We are currently in the midst of only the third cycle of non-financial data reporting. This obligation entered Polish law with the implementation of Directive 2014/95/EU. And it is this directive that is currently under review by the European Commission, which plans to present a draft of its amendment by the end of 2020. That's very fast, considering the publication of the first reports just two years ago, because usually the EU regulator evaluates the functioning of the regulations after 4-5 years after their introduction.
The reason for the rush is the climate crisis and pressure from financial institutions. Banks, insurers and investment funds want to direct their resources as quickly as possible to finance those companies that are actively reducing their negative impact on the environment. At the same time, financiers want to reliably assess the risks of their individual portfolios. To do so, however, they need reliable and, above all, comparable data. A very general directive has allowed companies to report non-financial information using whatever standards they want. Since 2018, large companies have been flooding the market with reports of varying levels of detail and, not surprisingly, very different quality. The European Commission's guidelines, by their very nature, have not standardized the reports.
Financial institutions expect the kind of quality and comparability of non-financial data that they get from financial statements prepared throughout the Union on the basis of International Financial Reporting Standards. The answer to the incomparability of non-financial data is the various forms, surveys and questionnaires that companies get to fill out, whether directly from investors or from intermediaries, data brokers, analyst firms and rating agencies. They are the ones who have filled the gap and are trying to provide investors with data that is at least somewhat comparable. However, this results in increased personnel, organizational and financial costs on the part of the companies, because someone has to fill out all these questionnaires, after all.
The solution to the problem is very simple. For several years I have been advocating in the EU forum for the creation of an „International Standard for Non-Financial Reporting,” which would make it easier for companies to prepare reports and for investors to use them. Such an MSSNF would become, to paraphrase Tolkien, one standard to rule them all, a unified platform for reporting, analysis and exchange of ESG data and information. Over the past year, I have heard more and more voices in favor of a similar unification of non-financial reporting. And finally, at the end of January, European Commission Vice President Valdis Dombrovskis announced that work would begin in parallel with the revision of the directive to create a European standard for non-financial reporting, which, once announced, would also be promoted by the Union more widely internationally.
The Commission plans to outsource the work on the draft standard to EFRAG, which seems to be the right institution to carry out this huge task. In creating the standard, it is necessary not only to cover a number of non-financial areas (environmental, social, labor, human rights, corporate governance issues), but also at the same time to cover all sectors of the economy (without losing their specificities) and ensure that the reports are concise and comparable. We should only learn the details of the planned work in the next few weeks, but representatives of both issuers, as well as investors, analysts, banks, insurers and rating agencies will certainly be involved. The work on the standard will be carried out in parallel with the revision of the non-financial reporting directive, as the European Commission, acting under pressure from the financial markets, is anxious for time. In the usual course, a working group on the standard would be formed only after the new directive is passed, but by starting work at the same time it will be possible to save roughly two precious years. Commission representatives also mention the possible replacement of the directive with a regulation. Such a move would also save two years, as the new regulations could take effect soon after their enactment, without the need for time-consuming transposition into the laws of member states.
The shortest timetable could see the legislation designed in 2020, enacted in 2021 and taking effect in 2022. Perhaps the whole process will take longer, but companies should also be ready for this scenario. Not only those that already report today, as there is fairly widespread talk of making reporting mandatory for smaller companies (over 250 employees, rather than 500 as today), which would roughly triple the number of reporting entities. It is also worth remembering that the European Commission has started parallel conceptual work on a limited, basic scope of non-financial data reporting, which could be introduced for small and medium-sized companies. The transitional period of change always seems difficult, but we are getting closer to a situation in which reporting basic data on a company's environmental, social and employee impact will be something normal and common, and not just a difficult task that only the most ambitious and largest companies can afford to perform.
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