ERU, Alm.del - 2019-20 - Bilag 324: Regeringens svar på Europa-Kommissionens offentlige høring om revisionen af Non-Financial Reporting Directive (NFRD) samt orienteringsnotat, fra erhvervsministeren

Erhvervsudvalget 2019-20
ERU Alm.del Bilag 324
Offentligt

NOTE

8. June 2020

20/07388-1

otfruh-dep

The Danish Government’s response to the public consultation on the

revision of the Non-Financial Reporting Directive

It is a key priority for the Danish Government to enable a green and sus-

tainable transformation of the society and accordingly the Danish govern-

ment has set an ambitious target to reduce CO2 emissions by 70 % in 2030.

Private companies play a vital role in order to fulfil the ambitions of the

CO2 reduction targets nationally and of the Paris agreement, to fulfil the

UN sustainable development goals, the purpose of the UN guiding princi-

ples for business and human rights and the OECD guidelines for responsi-

ble business conduct.

The Danish Government supports the initiative of the Commission in the

European Green Deal to evaluate the Non-Financial Reporting Directive

(NFRD) and appreciates the opportunity to comment on the Commission’s

public consultation.

Capital and investment are necessary in order to finance transformation at

the company level and even more so in light of the Covid-19 crisis. The

core message from leaders at Davos 2020 was not to be misunderstood

–

investment and finance will increasingly be directed towards sustainable

activities. We need to make sure that European businesses are optimally

equipped to attract the increasing amount of green and sustainable invest-

ment funds both at the European level but also at the global level.

The reporting framework of the non-financial reporting directive (NFRD)

plays an important role in enabling company documentation for investors

and other stakeholders. Implementation of the requirements of the NFRD

has contributed to increased transparency and a shared focus between

Member States. The directive has provided flexibility due to the comply-

or-explain principle in accordance the wishes of companies in general.

However, we see a gap between needs of the users of non-financial in-for-

mation (NFI) and the information given in the reports from companies. The

Danish government believes that a revision of the NFRD isneeded to

strengthen the quality and value-creation of non-financial reporting.

ERU, Alm.del - 2019-20 - Bilag 324: Regeringens svar på Europa-Kommissionens offentlige høring om revisionen af Non-Financial Reporting Directive (NFRD) samt orienteringsnotat, fra erhvervsministeren

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From October 2019, the Danish Business Authority has engaged in a wide

stakeholder dialogue on CSR reporting at the national level. While stake-

holders have different purposes for reading non-financial information, it is

our conclusion that they generally ask for more data in the form of stand-

ardised indicators as well as more structure in the reporting format. Many

stakeholders are now placing increased importance on non-financial infor-

mation and they are asking for a higher degree of alignment of reporting on

financial and non-financial information. Further, in the autumn of 2019 the

Danish government launched 13 climate partnerships representing different

sectors and chaired

by CEO’s of some of the biggest

Danish companies.

Among their recommendations published this spring, a number revolved

around the need for more standardized data and reporting on CO2 emis-

sions.

To reach the goal of more value-creating non-financial reporting we find it

important to have easy access to both digital financial and non-financial

information. The data should be easily accessible for the investors in the

same document and structured non-financial data is recommended.

Finally, we would find it beneficial if more companies could be encouraged

to report on non-financial information while keeping in mind that re-

sources, size and competences vary significantly at the company level in

Member States. The Danish Government proposes to introduce different

level of requirements based on a proportionality perspective to engage

more companies

including SME’s to report as a minimum a set of core

KPI’s.

Quality and scope of disclosed information

The Danish Government agrees that both investors and other stakeholders

are asking for more relevant, reliable and comparable information. Report-

ing on relevant KPI’s is essential for a fair, balanced and understandable

report and this will positively contribute to transparency. The updated Non-

Binding Guidelines on the NFRD clarifies some of the articles of the

NFRD. However, the guidelines are not enough to secure relevant and nec-

essary information.

The Danish Government strongly endorses the Commission to establish a

minimum set of standardised ESG indicators. The set of ESG disclosures

must be compatible with the needs for information from the financial mar-

ket participants as required by the Disclosure Regulation and the Taxon-

omy Regulation, thereby providing companies and investors with struc-

tured data to make informed choices on sustainability challenges. When

disclosing ESG-indicators, companies must also disclose their targets to

provide information on progress for users.

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We encourage the Commission to update the section on KPIs in the Di-

rective, not only on climate, but on all topics. In relation to disclosures,

focus should be on the quality of the KPIs rather on quantity. A long list of

KPIs or KPIs without information on the applied method may be counter-

productive due to the risk that companies may focus on reporting on all the

KPIs instead of those that are material or only KPIs, which show a positive

development. A common and detailed standard method for all KPIs is es-

sential for the quality and comparability of the reports. For a report to be

fair, balanced and understandable

there must be a link between companies’

reporting on their policies and principal risks, and matters related to those

risks, as well as to the undertaking’s operation and its KPIs.

