The future of non-financial reporting – an update on sustainability reporting

External corporate reporting is currently undergoing a fundamental change, driven above all by stakeholder interests that are being far more strongly articulated. Whereas for decades the main focus was on ‘traditional’ financial reporting that was primarily for shareholders, there is now an increasing demand for additional non-financial information – especially on ESG – which serves a whole range of users, including investors and in particular those groups who (as non-shareholders) are affected by companies in terms of environmental pollution, human rights, etc. Reference is often made here to companies’ ‘social licence to operate’, something which is only granted by stakeholders to companies that are transparent and sustainable.

Reporting on the financial position of entities is, then, to be expanded to include the direct and indirect impact of such effects on the entity and its environment. European legislators firstly reacted to this significant paradigm shift by imposing additional non-financial reporting obligations on certain publicly traded entities and on large financial services providers by mandating CSR reporting.

Since our last newsletter, the following changes have been made:

• International Sustainability Standards Board: on 26 June 2023, the ISSB published the sustainability reporting Standards IFRS S1 and S2. These Standards focus on sustainability-related risks and opportunities and include ‘General Requirements for Disclosure of Sustainability-related Financial Information’ and ‘Climate-related Disclosure’ (as of 28 June 2023).
• EU Taxonomy Regulation: on 13 June 2023, the EU Commission approved the delegated regulation on environmental objectives three to six and on amending the existing EU Taxonomy Regulation (as of 14 June 2023).
• European Sustainability Reporting Standards: on 9 June 2023, the EU Commission published the draft delegated act on the European Sustainability Reporting Standards (ESRS). After a four-week consultation period, the Standards are expected to be adopted by the end of July (as of 12 June 2023).
• International Federation of Accountants: in collaboration with other organisations, IFAC published a guide to support greenhouse gas reporting. This consists of a roadmap for improving greenhouse gas reporting and technical guidance on how to obtain data.

The experiences of recent months and years have shown at various levels that the measures taken thus far by European and national legislators can’t be the last word on the matter. Currently, there is intense discussion about the following main areas of criticism:

1. The lack of international comparability of what is mostly qualitative CSR reporting.
2. Even though there have been efforts to achieve integrated reporting, financial and non-financial information is still being presented in a largely unconnected manner according to the European plan and current implementation.
3. The mandatory audit of entities’ financial reporting is a well-established institution in functioning capital markets. Non-financial reporting also serves to inform the entity’s stakeholders, however, so that on this basis they are able to make decisions on the allocation of capital and ‘goods’. The scope and level of assurance are not the same.

The Institute of Public Auditors in Germany (IDW) has published its position and a brief forecast on these three issues. The position paper includes the following aspects:

1. Further standardisation of non-financial reporting
   The IDW considers it a feasible intermediate step to first develop a solution on the European level using existing reporting frameworks, with the possibility of adopting a global solution.
2. Further development towards integrated corporate reporting
   According to the IDW, there is an urgent need to ensure that reporting on non-financial aspects is treated as part of the management report in such a way that it cannot be presented differently, either in terms of where it is placed or the time of publication. Non-financial aspects should also be monetarised to facilitate preparation of a full ‘statement of comprehensive income’.
   Of course, expanded and integrated reporting also requires entities to implement new systems and processes, including internal controls.
3. Assurance related to non-financial reporting 
   The IDW also calls for auditors to obtain a uniform level of assurance in relation to this integrated reporting as a whole.

Comparable and reliable external reporting that satisfies the needs for information of different stakeholders is necessary. The further development of accounting towards fully integrated reporting is also absolutely possible. A corresponding auditing requirement would be a comprehensive and reliable model as a kind of ‘expanded market information’. In the medium-term, careful consideration needs to be given to extending the circle of entities required to report. This is dependent on the scalability of the regulations and also how well it can be connected to the EU Accounting Directive and national regulations (HGB etc.).

(Source: IDW Position Paper “FUTURE OF NON-FINANCIAL REPORTING AND ASSURANCE”)