The Financial Reporting Council (FRC) are currently conducting a review on the non financial reporting requirements for firms and seeking input on how to improve standards. Rashim Arora looks at the aim of this review and what firms can take away from it to improve their reporting processes.
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With Environmental, Social and Governance (ESG) issues becoming primary agendas for businesses and governments alike, the significance of non financial reporting has grown significantly to align with sustainability measures and long-term climate agendas. As well as this, stakeholders and regulators are increasingly demanding transparency and accountability throughout the reporting process, meaning there is a push to ensure that non-financial information is reported accurately and consistently across the board to improve overall standards and meet best practice.

To meet this objective, a call for evidence has been initiated by the FRC with their Smarter Regulation Non financial reporting Review. This review aims to improve the quality and effectiveness of non financial reporting within firms by assessing the current standard and gaining perspective on how firms currently operate, with a long-term aim of promoting sustainable business practices and informed decision-making capabilities across industry. Therefore, it is important that firms assess the findings of this reporting review and consider how you can use the information gathered to improve your internal business practices.

Defining non financial reporting

Non financial reporting specifically details the coverage of a company's environmental, social, and governance (ESG) performance. In essence, it provides a broader understanding of a firm’s overall impact on the environment beyond traditional financial metrics, such as profit or gross margins, and provides an overview of the firm’s larger objectives and social contributions. Non financial reporting allows for consumers, employees and regulators to fairly assess a company's commitment to sustainability practices and climate change mitigation amongst other ESG factors and how these practices align with the financial and holistic objectives of the firm.

The Smarter Regulation Non Financial Reporting Review looks to gain information on the current state of non financial reporting practices and is a chance for firms to put forward their insights and experiences on sustainability to map out what is still needed to improve ESG practices across industry. Their call for evidence invites fresh perspectives on various aspects of non financial reporting, such as the current regulatory landscape and potential areas for improvement. The FRC is also seeking input on how to enhance details around reporting requirements and improve the quality and comparability of non-financial information across the board, so you should consider how you can contribute by assessing your current reporting standards.

Reporting review objectives

The feedback that the FRC is seeking from firms revolves around a set of key areas that define the purpose of the review and outline the current landscape of reporting standards. These targets also reflect the current trajectory of non financial reporting and where they feel improvements are still needed. One of the largest objectives of this review revolves around the need to enhance the quality of reporting information and the metrics surrounding it. There is a sense that the current standard could be improved to consider more aspects of the ESG process and specifically how firms are choosing to use their resources on sustainability measures. The priority is to identify areas where non financial reporting can be improved by reviewing the existing templates and standards in place, including the reliability and consistency of reported data, and ensuring that it provides meaningful and reliable insights.

Additionally, the review is looking to streamline the overall reporting requirements around ESG and point out what opportunities are available to enhance the reporting process. Therefore, a key aim of the review is to encourage collaboration and invite different perspectives around best practice to identify strong examples of effective reporting strategies and provide important insights. You should look to assess this information and reflect on how you can incorporate these methods into your current reporting frameworks.

Using the review findings

It is important that firms consider this review from a strategic perspective and absorb the findings to incorporate into their current processes. A key factor of the review revolves around how you should be considering the range of angles and attitudes from industry leaders on non financial reporting and how it will ultimately improve your internal reporting standards and help you get ahead. Improving this aspect of your framework will improve transparency by creating a good foundation to establish trust and improve stakeholder relationships with clearly defined data on your sustainability measures to highlight, as well as avoiding inadequate disclosures and the reputational damage that would likely accompany this.

As the burden of reporting increases, you'll need to think about the impact on resourcing. As each organisation will have different targets, based on their individual needs and ESG ambitions, you will need to consider what additional skills sets you’ll need. This may depend on the type of data and metrics you collect, and the Key Performance Indicators (KPIs) you set. If they’re quantitative in nature you may have greater demand for data scientists, if they’re qualitative you may rely on more exert opinion from a risk or ESG specialist. Either way, you need appropriate resources with clear management information to help the Board make informed decisions and support good governance.

Improving your reporting standard also ensures that potential risks are considered by the Board and mitigated efficiently. A strong infrastructure for reporting will allow you to identify and manage your ESG risks and opportunities more easily and allow you to follow emerging trends and impacts on business practices. In turn, this will ensure that there are strong risk mitigation strategies in place and the ability build resilience against these issues. Strong non financial reporting will ultimately allow you to make better decisions on these emerging issues and develop a constructive knowledge of the firm’s sustainability performance. In turn, you can ensure that you are meeting best practice whilst considering positive environmental and social impacts this reporting standard will create.

It is important to consider that firms that are capable of showcasing their ESG capabilities through reliable and comprehensive reporting are able to gain a competitive edge and stay ahead of the curve. Having the ability to demonstrate your focus on sustainability practices and environmental impact will improve consumer trust and create meaningful reputational impacts whilst ensuring that best practice is being met. The consultation is currently ongoing and closes on 31 August, so assessing your current processes now would be beneficial in getting a head start on your non financial reporting framework.

For more information, contact Rashim Arora (FSG) and Jacky Griffiths (BRS).