EUROPEAN COMMISSION Brussels, 21.4.2021 SWD(2021) 150 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Directive of the European Parliament and of the Council

amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting {COM(2021) 189 final} - {SEC(2021) 164 final} - {SWD(2021) 151 final}



Table of contents 1.Introduction: Political and legal context 1.1 How does this initiative contribute to the political priorities of the Commission and the EU? 1.2 What is the legal and policy context? 1.2.1 The Non-Financial Reporting Directive 1.2.2 Other relevant EU legislation and policy 2.Problem definition 2.1 What are the problems? 2.1.1 Problems and consequences from a user perspective 2.1.2 Problems and consequences from a preparer perspective 2.1.3 Overall consequences 2.2 What are the problem drivers? 2.2.1 Market failures 2.2.2 Regulatory failure 2.3 How will the problems evolve? 3.Why should the EU act? 3.1 Legal basis 3.2 Subsidiarity: Necessity of EU action 3.3 Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved? 4.1 General objectives 4.2 Specific objectives 5.What are the available policy options? 5.1 What is the baseline from which options are assessed? 5.2 Description of the policy options 5.2.1 Standardisation options 5.2.2 Assurance options 5.3.3 Scope options 5.3 Options discarded at an early stage 6.What are the impacts of the policy options? 6.1 Impacts of standardisation options 6.1.1 Analysis of impacts of Option 1: Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use) 6.1.2 Analysis of impacts of Option 2. Develop EU non-financial reporting standards for voluntary use 6.1.3 Comparison of standardisation options 6.2 Impacts of Assurance options 6.2.1 Analysis of impacts of Option 1: Require reasonable assurance 6.2.2 Analysis of impacts of Option 2: Require limited assurance 6.2.3 Comparison of assurance options 6.3 Impacts considering different scope options

6.3.1 Analysis of impacts of Package 0 6.3.2 Analysis of impacts of Package 1 6.3.3 Analysis of impacts of Package 2 6.3.4 Analysis of impacts of Package 3 6.3.5 Analysis of impacts of Package 4 6.3.6 Comparison of Packages 7.Preferred option 7.1 REFIT (simplification and improved efficiency) 8.How will actual impacts be monitored and evaluated? Annex 1: Procedural information 1.Lead DG, Decide Planning/CWP references 2.Organisation and timing 3.Consultation of the RSB 4.Evidence, sources and quality Annex 2: Stakeholder Consultation Annex 3: Who is affected and how? 1.Practical implications of the initiative 2.Summary of costs and benefits Annex 4: SME Test Annex 5: Summary Report of SME Panel

1.Introduction 2.Demographics of the respondents 3.Current ESG practices and requirements 3.1 Practices on ESG data collection 3.2 Publication and disclosure practices 3.3 Requests of ESG information from stakeholders 3.4 Time invested on ESG data processes 4.SMEs preference on development of a non-financial reporting standard for SMEs 5.Methodology of Size Assessment Annex 6: Implications of the Covid-19 Pandemic Annex 7: Description Of The Non-Financial Reporting Directive Annex 8: Examples of Non-Financial Information given in the Commission’s 2017 guidelines Annex 9: Overview of Transposition of the Non-financial Reporting Directive by Member States Annex 10: Relevant EU legislation and policy initiatives Annex 11: Capital Markets Union High-Level Forum proposal for European Single Access Point. Annex 12: Problem Definition 1. Problems and consequences from the perspective of users of non-financial information 2. Problems and consequences from the perspective of preparers (reporting companies) Annex 13: Description of principal private international non-financial reporting frameworks and standards Annex 14: Non-financial Reporting Requirements in Other Jurisdictions

Annex 15. Legal basis Annex 16: Assessment of proposed policy options for other variables 1. Digitalisation 1.1 Baseline 1.2 Proposed change: Develop EU digital taxonomy and require companies to tag reports 1.3 Impacts of the proposed change: Develop EU digital taxonomy and require companies to tag reports 1.4 Proposed changes compared to baseline 2. Sanctioning regime and enforcement 2.1 Baseline 2.2 Proposed changes: Clarify and strengthen supervisory regime of non-financial reporting 2.3 Impacts of the proposed changes: Clarify and strengthen supervisory regime of non-financial reporting 2.4 Proposed changes compared to baseline 3. Reporting on intangibles 3.1 Baseline 3.2 Proposed change: Require reporting on intangibles 2.3 Impacts of the proposed change: Require reporting on intangibles 2.4 Proposed changes compared to baseline 4. Where to publish non-financial information? 4.1 Baseline 4.2 Proposed changes: Do not allow reporting in separate report

4.3 Impacts of the proposed changes: Where to publish non-financial information 4.4 Proposed changes compared to baseline 5. Materiality concept in non-financial reporting 5.1 Baseline 5.2 Proposed change: Clarify in law when is information material 5.3 Impacts of the proposed change: Clarify materiality concept 5.4 Proposed change compared to baseline 6Exemption of subsidiaries 6.1 Baseline 6.2 Proposed changes: Clarify in law the exemption of subsidiaries 6.3 Impacts of the proposed change: Clarify in law the exemption of subsidiaries 6.4 Proposed changes compared to baseline Annex 17: Costs Analysis Annex 18: Discarded Policy Options Glossary Term or acronym Meaning or definition KPIs Key Performance Indicators NFRD Non-Financial Reporting Directive ESG Environmental, social and governance SMEs Small and medium-sized enterprises SFDR Sustainable Finance Disclosure Regulation GRI Global Reporting Initiative CRR Capital Requirements Regulation SASB Sustainability Accounting Standards Board IIRC International Integrated Reporting Council ESAP European Single Access Point CMU Capital Markets Union ESMA European Securities and Markets Authority TR Taxonomy Regulation EMAS Eco-management and Audit Scheme LPD Late Payments Directive TCFD Task Force on Climate-related Financial Disclosures





1.Introduction: Political and legal context This impact assessment concerns a proposed initiative on annual public reporting of non-financial information by companies. It considers different policy options, taking account of the existing legal provisions introduced by the Non-Financial Reporting Directive. 1.1 How does this initiative contribute to the political priorities of the Commission and the EU? This initiative is part of the Commission’s 2020 Work Programme and is one of the actions proposed by the European Commission to implement the European Green Deal. The European Green Deal is Europe’s new growth strategy. It aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050. It will decouple economic growth from resource use, and ensure that all regions and citizens of the EU participate in a socially just transition to a sustainable economic system. Private finance has an important role to play in meeting the objectives of the European Green Deal. This initiative will support sustainable private finance, by helping investors identify companies that carry out sustainable activities. The Commission will present a renewed sustainable finance strategy in the fourth quarter of 2020, building on the 2018 Sustainable Finance Action Plan. This initiative also supports the current European Commission’s objective of ensuring An Economy that Works for People. It contributes to the completion of the Capital Markets Union, by enabling investors, and other stakeholders, to access comparable non-financial information from investee companies across the EU. It aims to enable SMEs to better contribute to and benefit from the transition to sustainable economy. This impact assessment takes an “SME-first” approach. A culture of greater accountability and transparency from companies regarding their impacts on society and the environment could also help to strengthen the social contract between business and citizens, and contribute to a greater sense of social fairness. In addition, this initiative supports the objective of A Europe Fit for the Digital Age. The Commission has stated that the “twin challenge of a green and digital transformation has to go hand-in-hand”. Non-financial information reported by companies should become part of the single European data space. This initiative can create opportunities for reporting companies, investors, civil society and other stakeholders to radically improve the way in which non-financial information is reported and used through the use of digital technologies. The Covid-19 pandemic is expected to further accelerate the growth in demand for non-financial information from companies. At the same time, the economic crisis generated by the pandemic makes it ever more important to avoid the imposition of unnecessary administrative costs on business. Annex 6 summarises the implications of the Covid-19 pandemic for this initiative. This initiative reflects the calls by the Council and the European Parliament to consider further action to improve non-financial reporting. In December 2019, in its conclusions on the Capital Markets Union, the Council stressed the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts, and called on the Commission to consider the development of a European non-financial reporting standard. In its resolution on sustainable finance in May 2018, the European Parliament called for the further development of reporting requirements in the framework of the Non-Financial Reporting Directive. A wide variety of different organisations and stakeholders have called for consideration of a new regulatory approach to non-financial reporting, including the International Monetary Fund , central banks in the Network for Greening the Financial System , investors, some business associations, civil society organisations and trade unions. 1.2 What is the legal and policy context? 1.2.1 The Non-Financial Reporting Directive In 2014 the EU agreed the Non-Financial Reporting Directive (Directive 2014/95/EU), which amended the Accounting Directive (Directive 2013/34/EU). The Non-Financial Reporting Directive (NFRD) imposed new reporting requirements on certain large companies. Companies under the scope of the NFRD had to report according to its provisions for the first time in 2018, for information covering financial year 2017. This section highlights some of the main provisions of the NFRD. Annex 7 provides a full description of the NFRD. The Non-Financial Reporting Directive at a glance As required by the NFRD, in 2017 the Commission published non-binding guidelines for companies under the scope of the Directive. In 2019, the Commission published additional guidelines, specifically on reporting climate-related information. If companies use reporting frameworks, then they have to specify which frameworks they have used. The NFRD does not, however, require the use of a reporting framework or standard. The NFRD applies to large public interest entities with more than 500 employees. In practice this means that it applies to large EU companies with securities listed in EU regulated markets, large banks (whether listed or not) and large insurance companies (whether listed or not) – all provided they have more than 500 employees. The NFRD exempts the subsidiaries of parent companies from the reporting obligation, if the parent company itself reports the necessary information on a consolidated basis. We estimate that approximately 11 700 companies are subject to the reporting requirements of the NFRD.

