In the European Green Deal, published in December 2019, the European Commission made a commitment to review the Non-Financial Reporting Directive (NFRD) by the end of 2020. This review offers an opportunity to accelerate the transition towards an impact economy, a market economy revolving around the common good. Thus, the Impact Economy Foundation (IEF) has submitted a response to the EU Consultation for the revision of the Non-Financial Reporting Directive (NFRD).

Urgency to mature the field of non-financial reporting

It is undeniable that the current market economy still facilitates human rights violations and exacerbates global societal challenges, such as climate change and health crises. The impact economy, as a market economy, is much more effective at creating welfare and solving societal challenges than our current economy. To realize the impact economy, enterprises, investors, consumers, employees and governments need much better information on the impact that enterprises have on society. Specifically, it requires enterprises to measure, value and report on impact in a standardised and universal manner. The impact transparency this will create will enable enterprises to create more value for society, governments to incentivise such value creation and consumers and employees to choose enterprises that do so.

By contributing to impact transparency, a revised NFRD can contribute to the realisation of the impact economy and make the European Union the strongest major economy – in terms of resilience and value creation for its citizens.

Increasing the scope and extending the quality of the NFRD

As is well-recognized, the NFRD was a major leap forward for non-financial reporting. It created a critical mass of EU enterprises reporting on non-financial information and stimulated the adoption of non-financial reporting standards, such as GRI. In addition, it stimulated the development of innovation in non-financial reporting, in particular in the field of impact measurement and valuation by large enterprises.

It is now time to take the next step and work towards a form of non-financial reporting whose goal is to enable informed decision-making for every stakeholder of an enterprise.

In particular, in recent years it has become clear that informed decision-making by investors or other stakeholders requires that enterprises be compared and ranked in terms of their impacts on society (and its specific stakeholders).

This necessitates information on impact that has, in addition to being standardised and reliable, the following qualities:

  1. It needs to be based on an agreed taxonomy
  2. It needs to be quantified
  3. It needs to be valued in the same unit or in commensurable units
  4. It needs to have a valuation based on science and existing normative international frameworks
  5. It needs to be complete in all material aspects
  6. It needs to be attributed

In line with those criteria we propose that two more categories of non-financial information are disclosed in company reports.

  1. Impact Statements in the form of a set of standardised tables and qualitative and quantitative annotations that present non-financial information regarding the quantified and (where possible) monetised impact of an enterprise in a systematic and comparable manner.
  2. An explicit specification of the welfare aspects and dimensions considered. Welfare aspects should include (i) welfare realised during the reporting year, (ii) welfare captured in stocks of financial and non-financial capitals, (iii) welfare for all people, current and future. Welfare dimensions should include well-being of people and respect of rights.

Building on existing frameworks and promising initiatives

Standardisation (of current practices) alone will not solve the lack of useful impact information. However, it is very much a necessary condition for successful non-financial reporting. Given that it is aimed at information relevant to the welfare and use of all stakeholders, it is key that the standard is also developed in a multi-stakeholder manner. Currently, there are various inspiring new initiatives, such as Impact Measurement Project (IMP), the True Cost Accounting Community of Practice (CoP), the Value Balancing Alliance (VBA) and the Impact Weighted Accounts Initiative (IWAI), defining the language and methods for impact measurement and/or valuation. Some of these are focussed on developing intellectual products or harmonisation and others aim to publish a framework for impact measurement and/or valuation in the future.

An existing innovative framework to measure, value and report impact is the Framework for Impact Statements. This framework is used by various corporates and SMEs and addresses the questions of (1) double materiality, (2) quantifying, valuing and monetising impact, (3) covering backward and forward looking impact and (4) reporting on impact.

This framework is an innovation. However, in terms of maturity and adoption, it is not comparable with established frameworks such as GRI, IIRC, CDP, etc. This framework could nevertheless help catalyse a ‘next generation’ NFRD by solving some of the problems identified above and providing an affordable option for both corporates and SMEs. For SMEs it is important to have a simplified approach that should, in first instance, be voluntary, as SMEs have less resources and expertise.

In addition, we also think it is important to provide consumers and customers with transparent and comparable non-financial information in relation to products. The Impact Economy Foundation is working on this together with the True Price Foundation.

Making assurance fit-for-purpose

EU law should impose stronger assurance requirements for non-financial information reported by companies falling within the scope of the NFRD. Non-financial information should, in the end, be published with reasonable assurance.

We believe that non-financial reporting should be accorded the same status as financial reporting. Mature non-financial reporting requires the involvement of auditors and a reliable due diligence of the disclosed information. Across the world, multiple impact reports have been provided with limited assurance, and various non-financial disclosures and selected quantified and monetised impact disclosures have even received reasonable assurance. This illustrates that it is possible to assure impact information. However, in the absence of both reporting and assurance standards for non-financial impact information meeting the aforementioned criteria, the assurance process is necessarily time intensive, subjective and dependent on the preferences of the people and enterprises involved in the assurance process. Moreover, involving auditors would make the profession as a whole more fit-for-purpose by providing them with the knowledge and competences to understand and audit non-financial information.

Towards a single report and a single standard

A single standard for non-financial information, and, in particular, one that ensures that each company publishes a set of harmonised impact statements, would (i) reduce the need for the plethora of domain-specific frameworks and (ii) induce more uniformity in the available non-financial information.

We acknowledge that a single standard is an ultimate goal, and also that there are steps in between to be taken. We realise that this may still be too early in the journey for achieving such an ambitious standard in the upcoming review of the NFRD. We do, however, believe great progress has been made towards these in between steps.  From a technical perspective we are quite advanced, and various enterprises have already applied the principles of, or similar to, the Framework for Impact Statements. Examples in Europe include ABN AMRO Bank and Alliander, which disclosed monetised overviews of the impact of the enterprise on six capitals in their integrated report. Furthermore, both of their impact disclosures received (limited) assurance from their auditors. Other enterprises outside Europe, such as DBS bank, have also utilised this framework.

This consultation is very promising for the next phase of the NFRD. Impact Economy Foundation is very willing to pursue this matter further with European Commission.

Full consultation document

For the full IEF consultation document, click here.