Financial stability, financial services and Capital Markets union

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Public Reporting by Companies

Overall state of play:

Evaluation – finalised:

Evaluation on International Accounting Standards (IAS): SWD (2015)301 and COM (2015)301, 18 June 2015

Fitness check on Public Reporting by Companies: SWD (2021) 81, 21 April 2021

Commission proposal – adopted:

proposal on corporate sustainability reporting (COM/2021/189), adopted by the Commission on 21 April 2021

proposals for a regulation (COM/2021/723), Omnibus directive (COM/2021/724) and Omnibus regulation (COM/2021/725) on European Single Access Point, adopted by the Commission on 23 November 2021

Legal act – adopted:

Directive (EU) 2022/2464 as regards corporate sustainability reporting

Ongoing work on further legislative initiatives

State of play, main conclusions, outlook

The 2015 evaluation of Regulation 1606/2002 on the application of international accounting standards (IAS) concluded that the objectives of the Regulation have been met. The Regulation appears to be the most effective instrument in ensuring comparable and complete financial information across Europe. A modification of Regulation 1606/2002 is currently not planned.

Public reporting by companies has evolved beyond financial reporting to make companies more accountable on broader economic and societal issues. Today, it covers a broad range of financial and non-financial information such as financial statements, management reports and reports on payments to government.

This 2021 fitness check assessed whether the public reporting obligations including financial and non-financial reporting requirements for EU companies with limited liability are meeting their objectives, whether the different adaptations to the public reporting acquis are consistent with one another and whether the cost and burden stemming from the various legal reporting obligations are reasonable and proportionate. The Commission consulted the public in 2021 on the quality of corporate reporting and its enforcement, following-up on findings of the fitness check.

As the fitness check identified certain shortcomings as regards the failure on the part of companies to disclose all relevant information, and the limited comparability and reliability of the information disclosed, the Commission put forward a proposal in 2021 on corporate sustainability reporting. This was adopted in 2022 by the European Parliament and the Council.

Also in order to improve access to information made public in the area of financial services and capital markets, on the basis of the action plan on the capital markets union, the Commission put forward a proposal in 2021 for establishing a pan European electronic access to company data (European Single Access Point).

State of Play:

Fitness check on Public Reporting by Companies: finalised, SWD (2021) 81, 21 April 2021.

Scope:

The Accounting Directive (2013/34/EU) including the Non-Financial Reporting Directive (2014/95/EU), Regulation 1606/2002 on International Accounting Standards (IAS Regulation), the Transparency Directive (2004/109/EC), the Banks Accounts Directive (2014/92/EU), and the Insurance Accounts Directive (91/674/EEC).

Evaluation findings:

The Commission carried out a Fitness Check on the EU Framework for Public Reporting by companies in 2021 and concluded that the underlying objectives of the EU framework remain relevant and that, overall, the EU framework has effectively and efficiently achieved its intended objectives and is still fit for purpose in light of evolving societal and technological challenges.

The fitness check found that the Non-Financial Reporting Directive (NFRD) has led to an increase in the quantity of non-financial information disclosed. Nevertheless, the fitness check identified some significant deficiencies in companies’ non-financial information disclosures including the failure to disclose all relevant information, and the limited comparability and reliability of the information disclosed.

The fitness check also highlighted the positive impact of the adoption of International Financial Reporting Standards in the EU for listed companies, which has improved transparency, comparability and reduced the cost of capital. Although the fitness check found that the information provided was overall reliable, it also noted that enforcement regimes and firms’ incentives to issue high-quality financial reports played a determinant role in enhancing transparency. The fitness check made it clear that the enforcement practices of national supervisors on corporate reporting of listed companies differ significantly across the EU. The Wirecard case confirmed that the EU framework has potential shortcomings and weaknesses as regards the effectiveness of enforcement practices.

Estimated savings and benefits

A key finding of the fitness check as regards efficiency is the need to tap the potential of digital tools to structure, re-use, secure, disseminate and give easier access to both financial and non-financial information. The EU framework has started to do so, for instance with the adoption of the ESEF Regulation under the Transparency Directive, which makes the consolidated IFRS financial statements of listed companies both human and machine-readable. However, more remains to be done to improve access to companies’ information.