The NFRD identifies four non-financial ‘matters’: environment, social and employee matters, human rights, and anti-corruption and anti-bribery. With regard to those four matters, it requires companies to disclose information about five business concepts: business model, policies (including due diligence processes implemented), the outcome of those policies, risks and risk management, and key performance indicators (KPIs) relevant to the business. Annex 8 provides illustrative examples of the kind of information that companies could be expected to disclose under the NFRD. Companies under the scope of the NFRD are required to disclose information “to the extent necessary for an understanding of [their] development, performance, position and impact of [their] activity.” The reference to “impact” represented a significant innovation: it introduced a double materiality perspective, whereby companies have to report information not only on how non-financial issues affect the company (“outside-in” perspective), but also regarding the impact of the company itself on society and the environment (“inside-out” perspective). The NFRD requires the auditor to check that the company has provided a non-financial statement, but does not require the auditor to assure the content of the information. However, Member States may require assurance on the content of the information reported and three Member States (Italy, Spain and France) have used this option. Annex 9 provides an overview of how Member States have transposed the NFRD. 1.2.2 Other relevant EU legislation and policy The Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, together with the NFRD, are the central elements of the sustainability reporting regime that underpins the EU’s Sustainable Finance Strategy. The Sustainable Finance Disclosure Regulation (SFDR) governs how financial market participants (including assets managers and financial advisers) should disclose sustainability information towards end investors and asset owners. Financial market participants can only meet the requirements of the SFDR if they have access to adequate information from investee companies. Since the NFRD governs reporting by investee companies, there is an obvious case for ensuring alignment between the disclosure requirements of the NFRD and the SFDR. The Taxonomy Regulation creates a classification system of environmentally sustainable economic activities with the aim of scaling up sustainable investments and combatting greenwashing of ‘sustainable’ financial products. It requires companies under the scope of the NFRD to disclose the extent to which their activities are considered environmentally sustainable according to the taxonomy. Financial market participants subject to the SFDR must disclose the extent to which financial products marketed as sustainable are aligned with the taxonomy. The taxonomy therefore represents an important reference point that further strengthens the interactions between the SFDR and the NFRD. The goal is to create a consistent and coherent flow of sustainability-related information through the financial value chain. To achieve this, consistency and alignment between the future technical standards of the SFDR and any possible standards developed under the NFRD will be especially important. Annex 10 describes in more detail the interactions between the NFRD, the SFDR and the Taxonomy Regulation, including a graphical representation of these interactions. This initiative will also be closely coordinated with certain other Commission initiatives, including in particular: -European Single Access Point: as part of the Action Plan on the Capital Markets Union, the Commission will put forward a legislative proposal in 2021 to set up a European Single Access Point (ESAP) – an EU-wide digital access platform to companies’ public financial and non-financial information. It will facilitate access to the non-financial information that companies disclose under the NFRD, provided that such information is digitally tagged in the appropriate way. -Sustainable corporate governance: the Commission will propose a new initiative in 2021 to embed sustainability in the corporate governance framework and foster behavioural change in companies by addressing issues such as the duty of care of company directors, the integration of sustainability into corporate strategies, the setting of science-based sustainability targets, and due diligence for environmental and human rights impacts. To ensure coherence and maximum alignment, the NFRD could mandate the disclosures that may be necessary under the proposed sustainable corporate governance initiative. -Pay Transparency: the Commission has adopted a proposal aimed at strengthening the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms. This proposal includes requirements on certain companies to make information regarding the gender pay gap publicly available. Some of these companies may also be covered by the Non-Financial Reporting Directive (NFRD). Both initiatives will be aligned so that any public reporting on the gender pay gap pursuant to the Pay Transparency Directive by companies subject to the NFRD would be taken into account in possible standards for non-financial reporting under the NFRD. -Green Claims Initiative: the Commission is considering a new legislative initiative to tackle false claims of environmental sustainability. Under the Green Claims Initiative, companies that voluntarily choose to make green claims would have to substantiate such claims against a standard environmental impact methodology. Environmental information published in company annual reports, which is regulated by the NFRD, does not fall within the definition of “green claims”. Any legislation of green claims would therefore not apply to the information in company annual reports. Nevertheless, to promote coherence and maximum alignment, the revision of the NFRD could as far as possible refer to the environmental impact methodologies that are likely to form the basis of any Commission initiative on green claims. -Environmental accounting: the Commission is co-financing a new business led initiative to develop standardised environmental accounting principles within the EU and internationally. Company-level environmental accounting practices can play an important role in quantifying companies’ environmental impacts and should help to underpin the content of environmental information that they disclose under the NFRD. Annex 10 provides a more comprehensive list of relevant EU legislation and policy initiatives, and a more in depth analysis of the interactions.

2.Problem definition This section summarises the identified problems, and the consequences and drivers of those problems. Annex 12 provides a more detailed analysis of the problems. In March 2021, the Commission published a Fitness Check on the overall EU framework for public corporate reporting by companies (financial reporting and non-financial reporting), together with a report on the NFRD itself as required by the review clause (Article 3) in the Directive. The deficiencies in current non-financial reporting identified in this section reflect the principal findings of the Fitness Check and the review clause report. In addition, this section extends beyond the Fitness Check and the review clause report with regard to presenting the consequences and the drivers of those deficiencies.Stakeholder consultations have helped to validate the problem definition, in particular open consultations organised in 2018 for the Fitness Check and in 2020 for this review of the NFRD. Annex 2 provides a summary of all stakeholder consultations and their results. Figure 1 - Integrated overview of drivers, problems and consequences 2.1 What are the problems?

It is useful to make a distinction between problems for users of non-financial information disclosed in company annual reports, and problems for preparers of that information (that is to say, reporting companies). 2.1.1 Problems and consequences from a user perspective This problem analysis focusses on the primary intended users of non-financial information disclosed in company annual reports: ·on the one hand investors, including asset managers, who want to better understand the risks and opportunities that non-financial issues pose to their investments, as well as to better understand the social and environmental impacts of those investments; ·and on the other hand, non-governmental organisations, trade unions and other stakeholders, who want to better hold companies to account for their social and environmental impacts. Many investors and asset managers purchase non-financial information from third party data providers, who collect information from various sources including public corporate reports. However, investors remain the end users of this information, and third party data providers are therefore not considered primary intended users of this initiative. Other stakeholders may also make use of non-financial information disclosed in annual reports. Policy makers and environmental agencies may make use of such information, in particular on an aggregate basis, to monitor environmental and social trends, to contribute to environmental accounts, and to inform public policy. Few individual citizens and consumers directly consult company non-financial statements, but more use such information indirectly, for example when considering the advice or opinions of financial advisers or non-governmental organisations. The specific problems from the user perspective of non-financial information are: a)Some companies from which users want non-financial information do not report such information. b)Many companies that do report non-financial information nevertheless do not report all relevant information that users need or want. c)Reported information is not sufficiently comparable. d)Reported information is not sufficiently reliable. e)It is hard for users to find and exploit the information they are looking for even when that information is reported. Whether a company reports against a recognised reporting standard, and whether the reported non-financial information is assured, are useful proxies for assessing the relevance, comparability and reliability of the reported information. They therefore help to illustrate the size of the problems from a user perspective. Based on CEPS study, we estimate that only around 20% of large limited liability companies in the EU comprehensively apply recognised reporting standards, and only around 30% publish non-financial information that has been assured at least to a minimum level. It is widely recognised that information on intangible assets is underreported, even though such assets currently represent the majority of investment carried out by the private sector in advanced economies. Amongst other reasons, the lack of digitalisation of the information reported and the lack of clarity about which company in a group is required to report non-financial information, lead to problems of searchability and accessibility of the information. These specific problems lead to the following general problem from the user perspective: users do not have access to adequate information about how non-financial issues, and sustainability issues in particular, might impact companies, or about how the company itself impacts society and the environment. The consequences of the problems from a user perspective depend on which users are considered: a)Investors are unable to take sufficient account of sustainability-related and other non-financial risks and opportunities in their investment decisions. This has the potential to create systemic risks that threaten financial stability. b)Investors are also less able to channel financial resources to companies and economic activities that address and do not exacerbate social and environmental problems.

