Navigating non-financial disclosure reporting

Lately, there has been a growing demand for non-financial reporting. But what does non-financial reporting entail?

The overarching idea of corporate social responsibility (CSR) traces its roots back to the early 20th century, gaining increased attention in the 1950s and 1960s. During this period, certain companies began recognising that their obligation to society extended beyond financial commitments. Consequently, this awareness prompted self-reporting on social and environmental initiatives.

During the 1990s, the concept of the ‘Triple Bottom Line’, coined by John Elkington, gained momentum. This concept underscored the idea that companies should gauge their success not solely in financial terms but also in terms of social and environmental impact. In the late 1990s, the Global Reporting Initiative (GRI) was established. GRI developed a comprehensive framework for sustainability reporting, offering guidelines for organisations to disclose their economic, environmental, and social performance. Presently, there are over 100,000 GRI reporters located in over 100 countries.

Following the establishment of GRI, various sustainability reporting frameworks and standards emerged globally, including the AA1000 Series, ISO 26000, and the Carbon Disclosure Project (CDP). The reporting landscape was becoming increasingly complex, even before delving into the developments of the 2000s.

In recent years, there has been a notable rise in investor interest in non-financial information. Many investors now view Environmental, Social, and Governance (ESG) factors as crucial to understanding a business's long-term prospects. ESG considerations have become integral to investment decisions, prompting numerous stock exchanges worldwide to advocate or enforce ESG reporting among listed companies.

This is where we observe a divergence in non-financial reporting requirements. Some reports are explicitly mandated by diverse global financial markets, serving to inform financial decision-making by (often obligatorily) addressing risks and opportunities. On the other hand, there are reports intended for sharing with all stakeholders to showcase positive environmental and socially responsible impacts. This aspect revolves around stakeholder engagement, corporate culture, and reputation. These ‘social impact’ reports serve as valuable tools for organisations to communicate their dedication to CSR, highlight accomplishments, and demonstrate accountability to stakeholders. They play a pivotal role in building trust, attracting socially conscious investors, and nurturing positive relationships with customers and communities. We can look at both requirements. 

Introducing the Corporate Sustainability Reporting Directive (CSRD)

This year, 2024, sees the introduction of the European Union’s new Corporate Sustainability Reporting Directive (CSRD), which revises the Non-Financial Reporting Directive (NFRD). This EU initiative requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.

The CSRD goes further than the NFRD, expanding on the sustainability reporting standards of the NFRD. Approximately 11,000 companies fell under the remit of the NFRD, whereas 50,000 companies will have to comply with the CSRD reporting requirements.

The goal of the CRSD is to provide transparency that will help investors, analysts, consumers, and other stakeholders better evaluate EU companies’ sustainability performance as well as related business impacts and risks.

CSRD reporting is based on the concept of double materiality. Organisations will have to disclose information on how their business activities affect the planet and its people, and how their sustainability goals, measures, and risks impact the financial health of the business. For example, in addition to requiring an organisation to report its energy usage and costs, the CSRD requires it to report emissions metrics that detail how that energy use impacts the environment, targets for reducing that impact, and to provide information on how achieving those targets will affect the organisation’s finances.

It is worth noting that the CSRD wants companies to prepare their reports in XHTML format (European Single Electronic Format – ESEF) as the reported information must be easily accessible to investors and other stakeholders in the European Single Access Point (ESAP) database.

As a guideline, CSRD compliance will be phased in from 2024 through 2029, primarily based on the NFRD legacy or company size.

• Starting in financial year 2024 (reporting in 2025): Compliance is compulsory for organisations already mandated to comply with the NFRD. This includes all organisations listed on an EU-regulated market with 500 or more employees.
  
  
• Starting in financial year 2025 (reporting in 2026): Compliance is mandatory for large listed undertakings not already required to comply with the NFRD.
  
  
• Starting in financial year 2026 (reporting in 2027): Compliance is mandatory for small and medium-sized undertakings or SMEs listed on an EU-regulated market that meet at least two or three of the following criteria:
• At least EUR 4 million in total assets.
• At least EUR 8 million in net turnover.
• At least 50 employees on average throughout the year.
  
  
• Starting in financial year 2028 (reporting in 2029): Compliance is mandatory for third-country, non-European parent companies with significant business in the EU; this will include all global jurisdictions.

While it may not have an immediate effect on a number of organisations, there is undeniable certainty that non-financial reporting will eventually influence all entities to some extent. This influence could stem from factors such as supply chain demands, adherence to net-zero goals, financial market assessments, or the increasing importance of stakeholder transparency.

Social impact reporting is for everyone

Social impact reports (SIRs) are similar to, and often run alongside, an annual report. They show all your audiences and stakeholders the beneficial outcomes and future plans your business is making through environmental, workplace, community, and philanthropic commitments. These include not just the intrinsic benefits social responsibility has to the planet and to society, but also the vital return on social investment (ROSI). This includes operational and financial savings, employee engagement, and bottom line benefits that are vital for tendering, ESG scoring for financial investment, organisational sustainability, advisories for future development, and, ultimately, long-term business sustainability. They are a perfect step towards CSRD. SIRs are generally seen as a global initiative with organisations across the world publishing and sharing their social impact reports with all stakeholders. 

Social impact reporting should include environmental and social actions and metrics. This could include data on carbon emissions, energy consumption, waste reduction, diversity and inclusion, employee well-being, and community engagement. It should also involve engaging with various stakeholders, including employees, customers, local communities, and investors. Understanding stakeholder perspectives and concerns helps organisations address societal issues more effectively.

Companies can also report on their efforts to contribute positively to the communities in which they operate. This could involve philanthropic initiatives, support for local education and healthcare, or other community development projects.

Social impact reporting serves the dual purpose of accountability and transparency. It allows organisations to showcase their commitment to social responsibility, build trust with stakeholders, and respond to the growing demand for businesses to operate in a sustainable and socially conscious manner. This reporting may be voluntary at the moment, but is likely to be mandated by regulatory bodies in the coming years. 

To report or not report 

Undoubtedly, reporting on your environmental and social impacts is far more beneficial than remaining silent on the matter. SIRs serve as invaluable tools in marketing and communication, offering a means to substantiate and showcase positive, socially responsible initiatives. CSR Accreditation (CSR-A) has introduced the Four Pillars, a structured system facilitating a straightforward process for benchmarking an organisation's socially responsible activities.

The Four Pillars – environment, workplace, community, and philanthropy – serve as comprehensive categories encompassing a diverse array of socially responsible actions that any organisation can undertake. This framework allows for the clear identification and definition of activities, enabling an accurate measurement of impacts and outcomes. It also aids in the creation of content supported by evidence and metrics, forming the foundation of a robust social impact report.

Such reports play a crucial role in preparing for potential future mandatory requirements, such as the CSRD. Additionally, they offer valuable information for tendering processes, ESG compliance, and fulfilling external stakeholder requests. Ultimately, engaging in social impact reporting is a proactive step in readying your organisation to meet its future sustainability commitments.