State of Play:

Adopted:
• proposal for a Directive (COM/2021/189) on corporate sustainability reporting, adopted by the Commission on 21 April 2021
• proposals for a Regulation (COM/2021/723), Omnibus directive (COM/2021/724) and Omnibus regulation (COM/2021/725) on European Single Access Point, adopted by the Commission on 23 November 2021

Which objective(s) does the Commission pursue?

The Commission proposal for a Corporate Sustainability Reporting Directive (CSRD) amends the Non-Financial Reporting Directive (NFRD). The proposal aimed to ensure that companies whose users need non-financial information report such information, and that reported information is relevant, comparable, reliable, and easy to access and use. It also aimed to reduce unnecessary costs for preparers. By enabling investors to better evaluate the sustainability risks and impacts of investments, it would mobilise private finance in support of the European Green Deal. It would contribute to the completion of the Capital Markets Union by enabling investors to access comparable non-financial information from investee companies across the EU. It is also expected to reinforce the social contract between companies and society by making companies more accountable for their impact on society and the environment.

The establishment of a European Single Access Point (ESAP) was announced in the Commission’s Capital Markets Union (CMU) Action Plan in September 2020. The proposal aims to reduce barriers to access to information by digital means, to increase the flows of information within the Union - including across borders - and to foster the digital use and re-use of information. These achievements on information flows and use will in turn contribute to integrating financial services and capital markets and to better allocate capital. As a common data space, the ESAP will also enable the development of new technologies and services for instance based on automation or artificial intelligence.

Estimated savings and benefits

Under the proposed CSRD, users would benefit from better access to comparable, relevant and reliable non-financial information from more companies. This would reduce the risks of investing in the financial system, increase financial flows to companies with positive social and environmental impacts, and make companies more accountable. All large and most listed companies would be required to apply non-financial reporting standards and seek assurance for reported information while today only an estimated 20% of large companies currently apply standards and only 30% seek some kind of assurance.

In the absence of EU action, costs for preparers are expected to increase greatly anyway due to:

- an increase in uncoordinated information demands from users;

- the ongoing absence of consensus on what information companies should report in order to meet users’ needs;

- the persistent difficulties in obtaining the non-financial information preparers need for reporting purposes from suppliers, clients and investee companies.

The unavailability of sufficiently detailed data made it impossible to calculate the costs for preparers in the absence of new rules. However, it was estimated that the use of standards could lead to annual costs savings of EUR 24.200-41.700 per company (around EUR 280-490 million per year for the current NFRD population and EUR 1.200-2.000 million per year for the preferred option), assuming that standards eliminate the need for additional information requests.

The ESAP is expected to enhance the accessibility of information, both within the Member States and across borders and to increase the digital use of this information. This would bring higher, equal and indiscriminate visibility of any market participants and voluntary filer to investors, analysists, intermediates, researchers or funds, independently of their own size or the size of their market. This would in turn open up funding opportunities which may contribute to a better allocation and lower cost of capital as well as more resilience of the internal market. ESAP will offer easy access to a wider array of information in a timely and efficient manner, thus opening new horizons. For users of information, this is expected to lead to potentially sizeable savings of time and resources for searching and processing information. The ESAP will also help address a growing need for access to sustainability-related data by companies, thus contributing to the objectives of sustainable finance and the Green Deal. The ESAP will enable the offer of innovative services in the financial area based on analytics, big data or artificial intelligence / machine learning, and as well access and use on electronic devices and thus also contribute to the development of the Digital Single Market.

State of Play:

Adopted Directive (EU) 2022/2464 as regards corporate sustainability reporting

Outcome of Legislative Procedure

The Commission proposal for a Directive (COM/2021/189) on Corporate Sustainability Reporting was adopted by the co-legislators as Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022.

Overall, the final text is close to the Commission’s proposal on all major issues. The most significant modifications made to the Commission’s proposal are the inclusion in scope of non-EU companies with branches and subsidiaries in the EU; certain modifications to the content of the reporting requirements and reporting standards, notably with regard to reporting value chain information; certain modifications to the proposed regime for audit and assurance; a requirement for sustainability information to be reported in a separate section of the management report; the deletion of the proposed specific sanctions regime for sustainability reporting, the sanctions regime under the Accounting Directive would be the same for sustainability reporting and for financial reporting; and the postponement of a number of deadlines (national transposition, entry into application of reporting requirements and adoption of standards by the Commission as delegated acts).

Overall, the simplification/burden reduction measures proposed by the Commission have been retained by the co-legislators.