c)Non-governmental organisations, trade unions and other stakeholders are less able to hold companies accountable for their impacts on society and the environment. This creates an accountability deficit, and may be a contributory factor in the weakening of the social contract between business and citizens, with effects on the efficient functioning of the social market economy. 2.1.2 Problems and consequences from a preparer perspective The specific problems from a preparer perspective are: a)Preparers face difficulty and complexity when deciding what information to report. b)Preparers find it difficult to get the non-financial information they need from suppliers, clients and investee companies to report adequately. c)Preparers receive information requests from stakeholders in addition to the information they report to fulfil their legal requirements. The general problem from a preparer perspective created by these specific problems is that preparers incur unnecessary costs associated with the reporting of non-financial information. 2.1.3 Overall consequences The overall consequence of these general and specific problems is that the potential of the European Single Market to contribute to the objectives of European Green Deal, and to the achievement of the UN Sustainable Development Goals, is not fully exploited. 2.2 What are the problem drivers? The drivers of the identified problems are market and regulatory failures. 2.2.1 Market failures Non-financial information from companies can be considered a public good, since one user’s “consumption” of the information does not reduce the amount available for others. In addition, it is not possible to charge for access to publicly available non-financial information because there is an obvious free-rider problem. This leads to a supply of non-financial information that is below market demand. Although some companies would publish non-financial information in the absence of an obligation to do so (because they find it beneficial, for example in terms of reputation or access to capital), overall, in the case of an unregulated market, the supply of information is unlikely to meet users’ demand. There has been a very significant increase in demand for non-financial information in recent years, especially on the part of the investment community. This increase in demand is driven by the changing nature of risks to companies and by growing investor awareness of the financial implications of those risks. It is also driven by the growth in investment products that explicitly seek to meet certain sustainability standards or achieve certain sustainability objectives. However, market forces on their own have not so far been sufficient to ensure that companies report the non-financial information that is needed to meet the increase in demand. Recognition of this failure lies behind many of the calls for stronger policies on non-financial reporting, including regulatory action, from organisations such as central banks and the International Monetary Fund. The European Securities and Markets Authority (ESMA) has recommended stronger non-financial reporting requirements as a means of addressing undue short-termism in securities markets. Market forces have catalysed the creation of a large number of non-financial reporting standards and frameworks, at international, national and sector level. Furthermore, new initiatives continue to emerge. The market on its own however has not ensured that many companies fully apply any of the existing standards and frameworks. For example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are widely respected as authoritative guidance on climate reporting, but the 2020 TCFD status report suggests that significant implementation challenges remain. The market on its own has also not so far been able to ensure adequate convergence and consolidation between the different frameworks and standards. There are overlaps and inconsistencies between them, including in terms of the non-financial issues they cover, and the intended audience of the disclosures they recommend. This is a significant driver of the reporting burden for preparers, and of the problems faced by users in terms of limited comparability and relevance of reported information. 2.2.2 Regulatory failure The EU agreed the NFRD before a number of landmark EU and global policy developments, including the UN Sustainable Development Goals (2015), the Paris Agreement on climate change (2016), the EU Sustainable Finance Action Plan (2018) and the European Green Deal (2019). These more recent policy developments reflect a growing political and social awareness of the intensity of the sustainability crisis. For most sectors of the economy, including the financial sector, sustainability has clearly moved from the margins to the mainstream in a relatively short period of time. Overall, the political choices that shaped the NFRD in 2014, while valid at the time they were made, may not be appropriate in the current circumstances. The following characteristics of the NFRD are drivers of the specific problems identified in section 2.1:

·Scope: The NFRD only ensures that large listed companies, large banks and large insurance companies disclose non-financial information, and only if they have more than 500 employees. This does not include some companies from whom users need non-financial information. ·Flexibility and lack of granularity of reporting requirements: The reporting requirements in the NFRD are high level and principles based. The NFRD does not specify in any significant detail the information that companies should disclose, and does not require companies to use a non-financial reporting standard. The accompanying guidelines are not binding, and, with the exception of the climate reporting guidelines, do not provide detailed guidance to companies. Companies therefore have considerable discretion in deciding what information to report and in the application of the materiality principle. Together, these characteristics of the NFRD help to explain why there are problems with the comparability of information, and why many companies do not disclose all information that users think is relevant. The inadequate reporting of intangible assets is at least partly explained by the fact that the Accounting Directive, even as amended by the NFRD, does not explicitly require companies to report on intangibles. ·Assurance: The statutory auditor has to verify that the non-financial statement is included in the report, but is not obliged to verify the content of the statement or the internal processes behind it. This limits the reliability of reported information. ·Location of reported information: The NFRD allows Member States to allow companies to report non-financial information in a separate report rather than in the management report. This helps to explain why many companies do not adequately address the connectivity between financial and non-financial information in their reports. Publication of non-financial information in a separate report also makes information harder to find and impacts negatively on its perceived reliability. ·Enforcement: the provisions of the NFRD are difficult to enforce. This is mainly because the disclosure requirements are high level, principles-based and flexible. Additionally, the non-financial statement falls outside the scope of supervision of some national competent authorities due to the lack of coordination between the provisions of the NFRD and the Transparency Directive. The difficulty of enforcing the NFRD contributes to many of the problems experienced by users, in particular the limited comparability and reliability of reported information and the fact that much information considered relevant by users is not reported. A comparison with EU rules for financial reporting helps to illustrate how certain characteristics of the NFRD are drivers of the specific problems identified in section 2.1. Overall, and in spite of certain specific problems, the Fitness Check on corporate reporting found that the EU framework for financial reporting broadly meets its intended objectives and ensures that users’ needs are adequately met. Most significantly, the EU framework for financial reporting requires companies to report according to clear rules set out in the Accounting Directive, and in practice Member States require compliance with national accounting standards. In addition, EU companies listed on the EU financial markets are required by the International Accounting Standards Regulation to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The mandatory use of common financial reporting standards is a major explanation for why users face far fewer problems regarding the relevance and comparability of financial information than is the case for non-financial information. Mandatory common standards mean that companies have much less discretion about what financial information to report compared to the very considerable discretion that they have in the case of non-financial information. In the view of the European Securities and Markets Authority (ESMA), “the effectiveness of the applicable framework and the comparability of the resulting disclosures would have been greater had the [NFRD] set up or indicated a specific framework and accepted a single set of standards to report this type of information.” In addition, the EU framework for financial reporting covers all companies from which users need financial information, with no apparent gaps, and it imposes audit requirements for financial information that provide a significantly higher level of reliability than is the case for non-financial information. Finally, supervision and enforcement of non-financial information lags behind what is done in the case of financial information, and this is partly the result of differences in the respective regulatory frameworks. ESMA believes that “the optionality that characterises the non-financial disclosure requirements (e.g. in relation to the applicable frameworks, the location and timing of publication of the NFS and the assurance) does not yet allow a satisfactory convergence of disclosure practices thus undermining the consistency of supervisory approaches which is urgent to achieve in this area.” 2.3 How will the problems evolve? Some analyses find that the quality of non-financial reporting is improving. Others acknowledge that the quality of reporting is improving but conclude that these improvements are nevertheless insufficient to meet users’ needs. Still other analyses find little evidence of improvement, and even some negative trends. At the same time, most observers predict that the information needs of users, in particular investors, will continue to grow significantly. The Covid-19 pandemic is likely to accelerate this trend (see annex 6). Overall, we conclude that the gap between the information needs of users and the non-financial information reported by companies will continue to grow. There is little evidence to suggest that the complexity and burden experienced by preparers will diminish. Indeed responses to the public consultation indicate that for many preparers these problems are intensifying. Section 5.1 (the baseline scenario) provides a more detailed description of the expected evolution in the case of no new policy initiative by the European Union. 3.Why should the EU act? 3.1 Legal basis In this Impact Assessment we consider two Articles of the TFEU as legal basis for the proposed initiative. Firstly, Article 50 TFEU, the traditional legal basis for company law legislation, and in addition, Article 114 TFEU, lex generalis that applies as well with the objective of establishing or ensuring the functioning of the internal market. See further details in annex 15. 3.2 Subsidiarity: Necessity of EU action The disclosure of non-financial information is already regulated at EU level by the Accounting Directive (as amended by the NFRD). Transparency rules are necessary to ensure investor protection and financial stability across the EU, while allowing civil society organisations and other stakeholders hold companies accountable for their impacts on the environment and society. Additionally, common rules on non-financial reporting ensure a level playing field among companies established in the different Member States. If non-financial reporting requirements are significantly different in different Member States, this would create additional costs and complexity for companies operating across borders and therefore undermine the Single Market. Member States acting alone are not able to ensure the consistency of non-financial reporting requirements across the EU. Member States acting alone are also not able to ensure the comparability of the reported non-financial information across the Single Market. The comparability of reported information enables potential investors and other users of non-financial information such as civil society organisations to better compare companies across national borders. It is therefore important on the one hand for the free movement of capital and the Capital Markets Union, especially in light of the growing relevance of non-financial information for investment decisions, and on the other hand to enable civil society organisations and other stakeholders to compare impacts of companies in different EU Member States and better hold them accountable. Finally, only EU intervention can ensure that companies disclose the information that investors need to comply with their own disclosure obligations under the SFDR.

