We keep hearing about it – what is non-financial reporting and does it affect us? Does it make sense, or is it just another bureaucratic evil? Based on the new EU Directive, companies in the Czech Republic will soon have to learn about what is a responsible business - finally.
By the end of this year, Czech Republic will implement a new European Parliament Directive into its legislation - the 2014/95/EU Directive on „Disclosure of non-financial and diversity information by certain large undertakings and groups“. The Directive is a new legislative measure of the European Union, in force from the beginning of 2017, under which businesses will have to compile a report on how they are sustainable.
Why non-financial reporting?
According to the European Commission, this new measure will lead towards an even more significant promotion of the Corporate Social Responsibility (CSR) concept. The Directive requires businesses to regularly assess and publish an overview of their non-financial information. This should allow for better understanding of their development, performance, position on the market and impacts of their activities.
The aim of the Directive is to:
- show businesses how to integrate social impacts associated with their business into their decision-making;
- provide investors and the public with information on how large corporations manage the impacts of their activities on society, employees, market economy, human rights, environment and corruption;
- create a general flexible framework for non-financial reporting that will allow for comparison of this information.
Who will be affected?
Approximately 6,000 companies will be affected in the European Union. In the Czech Republic, approximately 20 of the biggest local companies will be affected, including, for example, ČEZ, Agrofert or Česká pošta.
The requirements apply to large public-interest entities with at least 500 employees, total assets of more than €20 million and a net turnover of more than €40 million. Specifically, it will concern listed companies, banks, insurance undertakings and other companies that are key for the functioning of the state, such as Čepro in the Czech Republic.
What must companies disclose?
- Brief description of the company's business model;
- Description of the policies/strategies pursued by the undertaking in relation to its social and environmental impacts, including the applicable procedures of due diligence;
- Outcomes of these policies/strategies;
- Main risks associated with these impacts that are linked to the undertaking's operations, including its business relationships, products or services, which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks;
- Key indicators used for evaluation of the above mentioned.
Flexible approach
The European Commission set up a flexible reporting process and left the report form up to individual state members. By the end of 2016, official guidance should be published, which will, however, not be legally binding. Companies, for which certain areas in the report may not be relevant, will be able to justify this and omit that section in the report. Should a business publish a global report fulfilling all of the above requirements, local reports will not be required. Independent assurance of the report is recommended, but not essential. According to the Ministry of Finance, the Czech Republic is not planning to issue any local guidance on the Directive.
Businesses should rely on national or global reporting frameworks, and if they do so, they shall specify which frameworks they have relied upon. The most widely used international reporting framework is the GRI (Global Reporting Initiative) standard. The GRI methodology serves as a guidance of how to define business’s relationship to sustainable development based on internationally recognized and comparable aspects and indicators.
Established practice
It is a common process around the world that businesses publish reports on their CSR and sustainability development. It helps to define their comparative advantage, better reputation and a more successful communication with stakeholders. Furthermore, some of their important partners (e.g. banks or investors) require it, too. CSR reports are prepared not only by large corporations, but also by a significant number of SMEs, including a lot of non-governmental organizations.
Explore new opportunities
There are two ways of how to implement the new requirement. It is possible to understand it as a necessary bureaucratic evil and delegate its fulfilment to your company’s solicitors. Or it is possible to take an advantage of these disclosures and use them as a tool for integration of values, employee involvement, improvement of performance & strategic decision-making, and exploration of new opportunities for a long-term growth. Flagship, the first agency in the Czech Republic specializing in non-financial reporting, can help you with the second option.