The requirement to report on

due diligence processes

in the

NFRD’s arti-

cle 19a (1) is vague and could be revised to more clearly require companies

to disclose whether they practice due diligence processes or not. A simple

Y/N option would increase transparency significantly compared to status

quo. At the same time, the Danish Government do not believe that substan-

tial requirements to due diligence processes should be part of the NFRD

revision if the purpose of aligning financial and non-financial re-porting is

to be achieved. The Danish Government believes due diligence processes

to be a very important part of responsible business conduct and stand ready

to discuss the issue outside the scope of the NFRD.

Data ethic

relates to the use of increasing amounts of data and the ethical

considerations a company must make when applying new technologies.

Data is becoming increasingly important in business models, and digital

responsible companies will be strengthened by a requirement of reporting

data ethic policies. We therefore encourage the Commission to consider

including new provisions for companies to prepare a non-financial state-

ment containing information relating to their data ethics policies as part of

their annual management reports. The aim is to create focus and transpar-

ency on European companies' work with data ethics for the benefit of po-

tential business partners, investors and customers. If data ethics are to be

covered by the directive on non-financial reporting, it will become a global

competitive parameter that supports a European way for digital responsi-

bility and differentiate European companies from e.g. Chinese and Ameri-

can companies.

With a view to ensure fulfilment of the aims of the European Green Deal

and the new Circular Economy Action Plan, we support the Commission's

intention to enhance disclosure of environmental data. We also encourage

the Commission to include provisions for companies to provide infor-

mation on the work of the company in the area of circular economy princi-

ples. Developing the EU as a circular economy is an important part of de-

livering on the Paris Agreement on greenhouse gas reductions and at the

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same time holds great potential for cost savings and business development

for companies. Accordingly, developing standardised KPIs on circular

economy is important. The KPIs on circular economy should be aligned

with the definitions set forward in the Taxonomy Regulations article 13.

Standardisation

In order to support companies in reporting in compliance with the NFRD,

one standard rather than a multitude of standards from different standards

setters is desired to ensure quality of the report, but we do not see that any

of the existing reporting frameworks and standards are able to cover the

entire scope of the NFRD on its own.

Denmark strongly supports a global holistic solution for the disclosure of

non-financial information. European companies often have suppliers, in-

vestors and customers around the world and non-financial issues like envi-

ronment and labour rights are also not just European issues. Consequently,

the Danish Government sees one global non-financial reporting framework

or set of standards as the ambitious goal. European guidelines can be a step

in the right direction preferably as a first step solution to the long-term goal

of a global standard.

There are several European initiatives on non-financial reporting. It is im-

portant that these initiatives are aligned. It is highly important to ensure

alignment between the NFRD and the concrete reporting demands of the

Disclosure and Taxonomy Regulation.

European Financial Reporting advisory Group (EFRAG) is contributing

with great success in regards to the international work on developing stand-

ards for financial reporting. EFRAG have competences in relation to de-

veloping financial reporting standards and have a good dialogue with both

companies producing financial statements (preparers) and the users of the

financial statements. EFRAG have been involved in the work with non-

financial reporting (NFR) as the EFRAG reporting LAB have been estab-

lish and are publishing valuable information regarding NFR. We believe

that the competences of EFRAG are very useful in the process of the de-

velopment of guidance of NFR.

Therefore, the Danish Government suggests that until new international

standards on non-financial reporting have been developed and approved,

EFRAG may issue temporary guidelines on non-financial reporting to the

European companies. EFRAG reporting LAB may assist in the work on

guidelines for the European companies

–

especially regarding the develop-

ment of KPI’s.

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This will, however, require that EFRAG receives the necessary resources

as this is an additional task, but also because it will be necessary to recruit

specialists on NFR.

It will furthermore require some changes to the governance of EFRAG in

order to make sure that the interest of all relevant stakeholders on NFR are

included in the decision-making process regarding issuing guidelines on

NFR.

If it is not possible to have an international standard or have European

guidelines from EFRAG under condition of the necessary changes in EF-

RAGs governance structure, then The European Securities and Markets

Authority (ESMA) could get a central role regarding NFR. ESMA is fully

involved in the work with NFR in the EU and has a broad network with the

National Competent Authorities

(NCA’s) in the EU about the reporting of

both financial and non-financial information. ESMA has also knowledge

and experience with preparing financial guidelines/standards. ESMA at-

tends to the interest of the financial investors’ operating on the financial

markets. It will therefore also require changes in ESMA, as ESMA will

need to get expertise on not only listed companies but also non-listed com-

panies, both large and SMEs. The decision-making process in ESMA is

based primarily on collaboration with the NCAs, but in case ESMA would

be tasked with developing guidelines on NFR, it would be necessary to

consider governance arrangements to better reflect input from preparers,

users and other stakeholders.