3.3 Subsidiarity: Added value of EU action As attention to non-financial reporting grows in jurisdictions around the world, it becomes ever more important for the EU to engage with its partners on the basis of a coherent and comprehensive European approach. Compared to individual action by Member States, EU intervention can ensure a strong European voice in policy developments at the global level regarding non-financial reporting. This could translate into a competitive advantage for EU companies with respect to non-EU companies, as investors’ interest in non-financial information increases. In addition, EU intervention can ensure that companies in all Member States report relevant, reliable and accessible non-financial information needed by European investors and civil society organisations. 4.Objectives: What is to be achieved? 4.1 General objectives The general objective is – by improving EU non-financial reporting at the least possible cost – to better exploit the potential of the European Single Market to contribute to the transition towards a fully sustainable and inclusive economic and financial system in accordance with the European Green Deal and UN Sustainable Development Goals. This will be achieved by: a)helping to reduce systemic risks to the economy resulting from the fact that many investment decisions currently do not take adequate account of sustainability-related issues; b)improving the allocation of financial resources, so that more financial resources flow to companies and activities that address social and environmental problems and fewer resources flow to companies and activities that exacerbate such problems; c)making companies more accountable for their impacts on society and the environment, thereby strengthening the social contract between companies and citizens. 4.2 Specific objectives The specific objectives can be distinguished between objectives for users of non-financial information, and objectives for preparers (reporting companies). For users, the specific objectives are to ensure that there is adequate publicly available information about the risks and opportunities that non-financial issues present for companies, and about the impacts of companies themselves on society and the environment. In order to achieve these objectives: a)companies from which users need non-financial information should report such information; b)companies should report all information that users consider to be relevant; c)reported information should be comparable; d)reported information should be reliable; and e)reported information should be easy for users to find and exploit. These objectives imply changing the status of non-financial information, so that over time it is more comparable to the status that the EU framework currently gives to financial information. For preparers, the specific objective is to reduce unnecessary administrative costs associated with non-financial reporting, in particular by: a)bringing greater clarity and certainty about the non-financial information and the methodologies behind the information they are expected to report; b)making it easier for preparers to get the non-financial information they need for reporting purposes from their own business partners (suppliers, clients and investee companies);

c)reducing the burden created by demands for non-financial information that come in addition to the non-financial information included in company reports. There may be trade-offs between reducing burden for reporting companies on the one hand, and meeting the information needs of users on the other hand. At the same time, the wider costs of not meeting users’ information needs – for example in terms of not contributing to the objectives of the European Green Deal – will also need to be considered. Figure 2 - Integrated overview of specific and general objectives 5.What are the available policy options? 5.1 What is the baseline from which options are assessed? Under the baseline, the EU would not develop any new regulatory or non-regulatory action specific to reporting of non-financial information. The existing provisions of the NFRD would continue to apply, together with the general and the climate-specific non-binding guidelines.

We predict that the baseline scenario is highly dynamic, with a very significant increase in the intensity of problems for users and preparers. The principal characteristics of the baseline scenario are: ·A very significant increase in the information needs of users. Some of this increase is the logical consequence of previously agreed EU legislation, notably the SFDR and the Taxonomy Regulation, and some would have happened in any case, due to fast-changing citizen awareness, consumer preferences and market practices, driven by the sustainability imperative. The Covid-19 pandemic will further accelerate the increase in users’ information needs (see annex 6). Users will need and expect more and better information from an increasing number of companies, especially large companies but also a growing proportion of SMEs. ·A growing gap between the information that users want and need, and the information that companies report. In the absence of widespread consensus and clear rules about what companies should report, any improvements in non-financial reporting will remain insufficient to meet the increasing needs of users. Specifically, in the absence of requirements to report in a more standardised manner, and to assure the reported information, the gap between users’ needs for relevant, reliable and comparable information and the relevance, reliability and comparability of reported information, are expected to grow. Additionally many companies from which users want information would not report, as the personal scope of the current requirements would remain the same. ·Lack of coherence with other EU sustainability disclosure regulations, which will undermine the EU’s sustainable finance objectives. Once disclosure requirements of the SFDR and Taxonomy Regulation become applicable, there will be a growing situation of incoherence if investee companies do not report the specific information that entities subject to the SFDR and the Taxonomy Regulation need in order to meet their own reporting requirements. This in turn would seriously undermine the achievement of the EU’s sustainable finance objectives. ·An increase uncoordinated in information requests to preparers. In an attempt to address the information gap, more users will directly contact companies to ask for the necessary information. Data providers will further develop their own proprietary questionnaires and data-collecting methodologies, which will involve more uncoordinated requests to companies for specific information. ·Ongoing expectations on companies to use a variety of different frameworks and standards. The proliferation of different private and public-private reporting frameworks and standards will continue and may even intensify as the value placed on non-financial information continues to grow. Different users and regulators will pressure companies to use different frameworks and standards. The International Financial Reporting Standards Foundation (IFRS Foundation) is developing plans for the creation of a Sustainability Standards Board, which could be created by the end of 2021. The intention of the IFRS Foundation is, for the time being, to address climate reporting only, and to do so only from a financial materiality perspective (“outside-in” risks to the company). If the IFRS Foundation initiative is successful, it could clarify and simplify reporting expectations on companies, but only with regard to climate reporting from a financial materiality perspective. For all other sustainability issues, and for reporting on company impacts, the problems created by the co-existence of multiple different standards and frameworks would remain. ·Significant increases in costs and burden for preparers and for users. Users will have to dedicate more resources to finding and collecting the additional information that they need. Preparers will face higher costs due to the increase in uncoordinated information demands from users, due to the ongoing absence of consensus about what information they should report in order to meet users’ needs, and due to persistent difficulties in obtaining the non-financial information they need for reporting purposes from suppliers, clients and investee companies. ·An increase in the application of information technology and artificial intelligence to the field of non-financial information, but without resolving underlying problems. Current trends in the use of innovative information technology and artificial intelligence will intensify, will provide new opportunities for accessing and exploiting non-financial information, and may offset some of the predicted increases in cost and burden. However, such developments on their own will not resolve the problems faced by users if the underlying information is not relevant, comparable and reliable. ·Growing likelihood that Member States take national initiatives that undermine the Single Market. Policy-makers at national level are increasingly convinced of the need to address existing problems regarding non-financial reporting. If the EU does not act, there is a high probability that individual Member States will introduce national rules or standards that undermine the right of establishment and the free movement of capital across the EU. 5.2 Description of the policy options In order to focus the impact assessment on a limited number of key variables and improve its readability, this section presents different policy options for three main variables: the standardisation of reported information, assurance requirements, and scope (i.e. which companies should report). These are the most important variables in terms of addressing the identified problems and they are also the principal determinants of costs.

