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The Ethics of Non-Financial Reporting: Why It’s Time for Deeper Disclosure

Non-Financial Reporting: What’s Changing?

Reporting on human rights is becoming the new normal for business. Issues such as forced labour, living wages, community displacement and gender equality carry much emotional weight – and reputational risk – for companies and their stakeholders.

Recent regulatory requirements such as the UK Modern Slavery Act and California Transparency in Supply Chains Act are reflective of the growing corporate scrutiny. The moral obligation to act, in a way that respects people as much as planet, is also fueling demand for more honest disclosure.

Non-Financial Reporting Directive: How to Prepare

The Non-Financial Reporting (NFR) Directive from the European Union (EU) is one example of how the bar is being pushed higher when it comes to business ethics. The directive, due to come into effect January 2017, will force large companies to rethink how they report on non-financial matters such as human rights, anti-corruption,  social welfare, diversity and the environment.

Under the new rules, companies with 500 or more employees that are headquartered (or have significant operations) in the EU will be required to produce non-financial statements detailing policies relating to the above issues, together with key performance indicators, expected outcomes and risks. Those that don’t disclose this information will have to explain why.

Preparing for NFR is a complex task. The directive is not prescriptive and member states are likely to take differing approaches when transposing it into legislation. Companies meanwhile have to decide which reporting approach is best for them. Three frameworks are likely to dominate: Global Reporting Initiative (GRI), UN Global Compact and ISO 26000.

The most widely adopted is GRI – 82 percent of the world’s 250 largest companies use it to guide their sustainability reports. The number of new GRI reports is expected to double this year to 3,300. An adaptable set of guidelines, GRI can integrate with other frameworks, but imposes additional reporting such as value chain assessments and relies on multi-stakeholder input.

Schneider Electric has actively encouraged its own suppliers to sign up to the UN Global Compact, which is also well recognized due to its association with the United Nations (UN). However, inconsistent participation rates among leading companies makes it challenging  to benchmark across different sectors.

For those with less experience in NFR, the sustainable development standard ISO 26000 offers a useful starting point. It gives good accountability, but the focus is weighted towards internal, rather than external, operations. It also lacks a certification option.

Corporate social responsibility experts anticipate that 6,000 organizations will have to comply with NFR requirements starting in 2017 so it’s advisable to establish a strategy sooner rather than later. Resources such as “Getting Ready for Mandatory Non-Financial Reporting” offer useful guidance, and there are tailored services which can assist with corporate reporting and disclosure.

The Impact: Increased Value and Transparency

Ultimately, NFR should be viewed as driving value for companies. Investors are increasingly looking to access non-financial data that is both useful and comparative across businesses. The directive should be clearly linked to company strategy and risk, and demonstrate transparency on less visible issues such as corporate governance and supply chain impacts. Going forward, NFR will also assist in delivering on wider global commitments such as the UN’s Sustainable Development Goals.

Measuring and reporting NFR results alongside financial data will not only help companies track their performance more consistently, but give them greater accountability. Schneider Electric’s Planet & Society Barometer is just one example of such an evidence-based approach.

Contributed by Nic Seuren, International Director, Schneider Electric, Energy & Sustainability Services

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