UK Financial Reporting Council consults on non-financial reporting

by Carol A Adams

The UK’s Financial Reporting Council (FRC) has responded to the incorporation of the EU Directive on non-financial information into the UK Companies Act by amending its guidance on the Strategic Report.  UK companies with more than 500 employees are required by law to prepare a Strategic Report and now, across the EU, also to report specific non-financial information. This explicitly includes their policies on environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery and diversity on company boards.

The FRC’s Draft amendments to the Guidance on the Strategic Report: Non-financial reporting enhance the link between section 172 of the UK Companies Act with respect to Directors’ responsibilities to promote the success of a company and the purpose of a strategic report. This is good news – research demonstrates that when Boards are involved in the development of corporate reports that both take a long-term focus and recognise that value is more than profit they are cognisant of a wider range of risks and opportunities.  They then set strategy accordingly.

The FRC’s intention is that the guidance reflects key developments in corporate reporting.  Indeed, the proposed guidance has clear synergies with other Frameworks, particularly the Task Force on Climate related Financial Disclosure (TCFD) and the International <IR> Framework, but unfortunately does not make this explicit. There are also synergies with the work of the Climate Disclosure Standards Board (CDSB) and the Global Reporting Initiative (GRI) (for example, with respect to the encouraging the identification of major stakeholders – something the GRI Standards tell reporters how to do).   But without an explicit reference to such standards/frameworks/guidelines the FRC misses an opportunity to provide a really valuable resource for reporters.  These supporting standards and frameworks could be either explicitly referred to or an appendix could be included which draws out where use of such globally recognised frameworks will further enhance the strategic report.

Of course, these other standards/frameworks/guidelines also do not reference each others’ work, but there’s an opportunity for the FRC to lead by example here.

Companies and key global standard setters are providing guidance to companies on responding to the Sustainable Development Goals (SDGs).  The SDGs are a key development in reporting that the FRC’s proposed guidance is silent about.  Yet it does discuss the need to disclose external environmental issues which post a risk to the company’s ability to create value over the long term.  This would be an appropriate place to make explicit reference to the existence of sustainable development issues.

Refreshingly the proposed guidance notes that creating value for shareholders requires developing relationships with stakeholders, but the existence of this link is not consistent with the discussion of stakeholders v shareholders elsewhere.

Whilst there is much that is similar in the proposed guidance to the International <IR> Framework (long-term focus, broader view of value, connectivity, business models), multiple capitals are referred to as ‘sources of value’.  Can’t we stick to one term rather than introduce another new one that people don’t understand?

The thinking on materiality is inconsistent and underdeveloped.  The proposed guidance states (para 5.6): “In the context of qualitative information in general and non-financial information in particular, however, a numerical materiality figure is of less importance and a separate assessment may be required.” It is hard to see (at least without further explanation) how a numerical materiality figure is ever relevant in the case of qualitative information and a different type of assessment is most definitely required!

Further there are inconsistencies in definition. Para 4.2 appropriately recognises that creating value for shareholders requires developing relationships with stakeholders. Therefore issues which are material for stakeholders can become material for shareholders. The definition of materiality should reflect this.

Finally there is a tendency for annual reports to ignore climate change (KPMG, 2017) despite its significant financial implications ,so the guidance could emphasise it.

Nevertheless, the draft guidance is progress towards better, more comprehensive corporate reporting.

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