Annex 16 examines policy options for a number of other variables: digitalisation, sanctioning regime and enforcement, reporting on intangibles, location of reported information, clarification of materiality concept, and clarification of exemption to subsidiaries. These are additional variables that the Commission will need to consider when formulating its proposal for this initiative, but they are less important in terms of addressing the identified problems and determining costs, and are therefore presented in an annex in order not to overburden the reader. Table 1. Overview of which principal variables for policy options address which specific objectives Policy options Standardisation Assurance Scope Specific objectives Companies from which users need information do report x Companies report all relevant information x x Reported information is comparable x Reported information is reliable x x Reported information is easy to find and exploit x Companies have clarity about what to report x Companies have better info from suppliers, clients & investees x x x Reduced burden from additional demands for information x x Table 2: Overview of policy options Standardisation Assurance Scope Option 1 Mandatory EU standards Option 2 Voluntary EU standards Option 1 Requirement for reasonable assurance Option 2 Requirement for limited assurance Option 1 All large PIEs (remove 500 employee threshold) Option 2: Option 1 plus: ·Large non-listed companies ·Large non-EU companies listed in the EU Option 3: Options 1 and 2 plus ·Listed SMEs Option 4: options 1, 2 and 3 plus ·Non-listed medium sized companies

5.2.1 Standardisation options i) Option 1. Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use) According to this approach, the EU would support the development of EU non-financial reporting standards, and mandate their use by companies under the scope of the NFRD. These standards would specify all information necessary to allow companies to meet the legal requirements of the NFRD, and would provide guidance on how to present this information. This means that for all sustainability matters and areas addressed in the legal provisions of the NFRD, the standards would specify disclosures, including indicators, that cover how non-financial issues affect the company’s financial performance (‘outside-in’ perspective), and how the company impacts society and the environment (‘inside-out’ perspective). For most quantitative indicators, the standards would also specify the methodology to be used. The standards would cover appropriate forward-looking information, as well as information about past performance. They would specify which information companies need to report on the supply chains, taking into account their international dimension and the specificities of different geographies where relevant. Such standards would be significantly more comprehensive and more detailed than the existing guidelines on non-financial reporting published by the Commission. These standards would take into account the information needs of investors and specialised civil society organisations. They would also take account of the needs of other potential users, such as policy-makers and statistical agencies. Additionally, these standards would take into account the information needs of the financial sector that result from their obligation to comply with the SFDR and the Taxonomy Regulation. The EU standards would be consistent with EU non-financial reporting laws, and would specify disclosures that allow entities subject to those laws meet their legal obligations. These EU non-financial reporting standards would build on the most widely accepted elements of the existing private standards and frameworks. It would ensure as much continuity and consistency as possible with the private standards and frameworks that some companies currently use. In addition, EU non-financial reporting standards would build on the Commission’s guidelines on reporting non-financial related information as necessary. The standards would comprise a number of different normative documents built on a modular structure. For example, different standards might address general disclosure requirements applicable to all enterprises (e.g. description of the business model, risk management system, or due diligence) and thematic disclosure requirements (e.g. on particular environmental or social matters). Other standards might cover certain economic sectors, justified by the sustainability-related impacts and dependencies specific to those sectors. Consistent with the “think small first” approach, the standard-setter would develop a simplified standard for voluntary use by SMEs who are not under the scope of the NFRD. The simplified nature of this standard would reflect the fact that SMEs often do not have the technical expertise nor resources necessary to prepare reports in accordance with state-of-the-art, sophisticated standards. The standards would consider the particularities of consolidated reporting; they would ensure that information about subsidiaries is appropriately included in consolidated reporting in order to meet users’ needs. The standards setter would explore the best ways to disaggregate subsidiaries’ information, to ensure useful, efficient reporting. An adequate degree of political and democratic oversight of the content of the standards and a coordinated approach between the different EU bodies in charge of developing the different level 2 measures of other Sustainable Finance legislation would be ensured. Organisations that have advanced the cause of sustainability/non-financial reporting, such as the Global Reporting Initiative (GRI), the IFRS Foundation (and/or the possible future sustainability standards board created under its auspices), the Sustainability Accounting Standards Board (SASB) and the TCFD, would be invited to work closely with the future EU standards setter. EU standards would build on the content of existing and future international standards and frameworks where appropriate. The standard-setting process would be inclusive and carried out by experts. All relevant stakeholders would be involved, including preparers (reporting companies, including SMEs) and users (the investment community, and specialists in civil society and trade unions) of non-financial information. EU non-financial reporting standards should ensure connectivity between financial and non-financial information, as increasingly demanded by investors. Synergies between financial and non-financial reporting are essential to ensure that investors can form an integrated view of the financial and sustainability-related risks and impacts of investee companies. The strategic importance of these synergies is growing rapidly, as the interactions between sustainability and company value become ever more evident. Under this option, EU non-financial reporting standards could be adopted by means of delegated regulations, based on an empowerment that would be granted to the Commission in the Accounting Directive. This would permit the direct applicability of the standards, i.e. no need to wait for transposition of amendments to the Directive by Member States before adopting the delegated act, and no delay in the date of entry into application. The revision of the NFRD could specify the conditions that need to be met in order for the Commission to adopt EU non-financial reporting standards in level 2 legislation. These conditions could include the principal elements of the standards as described in this section. ii) Option 2. Develop EU non-financial reporting standards for voluntary use The EU would develop EU non-financial reporting standards described under option 1, but would not mandate their use. No action will be directly required by businesses, who would be free to use this standard if they find it useful. 5.2.2 Assurance options Most experts agree that an independent assurance services provider can only adequately check compliance of the reported information if companies report against non-financial reporting standards. The feasibility of the assurance options is therefore closely linked to the policy choice made for standardisation. 44% of respondents to the open public consultation, and 40% of preparers, believe mandatory reporting against standards is prerequisite to require assurance of non-financial information.

i) Option 1: Require reasonable assurance The auditor would be required to perform a reasonable assurance engagement on the non-financial reporting. The conclusion of reasonable assurance is usually provided in a positive form of expression and states an opinion on the measurement of the subject matter against previously defined criteria. The work effort in this type of engagement is significantly higher than in a limited assurance engagement. It entails extensive procedures including consideration of internal controls of the reporting company and substantive testing. EU law imposes a reasonable assurance requirement for the audit of financial statements. ii) Option 2: Require limited assurance The auditor would be required to perform a limited assurance engagement on the non-financial reporting. The work in providing limited assurance engagements is less than for reasonable assurance (see option 1). The auditor performs fewer tests, providing a lower level of assurance. The conclusion of limited assurance is usually provided in a negative form of expression by stating that no matter has been identified by the practitioner to conclude that the subject matter is materially misstated. 5.3.3 Scope options The scope options are presented cumulatively, so each option builds on the previous one. The order in which the options are presented follows a logical progression, starting with companies that users are most in favour of including under scope (mainly larger companies) and gradually expanding the scope towards smaller companies. This approach allows us to analyse clearly the impacts of adding different categories of company to the scope, while keeping the presentation as clear and as simple as possible. i) Option 1: Broaden scope to all other large public interest entities (PIEs) i.e. removal of 500 employee threshold The personal scope would be broadened to all other large PIEs, i.e. deleting the 500 employee size threshold of the current legal provisions. This means that the size threshold delimiting the personal scope of this obligation would correspond to the definition of ‘large undertaking’ of the Accounting Directive. In other words, all large PIEs as defined in the Accounting Directive would be required to comply with the requirements. ii) Option 2: Further broaden scope to all other large limited liability companies In addition to the changes in scope indicated under Option 1, the current non-financial disclosure requirements would be extended to large companies that are not PIEs: non-listed EU companies (including large EU companies with securities only listed outside EU regulated markets) and non-EU companies with securities listed in the EU regulated markets. iii) Option 3: Further broaden scope to SMEs with listed securities In addition to the changes in scope indicated under Option 1 and 2, the current non-financial disclosure requirements would be extended to (1) EU SMEs with securities listed in EU regulated markets and (2) non-EU SMEs with securities listed in EU regulated markets, excluding micro-undertakings as defined in the Accounting Directive. iv) Option 4: Further broaden scope to non-listed medium sized companies In addition to the changes in scope indicated under Options 1, 2 and 3, the current non-financial disclosure requirements would be extended to non-listed EU medium-sized companies as defined in the Accounting Directive. 5.3 Options discarded at an early stage The following options have been considered but discarded at an early stage: (1) European Transparency Benchmark; (2) Additional non-binding guidelines issued by the Commission; (3) Endorsement of an international standard; and (4) Expanding the scope to include all SMEs. Annex 18 describes each of these options and the reasons for discarding them at an early stage. 6.What are the impacts of the policy options? We have adopted a two-step approach to assessing the impacts of the policy options. In the first step, we individually analyse the impacts of the policy options for standardisation (section 6.1) and assurance (6.2), and identify a preferred option for each of these two variables. In the second step we analyse the impacts of the policy options for scope (section 6.3), assuming the preferred policy options for standardisation and assurance. Each scope option is therefore a package that includes the preferred options on standardisation and assurance. We have adopted this methodology because it is not possible to analyse the impacts of expanding the scope without knowing the main features of the reporting requirements that companies under scope would have to meet. This is especially the case for estimating the costs for reporting companies, since assurance and reporting standards are the two principal determinants of costs.

