EFAA Leads Debate on NFI Reporting
Reporting could be beneficial but must be voluntary
EFAA Event Reveals Limited Support for Reporting of NFI by SMEs
Making the reporting of non-financial information (NFI) by SMEs mandatory would not be effective in stimulating SMEs and driving their role for a sustainable economy. This was the prevailing view at an expert roundtable event on the role of small and medium-sized enterprises (SMEs) in making economies more sustainable and circular, hosted by the European Federation of Accountants and Auditors for SMEs (EFAA) in Brussels on 19 February 2019. The event was especially timely given a day later the Commission published a Consultation Document on the Update of the Guidelines on Non-financial Reporting.
The event was opened by EFAA president Bodo Richardt explaining that there was rapidly growing expectation, pressure even, for enterprises to explain how their activities impact the environment and society given that SMEs collectively account for a significant, if not majority, of environmental and social impact. Accordingly, SMEs are key to the pursuit of circular and sustainable economies while being the backbone of the European economy. EFAA wanted to contribute to the discussion of the future direction to take by providing evidence from its new survey on NFI by SMEs and by this expert roundtable event.
The EFAA Survey of Non-Financial Reporting Requirements for SMEs in Europe, explained by EFAA Director Paul Thompson and Richard Martin ACCA Head of Corporate Reporting/EFAA Financial Reporting Expert Group Chair looks at the nature and extent of the reporting of NFI by SMEs in 14 European countries and concludes with three policy considerations:
National regulators should be encouraged to refer to the Non-financial Reporting Directive (NFRD) when formulating or considering NFI requirements for their SMEs, as this will help enhance international comparability of NFI reporting by SMEs;
SMEs should be encouraged to carefully consider voluntarily providing NFI, as this may yield benefits to them, their stakeholders and the wider public; and
Some elements of the NFRD might be suitable for voluntary adoption by SMEs.
Members of the European Parliament Wolf Klinz and Philippe Lamberts joined Bodo Richardt, EFAA President, Jonathan Labrey, Chief Strategy Officer for the International Integrated Reporting Council (IIRC) and Luc Hendrickx, Director at SMEunited to debate how best to stimulate more sustainable behaviour by SMEs and what role reporting of NFI might play in this endeavour.
Lamberts stated clearly that there is a need to change the economic system by changing the incentives to act more sustainable. Klinz concurred when both acknowledged that many SMEs, especially family owned and controlled ones, were inherently more responsible, sustainable and connected with their communities than larger businesses. These SMEs were also very close to their stakeholders, such as customers, suppliers, and capital providers, hence reducing the usefulness of conventional public reporting.
While panelists were unanimous in the desire to make SMEs more sustainable most felt that there were more effective mechanisms for achieving this than reporting NFI. Hendrickx suggested, and fellow panelists agreed, that it was better to focus on showing SMEs how to be more circular, incentivizing sustainable behavior through subsidies and taxation, facilitating SME access to finance for the necessary investments, and raising the capacity of SMEs to be more sustainable. In any case reporting should be on a voluntary basis. As EFAA’s Memorandum for Elections to the European Parliament 2019 explains small and medium-sized practices (SMPs) may have an important role to play in providing this advice.
Regarding NFI reporting, concerns were expressed as to the burden of such reporting which may outweigh the benefits. It was recognized that many if not most SMEs could do a better job of communicating their sustainable behavior but that this could be done in a variety of ways and not necessarily through formal reporting. Typically, SME stakeholders are close to the business and can access NFI directly.
Klinz impressed on the need to avoid an outcome like that of GDPR where an initiative with good intentions inadvertently ended up imposing a heavy burden on SMEs. Voluntary reporting of NFI by SMEs could be encouraged but there was a need “for better reporting, not more reporting”. Lamberts meanwhile said that there was limited appetite to read reporting of NFI by SMEs. Extending NFI reporting by larger business, say through full supply chain reporting, would prove more effective in helping re-orientate the economic system towards more long term sustainable behaviour.
Labrey advocated for integrated thinking and reporting, arguing that this would help facilitate longer term and more sustainable behaviour. The IIRC will soon issue implementation guidance for SMEs wishing to use integrated thinking and reporting; EFAA has already issued summary guidance. EFAA president Bodo Richardt concluded by suggesting that SMEs should be encouraged to consider integrated thinking as a way to facilitate sustainable behaviour and that SMEs need guidance on how to be sustainable rather than a requirement to report on NFI.