France’s financial market regulator, The Autorité des marchés financiers (AMF), has submitted several proposals to the European Commission, in response to the commission’s solicitation of comments on its review of Europe’s non-financial reporting disclosure rules. France has been one of the countries of the forefront of ESG, and a leader in regulatory practices on sustainability issues.

The European Commission’s Directive 2014/95/EU – also referred to as the  Non-Financial Reporting Directive (NFRD), is one of the landmark regulatory issues on the regulatory agenda this year affecting sustainable business and finance. The NFRD requires companies with more than 500 employees to disclose the non-financial risks and opportunities that they consider material for their business models, including many issues relating to the ESG and sustainability practices of those businesses. In February 2020, the European Commission  launched a public consultation on the review of the NFRD, inviting commentary from stakeholders on the review until June.

The European Commission’s review is being performed in light of the commission’s observations that current non-financial disclosures made by European companies fall short in several areas. Current information is seen to be lacking in reliability and comparability, with material disclosures often difficult to find, or even missing altogether.

In its response to the European Commission, France’s AMF submitted proposals to address five key challenges for the NFRD. First and foremost, the AMF highlighted the need to clarify the concept of materiality. Simply put, materiality is the measure of the importance of a piece of information. Materiality has long been a cornerstone of financial reporting, but tends to be less well-defined regarding non-financial or sustainability issues. While many companies publish high volumes of information regarding ESG topics, the materiality of that information may be questionable, leading to concerns of greenwashing.

The AMF proposed better defining the themes on which companies are invited to disclose, along with the creation of precise targets and indicators, to better enable stakeholders to better understand performance in the specific context of the companies their sectors.

The AMF also suggested expanding the scope of the companies that will be subject to NFRD rules. The current rules require NFRD compliance by companies with more than 500 employees. AMF’s submission proposes this be expanded to companies with more than 250 employees, which exceed €40 million in revenues and/or a €20 million balance sheet.

Finally, the AMF submissions include proposals to improve the reliability of non-financial information, and to define good governance rules for the future non-financial reporting standard.

The complete proposals outlined by the AMF are as follows (source: AMF):

Clarifying the concept of materiality

Materiality is the cornerstone of relevant non-financial reporting but is not defined clearly in the existing texts. Although it appears crucial to modify the current definition, this imperative must be reconciled with an objective of regulatory stability. The AMF therefore proposes not to significantly modify the current wording of Article 1 of the Non-financial Reporting Directive, but to complete to it.

As the materiality assessment represents a key step in the preparation of non-financial reporting, the AMF is in favour of companies publishing information on this subject. In order to guide actors in implementing this, it also proposes to create methodological tools to be used by companies on a voluntarily basis.

Completing the themes on which companies are invited to disclose

In order to evaluate the way in which companies consider non-financial issues, it is necessary that they publish information on their sustainability governance: the role of their governing bodies as regards these issues, on the governance of non-financial issues in general, and on the governance of non-financial reporting itself.

The definition of precise targets associated with the non-financial policies and indicators applied will also allow a company’s stakeholders to understand its performances in the specific context of the company and/or its sector, and to assess its prospects for the future.

Extending the scope of companies subject to non-financial reporting

Rethinking the limits of the scope of application of the Non-financial Reporting Directive is a key issue in the revision of this directive. The AMF therefore calls upon the European Commission to conduct a precise assessment of the impact of an extension of this scope in terms of the number of companies concerned and their environmental and social impacts.

On this subject, the AMF wishes to defend several strong convictions:

The current scope of application of the directive is too limited for European companies to be able to make an effective contribution to the sustainable development objectives of the European Union. It is also urgent to harmonise the scope of application on a European scale by removing any national options.

It is important to extend the scope of application to listed and unlisted companies with more than 250 employees and which exceed €40 million in turnover and/or a €20 million balance sheet total. A simplified reporting format should be proposed for listed and unlisted companies with between 250 and 500 employees.

Conversely, companies with less than 250 employees should be able to choose whether to draw up a non-financial report or not.

Improving the reliability of non-financial information

It seems crucial today that a review of the non-financial report by an independent third-party body become mandatory. Particular attention should be given to the non-financial performance indicators published by the companies, insofar as such data is then used by financial actors who will pay particular attention to it for the purposes of implementing the regulation on sustainability-related disclosure and on sustainability risks (known as the Disclosure Regulation).

Defining the good governance rules for the future non-financial reporting standard

The AMF draws the attention of the European Commission to the importance of defining specific principles to guide the setting process of the future European non-financial reporting standard. This should aim at ensuring the independence and transparency of the selected organisation, the supervision of its relations with the public authorities along with clear rules regarding accountability of the organisation, and the flexibility and agility of its operating methods. Likewise, it is essential to ensure well-balanced participation of all the stakeholders with an interest in non-financial reporting, in order to guarantee that the future regulations are relevant.