The policy options regarding other variables are individually analysed in annex 16, as they individually would not significantly influence the outcome of the preferred policy package. The preferred policy option for each of those variables is included in Section 7 (Preferred option). The analysis of impacts of each option is structured as follows: ·Firstly, we analyse the effectiveness of meeting the specific objectives identified in section 4.2 regarding the provision of adequate non-financial information for users. ·Secondly, we analyse the costs of the option for different stakeholders, in particular preparers. Since the specific objectives regarding preparers are to reduce unnecessary costs, this analysis also covers the effectiveness of meeting the specific objectives from a preparer perspective. A detailed analysis of the costs and their calculations for each option can be found in annex 17. ·Thirdly, we analyse other potential significant impacts that do not directly correspond to the specific objectives identified in section 4.2. We address the coherence with other EU policies throughout the whole analysis as appropriate. 6.1 Impacts of standardisation options 6.1.1 Analysis of impacts of Option 1: Develop EU non-financial reporting standards for mandatory use by companies under scope (and simplified SME standards for voluntary use) Effectiveness in meeting specific objectives Mandatory requirements on all companies under scope to use common EU reporting standards would contribute to meeting the specific objectives in the following ways: ·Relevance: All companies under scope would report the information that users find relevant, as defined in the common standards through a consensual approach involving representatives of all relevant stakeholder groups. In particular, this option can significantly enhance the coherence of EU sustainability reporting requirements: the common standards would ensure that all companies under the scope of the NFRD report information that financial market participants and other entities need to meet the reporting requirements established in the SFDR and the Taxonomy Regulation. 79% of financial sector respondents to the public consultation said that there was a need to better streamline the different reporting requirements. ·Comparability: Reported information would be comparable between all companies under scope of NFRD. Respondents to the public consultation highlighted comparability as being particularly important: 84% of users agreed that the limited comparability of information is a problem. ·Reliability: The use of standards would indirectly improve the reliability of information since it is easier to give effective assurance if information is reported against a standard. In addition, mandatory standards would ensure the transparency and robustness of methodologies behind the disclosed information, enabling greater control and scrutiny by users themselves. ·Usability: Common standards should contribute to a more standardised presentation of information, which should mean that users experience fewer difficulties in finding the information they are looking for. Standards are pre-requisite for the digital tagging of information, so this option would also facilitate the digitalisation of reported information. Overall, a requirement on companies to use mandatory EU standards would make a major contribution to the achievement of the specific objectives. It would represent a significant step in terms of making the status of non-financial information more comparable to the status that the EU framework currently gives to financial information. There is a strong consensus amongst users and other stakeholder groups, such as policy-makers and supervisors, that the mandatory use of common standards is necessary to address the identified problems. 82% of respondents to the public consultation (including 80% of preparers) believed that requiring companies to use common standards would help to address the problems of relevance, comparability and reliability to a reasonable or to a very great extent. The percentage of social and environmental organisations believing that mandatory common standards would help to address the identified problems to a reasonable or to a very great extent was especially high (89%). Some business associations and individual companies oppose this option. Firstly, they argue that a common set of standards cannot meet the needs of a variety of different users who demand different kinds of information. However, the information needs of users are converging. This is most evident in the case of information about adverse impacts of companies, where the information needs of investors, civil society, trade unions, and also policy-makers and statistical agencies, are increasingly similar. The standardisation process itself should further contribute to such convergence. This option would in any case not prevent companies from publishing additional communication material for specific audiences if they see value in doing so.

Secondly, some business associations and individual companies argue that a mandatory reporting standard would not be sufficiently flexible to allow them to report the information that they think is relevant. However, even if one objective of requiring the use of common standards is indeed to reduce the discretion of companies in deciding what to report, common standards would be based on the principle of materiality and would guide companies on how to apply that principle. It would therefore ensure all relevant information is reported but would not require companies to report information that is not relevant to their particular circumstances. Costs analysis Costs for preparers. The annual incremental costs of reporting against EU non-financial as a consequence of this new requirement would be approximately EUR 210 million. Additionally, one-off incremental costs would amount to EUR 29 million. These costs are not very high because around 50% of companies under the NFRD are already reporting against comparable detailed standards. On average, the estimated annual costs of reporting against EU standards for an individual company would be approximately EUR 106 000. This estimation is based on the current reporting practices assessed in CEPS study (see annex 17). At the same time, reporting costs for companies are expected to decrease in the medium term due to the following three factors: -If more adequate information was publicly available, the number of requests for additional information should decrease. As a result, costs associated with meeting multiple different users’ demands would be reduced in the medium term. In addition, if EU standards were applied by companies in the world’s largest market (as a minimum by those subject to the NFRD), there would be less incentive or need for users to ask for additional information according to other standards or formats. -Companies would have greater clarity and certainty about what information to report, reducing any inefficient investment in time or resources in trying to understand how best to comply with EU legislation. -Companies would face reduced costs from trying to get the necessary information from suppliers and clients, to the extent that those suppliers and clients are also required to use EU standards. Likewise, companies operating across different Member States would see a reduction in the overall costs of reporting of the group, given that requirements would be aligned throughout the EU. Costs for users. If many of the largest EU companies reported against EU standards, more relevant and comparable information would be publicly available for users. Costs associated with trying to find adequate information would be reduced. Specifically, investors would rely on rating agencies and data providers to a lesser extent, if more standardised information was publicly available, and would trust more the underlying source of the information. 59% of users who replied to the open public consultation face difficulties finding the reported information. Costs for the EU. The EU would incur certain costs for developing the EU reporting standards. These costs would be limited if the work was done in partnership with organisations active in non-financial reporting. Additionally, mechanisms could be set up to draw upon private sources of finance, while ensuring proper governance structures, limiting the impact on the EU budget. As a result of these reporting requirements, ESMA’s enforcement priorities would further expand towards non-financial reporting and it might dedicate additional resources to ensure supervisory convergence in the area of non-financial reporting. Costs for national authorities. Costs of enforcement activities by national authorities could slightly increase due to the resources needed to check compliance against a more detailed set of requirements. At the same time, national authorities would gain clarity about what information companies should report according to the NFRD, which could translate into costs savings. Other economic, environmental, social and fundamental rights impacts ·Company impacts on the environment, society and fundamental rights. Companies that are required to report against standards will have to identify and report on their most significant non-financial risks, dependencies and impacts, and explain how they manage them. This discipline will have an indirect beneficial effect on the environment, society and fundamental rights, to the extent that it affects company decisions and the way companies behave. These impacts would be biggest in the case of companies that have not previously used standards, which is approximately 50% of companies under the scope of the NFRD. There is, however, mixed evidence about the extent to which reporting requirements on their own will induce companies to mitigate and avoid their negative impacts, especially in comparison to policies and regulations that effectively price negative externalities. ·Company resilience. To the extent that reporting against a standard raises company awareness of sustainability-related risks and improves the way in which risks are managed, this option should help to make companies more resilient. It would, for example, enhance company awareness of dependencies on natural capital. This impact will be biggest for companies under scope that have not previously used reporting standards or have not fully applied them. ·Better policy on the environment, society and fundamental rights. Availability of better non-financial information for policy-making, can inform policy actions that lead to positive environmental, social and fundamental rights impacts (e.g. environmental agencies and national environmental accounts). ·Competitive advantage for more sustainable companies. Equal transparency requirements on companies reporting according to the NFRD would allow front runners in terms of performance regarding sustainability issues to be more easily identifiable. This could give them a competitive advantage, for example in terms of reputation, or to attract capital in the context of the Sustainable Finance agenda. This option also sets a more level playing field between companies under the scope of the NFRD, compared to the current situation in which companies that report the best quality and most relevant information incur higher reporting costs than other companies. ·International competitiveness of EU companies. Under this option there is a risk that EU companies incur higher reporting costs than non-EU companies. However, given the increasing interest of global investors and other stakeholders in sustainability-related information, some global companies are likely to decide voluntarily to align some elements of their non-financial reporting with the mandatory EU standards, and other jurisdictions are already introducing requirements or policy initiatives in the field of sustainability-related disclosures (see annex 14). Furthermore, the competitive situation of EU companies is likely to be enhanced in the longer term if EU standards shape global alignment and possible future global standards. By taking a leading role in this respect the EU and its companies could benefit from first-mover advantage. ·Risk of international fragmentation. In response to the public consultation, many respondents, including European Supervisory Authorities, the European Central Bank and some Member States stated that the ultimate goal should be global non-financial reporting standards. There could be a risk that the development of EU standards leads to global fragmentation. However, this risk can be mitigated by ensuring that EU standards incorporate and build upon existing international standards and frameworks. In addition, the EU can foster discussions on global coherence through the International Platform on Sustainable Finance. Annex 18 explains the reasons for not requiring EU companies to use an international standard.

