakeholders about whether the claims included in sustainability reports are reflected in the financial statements and in the assumptions that underpin accounting estimates."

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