The Danish government also has an ambition to enable SMEs to report on

ESG matters to a larger extend in order to steer SMEs attention to new

sustainable business models as well as attracting investment and capital to

sustainable SMEs. Danish studies of NFI reporting illustrates that the level

of reporting is still very fragmented and somewhat immature on ESG indi-

cators. Our study and dialogue with stakeholders have also provided in-

sights to the significant transitional task a structured and more value-creat-

ing NFI reporting will require in SMEs, as they have to develop processes,

systems and skills to report efficiently. Danish SMEs are asking for volun-

tary, simple reporting solutions allowing them to document sustainable

business models and activities with respect to the resources available for

small and medium size companies. While we believe that mandatory re-

quirements to a simplified standard for SMEs would be an ambitious goal

in the long term, we acknowledge that in the short term a voluntary solution

accompanied by SME specific guidance is the optimal solution.

Materiality

The Danish Government is aware that some companies find it difficult to

adequately address materiality. This insecurity decreases transparency and

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companies are asking for further guidelines on materiality. We strongly be-

lieve that the concept of double materiality is reasonable for non-financial

reporting and we encourage the Commission to prioritise ensuring that a

future standard for non-financial reporting provides clear guidance on how

the double materiality principle relates to all of the non-financial matters

–

environment, social and employee issues, human rights, bribery and cor-

ruption

–

as included in the NFRD.

Assurance

The Danish Government recommends the Commission to seek stronger as-

surance requirements for non-financial information, with limited assurance

as the required level of assurance. Keeping it as a possibility for ambitious

companies to choose voluntarily to have Reasonable assurance. The Com-

mission may look at the standard ISAE 3000, however, we believe that both

auditors and stakeholders need further guidance on assurance on non-finan-

cial information. This guidance must ensure that the stakeholders are aware

of the role of the statutory auditor and what auditor checks have been made.

Digitisation

We find it important to ensure future-proof solutions. This can among other

things be done by allowing for the use of digital solutions to the widest

possible extent, especially in relation to reporting requirements. There is

great potential in reporting through the same digital solution for both the

financial and non-financial information in the annual reports. This would

also ensure a smooth interlinkage between NFI and investments into sus-

tainable activities. This should of course be based on a consideration of

cost-benefit.

Structure and location

The Danish Government suggests applying the same structure as known

from financial reporting to non-financial reporting. This will help ensure

that all relevant information is included. This is important in order to ensure

the understanding of the undertaking’s development, performance, position

and impact of its activities, relating to, as a minimum, environmental, social

and employee matters, respect for human rights, anti-corruption and brib-

ery matters.

We conclude that the flexibility of the Directive to either publish NFI in

the management report or in a separate report have a negative impact on

the user’s ability to find the information. Hence, we encourage the Com-

mission to require publishing NFI only in the management report. Wher-

ever the non-financial information is published, it is important that only

relevant NFI is included and that the information is well structured and en-

ables digital reporting.

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Personal scope

For good reasons the scope and requirements of the NFRD has only applied

to one category of companies

–

the largest public interest entities. However,

we see two somewhat opposing trends in society today. Firstly, more com-

plex and extended non-financial information is demanded from large com-

panies by various stakeholders especially regarding climate information.

The requirements of the Regulation on Sustainable Finance (taxonomy) is

one example. Secondly, smaller companies also need to transform their

business to sustainable activities and attract investment with fewer re-

sources available for reporting. For these reasons, it may be time to apply

different scopes and levels of requirement in the NFRD. For these reasons,

we find it difficult to apply a one-size-fits-all approach to reporting.

We encourage the Commission to look at a three-level regulation under the

NFRD. First level, keeping the full set of requirements for the public inter-

est companies with more than 500 employees including the reporting re-

quirements for non-financial companies in the Taxonomy Regulation. Sec-

ond level, introducing a set of a minimum core requirements focused on

EGS reporting on a set of relevant KPI´s for the public interest companies

with 100 to 500 employees and large companies which should seek to

achieve coherence with the requirements under the Disclosure Regulation.

Reporting on relevant KPIs is essential for a fair, balanced and understand-

able report and we encourage the Commission to have in mind that the

companies differ in size and resources. Third level, a voluntary standard

for SMEs with a core of ESG indicators, which should also, to the extent

possible, be aligned with reporting requirements in the Disclosure Regula-

tion.

We encourage the Commission to develop simple and clear criteria for the

scope of each level and provide sufficient guidance for companies. A com-

plex set of criteria may risk creating new uncertainties for companies and,

hence, introduce new burdens.

Level of regulation

The Danish Government believes that regulating non-financial reporting

should continue in the form of a directive aligned with the Accounting Di-

rective (Directive 2013/34/EU). Also, some categories of information

needs a certain flexibility to apply national considerations like emission

factors for calculating CO2 emissions.

In conclusion,

requirements in the NFRD should ensure a high level of

quality and transparency of information in the reports. We would like to

cover all sizes of companies, but stress that no size fits all. We believe that

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the criteria highlighted in this paper are important to achieve more compa-

rable and reliable reporting on non-financial information. We look forward

to contributing actively to the revision process.