·Knock-on effects on SMEs: Making the use of standards mandatory for companies under the scope of the NFRD would increase the number of companies that seek detailed information from their suppliers or clients, which would include SMEs. While this phenomenon is to some extent an inevitable part of the transition to a sustainable economic system, it can also create administrative burden for SMEs. On the other hand, SMEs that do not provide certain non-financial information may suffer negative consequences in terms of access to finance and to commercial opportunities. The availability of simplified standards for voluntary use by SMEs, which is an integral part of this option, would aim to provide an effective solution and facilitate SMEs’ participation in the transition to a sustainable economy. ·Single Market. Risks to the Single Market from Member States endorsing different non-financial reporting standards would be significantly reduced, and probably removed altogether. ·The quality of ESG ratings. Improving the quality and comparability of published information could improve the reliability and quality of ESG ratings. It would improve clarity about the underlying data used for different methodologies by different third parties. 6.1.2 Analysis of impacts of Option 2. Develop EU non-financial reporting standards for voluntary use The impacts described in this section are highly dependent on the extent to which companies use the EU standards on a voluntary basis. Companies may continue to use different standards or no standard at all. Effectiveness in meeting specific objectives This option would address problems regarding relevance, comparability, reliability and usability amongst those companies that decide to fully apply the standards. A plausible scenario would be as follows: ·Companies under the scope of the NFRD that currently use standards (approximately 50%) would be likely to use the new EU standards. However, as is the case with current standards, only a small minority of these companies would fully apply the standards, while most would use the EU standards selectively, possibly in conjunction with other standards. ·Companies under the scope of the NFRD that do not currently use standards (50%) would be less likely to use the EU standards immediately, but a significant proportion may nevertheless begin to do so in the medium to long term, especially if pressured to do so by supervisors, investors and other stakeholders. However, most of these companies will apply the EU standards selectively, and some companies under scope will use no standards at all. In such a scenario, this option would make a moderate contribution to achieving the specific objectives but could not ensure that any of the objectives are fully met. The principal limitations would be that a) not all companies under scope would use the standards, even if the number increases over time, and b) only a minority of companies using the standards would apply them fully, while most would use them selectively. Costs analysis Costs for preparers. The reporting requirements would remain the same and therefore incremental costs of reporting due to EU intervention would be zero. Reporting companies that voluntarily decide to report against EU standards might incur higher costs. Nevertheless, because of the voluntary character of the standards, companies would only use the standards if they consider the benefits of doing so are higher than the costs. This option could result in some of the medium-term costs savings identified for option 1 (reduction in demands to companies for additional information, greater clarity about what to report, and better information from suppliers and clients). However, any such benefits are highly dependent on the degree of uptake of the voluntary standards. On the other hand, there would be a risk that voluntary EU standards would be perceived as another standard to add to the list of voluntary (private) standards already in existence. It would therefore run a significant risk of adding to the confusion, and adding to the administrative burden and costs for companies. Costs for users. The reduction in costs for users associated with trying to find adequate information would not be as significant as according to Option 1, as it would depend on the degree of uptake of the EU standards by reporting companies. Costs for the EU. Costs for the EU would be the same as the ones presented under Option 1 (section 6.1.1). Other economic, environmental, social and fundamental rights impacts ·International competitiveness of EU companies. Because the use of standards is voluntary, this option would create a low risk of competitive disadvantage for European companies compared to non-EU companies that are not subject to similar reporting requirements. European companies could take account of the reporting done by their international competitors when deciding whether and to what extent to use the EU standards. On the other hand, the EU would be in a less strong position in any global negotiations on alignment of standards, and the EU and its companies would not benefit fully from first-mover advantage. ·Risk of international fragmentation. The risk of international fragmentation exists for this option as it does for the mandatory standards option, and it can be mitigated in the same way. ·Single Market. The risks to the Single Market from Member States endorsing different non-financial reporting standards would probably be reduced, since if a Member State wanted to endorse a standard it would probably, but not inevitably, choose the new EU standards. However, this option also creates a new risk: the very existence of high quality EU standards may tempt some Member States to make the EU standards mandatory at national level, thereby introducing new barriers to the Single Market so long as other Member States do not do the same.

As for the mandatory standards option, this option could also have impacts regarding a) company resilience b) better public policy on the environment, society and fundamental rights, c) company impacts on the environment, society and fundamental rights, d) knock-on effects for SMEs, and d) the quality and consistency of ESG ratings. However, these impacts will only materialise to the extent that companies use or fully apply the standards on a voluntary basis. 6.1.3 Comparison of standardisation options The analysis of options is summarised in tables 3 and 4. The scores for effectiveness directly reflect the analysis carried out in previous sections 6.1.1-6.1.2, whereas efficiency considers the costs associated with each option in relation to its effectiveness and other positive impacts (benefits). Compared to the baseline scenario, Option 1 would increase the amount of comparable, reliable and relevant information available from companies, very significantly contributing to several of the objectives of this initiative (most effective). Option 2 is less effective as it cannot guarantee that companies would publish information according to standards, and therefore cannot significantly contribute to the identified objectives. Costs under Option 2, mainly costs for the EU as preparers would not be required to report against standards, would not be justifiable given the limited and uncertain effectiveness of this option. This option does not significantly reduce the risk of increasing unnecessary costs on preparers in the medium term and other negative impacts identified in the baseline scenario. Although Option 1 presents the highest costs, it achieves the best efficiency, as it presents the greatest benefits in terms of effectiveness and other positive impacts and would reduce unnecessary costs for preparers in the medium term. Additionally, significant improvement in the usability of reported information is only granted by Option 1; only if the use of reporting standards is mandatory, the amount of information reported that users consider not to be relevant would be significantly reduced. The availability of simplified standards would help SMEs to address the increase in uncoordinated demands for information that SMEs will face as a result of general market developments and as a result of the SFDR and the Taxonomy Regulation. With regard to coherence, although Option 2 contributes to enhance coherence with other EU policy objectives, Option 1 is the only one that guarantees this consistency. Option 1 ( Mandatory Standards) Option 2 ( Voluntary Standards) Effectiveness +++ + Costs for preparers - 0 Efficiency ++ + Other economic, environmental, social and FR impacts ++ + Coherence ++ + Table 3 - Comparison of standardisation options Table 4 - Comparison of standardisation options in terms of impacts on different stakeholders Option 1 ( Mandatory Standards) Option 2 ( Voluntary Standards) Investors ++ • improved usability of reported information (complete, relevant and comparable) •informed decision making process •costs savings from trying to find relevant information •benefit from coherence between EU sustainability reporting requirements + • impacts described for option 1, but only to the extent that companies voluntarily decide to report according to standards Civil society organisations ++ • enabled to hold companies accountable for their impacts • costs savings from trying to find relevant information EU and national authorities + • improvement of policy making thanks to the availability of information Society at large + • behavioural changes of reporting companies • increase of investment flows to more sustainable companies Reporting companies +/- • increase of admin burden due to detailed reporting requirements • clarity about which information to disclose • reduction in number of ad hoc demands of information received • better access to information from suppliers and clients, to the extent that they are also required to use EU standards 0 • availability of a reference standard to comply with the NFRD • but possible confusion about an additional standard alongside the rest SMEs +/- • knock on effects from the requirement, mitigated by the availability of simplified standards for voluntary use + • the availability of simplified standards for voluntary use by SMEs would help them address info demands, to the extent that counterparts do not ask for different information National supervisors + • supervision facilitated by a clear set of information required to be disclosed • however, enforcement priorities further geared towards non-financial reporting, might need additional resources to ensure supervisory convergence + • supervision facilitated by a clear set of information

6.2 Impacts of Assurance options 6.2.1 Analysis of impacts of Option 1: Require reasonable assurance Effectiveness in meeting specific objectives This option would very significantly contribute to achieving the specific objective regarding the reliability of reported non-financial information. It would mean that non-financial information and financial information are assured to the same level. This option can also contribute, although to a lesser extent, to the specific objectives regarding the comparability and relevance of reported information. However, the effectiveness of this option is currently limited by certain aspects: ·Reporting practices are not yet well developed in most companies, with relatively weak internal control systems for non-financial reporting that suggest that reasonable assurance would not be immediately appropriate or possible at this stage. ·The relative immaturity of the assurance market for non-financial information, especially if compared to the assurance market for financial information. There is some doubt about the ability of the assurance market to immediately meet the demand for reasonable assurance, especially if the EU were to decide to bring a significant number of additional companies under the scope of the reporting requirements (see section 6.3). ·The absence of a commonly agreed assurance standard for the assurance of non-financial information. A majority of both users (75%) and preparers (71%) responding to the public consultation believed that such a standard would be necessary. There is consensus amongst most respondents to the open public consultation that assurance is needed for non-financial information, with the exception of some preparers who consider that companies should be left to choose whether they will assure or not their reported information. Overall, respondents were evenly divided as to whether the EU should require limited or reasonable assurance, if it were to introduce stronger audit requirements. Although 51% of users favoured a reasonable assurance requirement (compared to 31% who preferred limited), only 35% of preparers agreed with this approach. Many respondents noted that the maturity of non-financial reporting is far from the maturity of financial reporting and that a reasonable assurance requirement would only be a valuable and reliable option over time, when reporting and assurance practices have further evolved. Costs analysis Costs for preparers. The estimated total annual incremental costs for companies in scope of the NFRD resulting from the requirement to perform a reasonable assurance engagement on non-financial reporting would be approximately EUR 280 million. These incremental costs do not include costs from companies already doing reasonable assurance on non-financial information, and considers a lower increase in costs for companies already doing limited assurance than for those that would be required to start from scratch. For companies in Spain, Italy and France, where assurance is mandatory, limited assurance is the common practice. This cost estimate also assumes companies currently doing limited or reasonable assurance would continue doing so. The estimated average annual costs of performing reasonable assurance for an individual company subject to the NFRD go from EUR 96 000 for companies not reporting against detailed standards to EUR 125 000 for companies reporting against detailed standards. The cost of assurance, especially reasonable assurance, was a common point raised by many categories of respondents to the public consultation, being a major concern for preparers. Other economic, environmental, social and fundamental rights impacts - -Resilience of companies. A reasonable assurance requirement would translate into more rigorous reporting processes within the company, as auditors would help companies identify any flaws in their internal controls, methodologies for data collection and reporting or in the identification of material risks and impacts.

