Your NFR journey can be profitable if done correctly

Financial Reporting (FR) season is upon us. For most producing annual reports to detail company performance, compliance and general activity by the end of 2021, the herculean task begins again.

This year, like any other, presents new challenges. With increasing numbers of corporations accepting climate change, the Biden Administration’s re-entering into the Paris agreement and the Climate Change Conference of the Parties (COP 26) just around the corner, sustainability has never been more important. However, it’s gone from a discussion topic to an EU mandatory disclosure with Non-Financial Reporting (NFR) becoming a mainstream practice.

It doesn’t have to be taxing. NFR, if used correctly, can serve as a profitable exercise.

To maximise the NFR’s benefits for corporate reporting, set a sustainability strategy. This can start as a short list of ‘green’ initiatives that are relevant and material to your organisation. If you feel confident, it could be a full statement of intent, detailing a full non-financial materiality assessment and identification of relevant reporting metrics to enterprise, stakeholders and consumers. It would also include an analysis of the companies’ shortfalls related to the identified materiality assessment, combined with a detailed proposal of initiatives and necessary standards/frameworks/policies to address the shortcomings.

These strategies or statements of intent should provide you and your stakeholders with a comprehensive outline of your business’s ESG impact, backed by data. Overly fanciful semantic-driven reports — discussing the current trends of ESG/sustainability, why your business has incorporated them and how they align to your purpose and mission — should be reserved for an opening and not littered throughout the statement, reiterated in different ways to fill space. It does not add value. Check out this 2019 McKinsey report, which gives some helpful guidelines.

Step two, and arguably the most important after ensuring the collection of reliable data, is to understand the regulations and define what additional metrics to report:

• The Sustainable Finance Disclosure Regulation (SFDR)(financial market participants and advisers only), authored by the three European Supervisory Authorities, demands full transparency of entity and product-level sustainability impacts.

• The EU Taxonomy Regulation is ‘a classification system establishing a list of environmentally sustainable economic activities’, acting as a tool to implement the European Green Deal and to help reduce greenwashing.

• The Task Force on Climate-related Financial Disclosures is chaired by Michael Bloomberg. This climate-related financial disclosure is fast becoming an industry standard.

While TCFD is not a regulation but set of a recommendations, it will be regulated shortly by UK GOV mandate and therefore may impact companies depending on size as follows:

• Before 2022: Pensions Schemes > £5b, Banks, Buildings Societies & Insurance companies & Premium Listed companies

• Before 2023: Occupational Pension Schemes >£1b, Largest UK AMs, Life Insurers and FCA-regulated pension providers, UK-registered companies, Wider scope of listed companies

• Before 2025: Other occupational pension schemes

While these regulations either apply only to — or presently only to — investors, they will apply to all economically active entities by around 2025. So, they are worth knowing about and also can be helpful purely from a company standpoint of knowing what investors are having to adhere to and what they require in terms of non-financial requirements.

Following your review of the compulsory disclosures, next check the voluntary global standards and frameworks. Finding the right one can be tricky, though. Here are some suggestions on some of the better recognised and well-established survey providing contenders:

• The UN Sustainable Development Goals were set up in 2015 for countries to manage their sustainability impacts. But, at a target level, they can provide an excellent framework for companies to report against. Check out this finnCap ESG Guide, which details more on how this can be achieved.

• Global Reporting Initiative (GRI)

• Sustainability Accounting Standards Board (SASB)

• International Integrated Reporting Framework

• Climate Disclosure Standards Board (CDSB)

* Note: SASB & IIRC to merge and become Value Reporting Foundation (VFR).

This article should give you a more-than-adequate starting point to begin your NFR journey. How much you choose to do is up to you. But the best way to begin is to start with a good and intelligible statement/strategy. To help facilitate this, we created a survey to help guide anybody deciding where to start on this journey.