Disclosure of non-financial information going forward in the EU
It is taken for granted that listed companies disclose financial information. Information such as how profitable the company is and what amount of assets it has is indispensable for investment decisions.
However, in recent years, not only such financial information but also non-financial information has become more important.
This is because financial information is accounting figures that show the past and present performance of the company, whereas non-financial information shows a company’s management strategy and can be used as a material to determine the company’s future.
The background to this is that the environment surrounding companies is changing faster than ever before and is expected to change significantly in the medium to long term.
Therefore, where the information, for example, on what risk or opportunity identification the company makes of the various problems it faces and how it is going to respond is provided carefully, it will be surely judged as the growth strategy of the company, and in some cases, the survival strategy.
Among such non-financial information, ESG-related information, which is related to the environment, society, and corporate governance, has attracted particular attention in recent years. In other words, ESG has come to be regarded as very important in terms of corporate sustainability and sustainable growth.
This perception is most advanced in the EU, where the Non-Financial Reporting Directive (EU law) is accelerating the need for companies to disclose information on how they perceive and respond to ESG issues.
For example, climate change-related information has become particularly important with regard to the environment of E. First of all, corporate activities are one of the factors of climate change, and companies are considered to have a great responsibility to fulfill.
At the same time, as a measure against climate change, it is conceivable that governments of each country will impose various regulations on companies in the future. In other words, companies should disclose information on what measures they are considering or taking against the risks, or opportunities from a different perspective, of such regulations.
As for the society of S, in Europe, there is a particularly high awareness of human rights, and in recent years, the disclosure of relevant information has been emphasized.
For example, there is a strong awareness of issues such as child labor, and companies are not only required to avoid child labor within the company, but also criticized for doing business with other companies, including overseas companies, that use child labor. In other words, we need to pay attention to respect for human rights in the supply chain or value chain.
The reason for this strong awareness is that there is an idea that sustainable corporate growth exists in the relationships between companies and society, and stakeholders, and sustainability of society and various stakeholders also exists in these relationships.
Significance of non-financial information disclosure related to ESG
There are three main reasons for emphasizing ESG-related information disclosure as non-financial information. The first is the idea of facilitating dialogue between investors and management.
For example, as mentioned earlier, non-financial information represents a company’s vision for the future. On this basis, investors can make investment decisions and exchange opinions with management about management strategies.
In other words, there are situations in which investors do not judge a company based solely on numerical values such as financial information.
The second reason is the idea that certain companies are responsible to society. That is why it is necessary to get them to report to see if they are doing what they need to do.
In Japan, accountability is translated as “responsibility to explain,” which is taken as an excuse when something goes wrong.
In Europe, however, companies are responsible entities, and that is why they are required to clarify and explain what role it should play.
In other words, there is the idea that making a profit is not the only reason for a company to exist (raison d’être).
The third reason is the idea that when information must be disclosed, companies usually decide their own actions based on the content of the disclosure.
For example, in order to disclose information on how much CO2 emissions can be reduced, companies will implement their own initiatives to achieve this.
Based on this concept, the EU is increasingly demanding the disclosure of non-financial information. This will enable the sustainable growth of the company, which in turn will lead to the sustainability of society.
Unfortunately, Japan’s perception is still low compared to the EU’s perception. This may be because Japanese companies and economic organizations voluntarily have regulated themselves based on Japanese customs and values.
However, in the present age, when the supply chain and value chain are globalized, human rights infringements overseas cannot be deterred only by perfect tuning between those involved domestically, so to speak, and climate change is not the problem of only one country.
Of course, also in Japan, we are moving toward emphasizing the disclosure of non-financial information. However, it is important for everyone to recognize and share what such disclosure is necessary for, not to demand the apparently same disclosure as the EU or others.
Citizens also want to raise awareness of ESG information
With the disclosure of non-financial information, the EU is also introducing a system to check its reliability.
Accounting and audit firms have been checking the contents of financial information. On the other hand, there were no experts in Europe who could check non-financial information, including environmental and human rights issues.
However, non-financial information is not just information related to the environment and human rights, but an indicator of the future of the company and also supports estimates information related to financial information. Therefore, major international audit firms, known as the Big Four, seem to be actively hiring and training specialists to check non-financial information.
In fact, countries such as France, Spain, and Italy already require checks, to a certain extent, by outside experts to ensure the reliability of non-financial information. There is a movement to spread it throughout the EU in the future. In order to realize this, it is an urgent task to develop human resources.
Certainly, sanctions can be imposed afterwards such as administrative sanctions, fines, and damages for intentionally not stating important things or making false statements as non-financial information. In fact, in Japan, it is difficult to determine how much non-financial information affects stock prices, but lawsuits have been filed claiming damages due to insufficient or inaccurate disclosure of non-financial information.
However, in order to prevent insufficient or untrue non-financial information from being released into the world, it is desirable that prior checks of non-financial information be carried out by experts as well as financial information.
In recent years, ESG investment has been expanding. I believe Japanese companies also need to recognize the importance of non-financial information not only from the perspective of providing information to stakeholders and society, but also from the perspective of using it for their own management.
At the same time, it is also necessary for us citizens to raise our interest in the non-financial information disclosed by companies.
In fact, one of the reasons European companies place importance on ESG is that citizens and civic groups are very interested in the information disclosed by companies.
In Germany, there is a political party called the Greens, which is working on environmental issues. In the Netherlands, there is a high awareness of child labor issues, and citizens raise protests if a company deals with foreign companies doing such things.
The UK has a statute called the Modern Slavery Act. In France, Switzerland, etc., citizens urge the administration to deal with companies with environmental and human rights issues. In other words, citizens and civic groups have the function of monitoring companies.
It seems that companies often respond promptly to these activities of citizens. I think this is because companies are aware that not only can they lose customers, but also what the citizens point out will lead to sustainable growth for companies. For the same reason, companies are conscious of ESG investment.
Some Japanese companies that are active in Europe disclose non-financial information related to ESG locally, but do disclose in less detail in Japanese in Japan.
However, I would like you to consider not only the fact that information disclosure is observed because it is a rule of the country, but also why such rules are established. Otherwise, if similar rules are established in Japan, it will be just a formality of information disclosure.
In order to prevent the disclosure of corporate non-financial information from becoming a mere formality, we, as citizens, would like to pay attention to the messages contained in the information disclosed by companies.
This is because it is not limited to the micro level of correcting corporate fraud and negligence, but also leads to the realization of the macro goal of ensuring the sustainability of the society in which we live.
* The information contained herein is current as of February 2022.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
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