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Frameworks for standards for non-financial reporting

Frameworks for standards for non-financial reporting

Overview

The Department for Business, Energy and Industrial Strategy ("BEIS") has published its Final Report: Frameworks for standards for non-financial reporting ("NFR") (the "Report") which sets out the preferences of key U.K. stakeholders around NFR standards. Whilst established reporting standards and accounting principles for financial reporting are available to businesses, the Report notes there is no equivalent for NFR despite there being a number of key drivers for the publication of this information (set out below) and so, although the purpose of this research is not to endorse a specific framework, BEIS hopes that it may support future studies exploring potential changes to policy in this area.

There were three aspects to the research (i) "Rapid Evidence Assessment" focussing on 20 studies concerning stakeholder views on NFR published over the past five years, (ii) small workshops held in September and October 2019 with user, preparer and institutional investor stakeholders and (iii) three surveys of each of  reporting companies, retail investors and employees and potential employees.

This report is an important step in identifying stakeholder expectations and the challenges faced by companies in non-financial reporting.

 

Key drivers of non-financial reporting

  • The role that businesses and others have to play in addressing climate change and wider environmental concerns, with a particular interest in their part in the transition to a low carbon economy.

  • Consumer interest in sustainable investment and businesses with a "do no harm" strategy.

  • The need to rebuild a perceived mistrust that business has no wider purpose beyond profit and that it does not consider ESG (environmental, social and governance) issues.

  • Individuals and non-governmental organisations taking a more pro-active approach to holding businesses responsible for their actions through litigation.

Key findings

Alignment of stakeholder views

  • Stakeholders find the language used in NFR complex and companies consider that it can also be quite negative.

  • Comparability of NFR in metrics and terminology is valuable to stakeholders but not fully enabled by the current frameworks.

  • There is support for a "Core and More" approach to reporting with a set of core, universal requirements which is supplemented by bespoke reporting relevant to the particular business.

  • Institutional investors and companies agree that "telling the story" is key to reporting on impact and greater standardisation in NFR will help reporters to do this more effectively.

  • Stakeholders are supportive of an international standardised NFR framework to facilitate comparability and benchmarking of businesses across jurisdictions and markets.

  • Companies experience similar barriers to better reporting which include lack of available data, costs and inconsistent terminologies.

Difference in stakeholder views

  • The perception of materiality in NFR across various stakeholder groups are different and complex. For example, users believe businesses should consider two types of materiality (i) issues directly affecting profitability and (ii) activities which have a broader effect on environment or society.

  • Lack of clarity around the objective and audience of NFR, with some companies trying to demonstrate financial viability and carry out an "impression management" process which is difficult to balance.

  • Companies do not see the business case for NFR, despite demand from users.

  • Companies are able to manipulate data to address particular points and there is a call for more balanced reporting on positive and negative aspects, with the avoidance of "greenwashing".

  • There is a perceived lack of "maturing" of the reporting process and a reluctance amongst companies to move away from their bespoke reporting approach.

  • There is a tension between the value of external assurance of NFR to users and the cost that is incurred to companies by engaging a third party in the process.

  • Users prefer NFR to be set out in a stand-alone report, but companies would rather take an integrated reporting approach.

  • Users familiar with NFR would like increased frequency of reporting whereas companies are reluctant to take on this additional cost. There is also a concern that increased reporting would reduce companies ability to act on the data which is the key purpose of the reporting process.

  • Some companies felt that the burden of publishing financial and non-financial reports simultaneously placed unnecessary pressure on reporting teams and if the "Core and More" approach is taken then separate publication periods could be introduced to address this.

For further details of the methodologies and findings, please find the full Report here. If you would like to discuss any aspect of this Report or its implications for your business, please do get in touch.

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