-Single Market. A requirement for reasonable assurance, the highest level of assurance, would avoid obstacles to the Single Market resulting from different levels of assurance requirements in different Member States. -Connectivity and consistency between financial and sustainability information. Auditors are already required to audit financial statements, to ensure their consistency with the management report and to check compliance of the management report with applicable legal requirements. A large number of respondents to the public consultation believe that auditors are best placed to provide assurance on non-financial information, while a smaller number stated that this should not necessarily be the case. This policy option allows to ensure the connectivity and consistency between financial and sustainability reporting, as the third party that verifies sustainability information would also have an understanding of the financial performance of the company. -Risk of concentration of the audit market. This requirement would contribute to a certain extent to maintain the current situation of concentration in the audit market. -Assurance of non-financial information would facilitate supervision of non-financial reporting by national competent authorities. 6.2.2 Analysis of impacts of Option 2: Require limited assurance Effectiveness in meeting specific objectives This option would contribute to achieving the specific objective regarding the reliability of reported non-financial information. Currently, the non-financial statement is explicitly exempt from the requirement to have an auditor’s opinion on the information in the management report. Therefore, making limited assurance of non-financial information mandatory would be a significant step to improve the reliability of reported information. It would also contribute, although to a lesser extent, to the specific objectives regarding the comparability and relevance of reported information. However, the effectiveness of this option in the case of all three of these specific objectives (reliability, relevance and comparability) is restricted by the nature of the assurance requirement, as limited assurance ensures the reliability of information to a lesser extent than does reasonable assurance. 52% of preparers favoured a limited assurance requirement (compared to 35% who preferred reasonable), but only 31% of users agreed with this approach. Costs analysis Costs for preparers. The total estimated annual incremental costs for companies in scope of the NFRD resulting from the requirement to perform a limited assurance engagement on non-financial reporting would be around EUR 80 million. These incremental costs do not consider costs from companies already assuring non-financial information. This is the case for companies in Spain, Italy and France, where assurance is mandatory, and for companies that voluntarily verify non-financial reporting in other member states. This cost estimate also assumes companies currently doing limited or reasonable assurance would continue doing so. The estimated average annual costs of performing limited assurance for an individual company subject to the NFRD go from EUR 56 000 for companies not reporting against detailed standards to EUR 75 000 for companies reporting against detailed standards. Other economic, environmental, social and fundamental rights impacts To a lesser extent than the reasonable assurance option, this option could also have impacts regarding a) company resilience, b) reduction of risks to the Single Market, c) connectivity and consistency between financial and sustainability information, (d) risk of concentration of the audit market and e) facilitation of supervision. 6.2.3 Comparison of assurance options The analysis of options is summarised in tables 5 and 6. The scores for effectiveness directly reflect the analysis carried out in previous sections 6.2.1-6.2.2, whereas efficiency looks at the costs associated with each option in relation to its effectiveness and other positive impacts. In terms of effectiveness, option 1 contributes to a greater extent than option 2 to meeting the identified objectives. However, in a context where reporting practices are not very advanced and the assurance market of non-financial information is not mature enough, costs for preparers would probably outweigh the benefits of this option in the short term. Therefore, the most efficient option with regard to assurance in the short term would be option 2 (require limited assurance). In the absence of a complete set of assurance standards, a significant number respondents to the open public consultation, both users and preparers, preferred a gradual approach starting with a requirement for limited assurance and then moving to a system with reasonable assurance in the longer term. A review clause to analyse whether conditions have been met for a transition towards a requirement for reasonable assurance would accommodate these concerns while enabling the initiative to maximise its contribution to the objective of improving the availability of reliable information in the medium term. The review would need to assess conditions such as how advanced reporting and assurance practices are in the market, and, although not an absolute condition for requiring a reasonable assurance engagement, the availability or not of assurance standards in the market. Therefore, given that option 1 would be the most coherent and efficient option in the medium term, a phase-in approach towards reasonable assurance is the preferred policy option. Requiring limited assurance and having a review clause to analyse whether conditions have been met for a transition towards a requirement for reasonable assurance allows for a phase-in approach with regard to costs for preparers, and for an assessment of the maturity of the industry in the medium term, significantly contributing to the specific objectives of the initiative. In order to reduce the risk of concentration in the audit market, Member States could decide to allow other third party assurance services providers to provide the opinion on sustainability reporting. Table 5 - Comparison of assurance options

Option 1 (Reasonable assurance ) Option 2 (Limited assurance ) Effectiveness +++ ++ Costs for preparers -- - Efficiency + + Other economic, environmental, social and FR impacts + + Coherence + + Table 6 - Comparison of assurance options in terms of impacts on different stakeholders Option 1 (Reasonable assurance ) Option 2 ( Limited assurance ) Investors ++ • information available would be considered significantly more reliable and useful. + • information available would be considered more reliable and useful. Civil society organisations ++ • information available would be considered significantly more reliable and useful. + • information available would be considered more reliable and useful. EU and national authorities ++ • significant improvement of policy making thanks to the availability of reliable information + • improvement of policy making thanks to the availability of reliable information Reporting companies +/- • would incur significant additional costs • companies would significantly improve their reporting processes • reduction in number of ad hoc demands of information received +/- • would incur additional costs • but some offsetting benefits as companies would improve their reporting processes National supervisors + • additional ‘line of defence’ in the supervision of non-financial reporting by national authorities + • additional ‘line of defence’ in the supervision of non-financial reporting by national authorities

6.3 Impacts considering different scope options In this section we analyse the impacts of the expansion of the scope of the NFRD to additional categories of company, assuming the preferred options for standardisation (mandatory use of EU standards for companies under the scope of the NFRD) and assurance (limited assurance requirement with review clause to possible reasonable assurance requirement at a later date). As explained at the start of section 6, we have adopted this approach because it is not possible to analyse the impacts of expanding the scope, in particular the costs, without knowing the main features of the reporting requirements that companies would have to meet. Each scope option analysed in this section is therefore a package that includes the preferred options on standardisation and assurance. We could theoretically have analysed other possible packages that combine different scope options with non-preferred policy options on standardisation and assurance. In particular, in an effort to balance benefits and costs, we could have analysed packages that expand the scope but do not require the use of EU standards and/or do not require any assurance. We have discarded such packages because we concluded that the identified problems can only be effectively addressed if reporting companies are required to report against standards and to seek at least a minimal level of assurance. We concluded that it would not be realistic to require more companies to report without ensuring they report comparable and reliable information, and therefore we have not analysed packages that reflect such a scenario. For the sake of clarity and to avoid repetition, this section does not include an analysis of the effectiveness and impacts of the preferred options for standardisation and assurance. Their contribution to the objectives of this initiative, and all their impacts (positive/negative), would apply to all additional companies brought into scope, and therefore would be overall greater the more the scope is broadened. The assessment of the costs for preparers of the different scope options takes into consideration the preferred options for standardisation and assurance. All companies under the scope of the (revised) NFRD will be required according to the Taxonomy Regulation to calculate and disclose the extent to which their activities substantially contribute to one of the EU environmental objectives as defined by the taxonomy. The Services of the European Commission are preparing a staff working document that will contain proper cost estimates of the Delegated Act that will specify this disclosure requirement in more detail (to be adopted by mid-2021). Annex 3 includes a preliminary, illustrative estimation of the magnitude of these costs for preparers. Table 7. Overview of packages

Standards (preferred option) Assurance (preferred option) Scope Package 0 Option 1 Mandatory EU standards Option 2 Requirement for limited assurance Baseline No change Package 1 Option 1 Mandatory EU standards Option 2 Requirement for limited assurance Option 1 + Other large PIEs Package 2 Option 1 Mandatory EU standards Option 2 Requirement for limited assurance Option 2 + Other large PIEs + Other large categories Package 3 Option 1 Mandatory EU standards Option 2 Requirement for limited assurance Option 3 + Other large PIEs + Other large categories + Listed SMEs Package 4 Option 1 Mandatory EU standards Option 2 Requirement for limited assurance Option 4