High quality corporate reporting is so important - it drives trust in our capital markets and beyond. But creating new requirements for corporate reporting is tough. Often, legislation and regulation are issued at speed, in response to rapidly emerging risks. Associated reporting requirements emerge equally quickly, and piece by piece - that means the different elements don’t always feel coherent. In Europe, for example, we’re just getting to the end of a really busy mandate for the Parliament and the Commission, and we’ve seen many new corporate reporting requirements emerge, covering digital risk and sustainability performance to name just a couple. Several new global and regional tax reporting requirements have also been issued in recent years. Individually, they’re all important, but they don’t always fit together perfectly.
It's perhaps not surprising that companies can feel like they’re drowning in a sea of complex and bureaucratic reporting requirements. Not only is this time consuming and costly for preparers, but users too can find it hard to wade through a huge volume of complex data points.
So, legislators need to take a thorough look at the rules, old and new, and find ways to simplify them. We should aim to reduce the reporting burden for companies while making sure that users have the information they need to make informed decisions.
But reduction and simplification is no easy task - and will need to become part of an ongoing process. The European Commission (EC) has taken an encouraging first step with its stated objective to cut reporting obligations by 25% to keep companies competitive and make it easier to do business in the EU. In her September 2023 State of the Union address1, EC President von der Leyen announced1 that we can expect the first legislative proposal on this area in October 2023. She described the plans as “a common endeavour for all European institutions”, encouraging collaboration “to match the 25%…at national level”. At a Eurofi financial forum the next day, European Commissioner for Trade, Valdis Dombrovskis, announced that “In addition, an independent board will conduct a competitiveness check for every new piece of legislation. We are aiming for a conducive business climate, transparent and with legal certainty. And most importantly, helping to attract investment.”
“In addition, an independent board will conduct a competitiveness check for every new piece of legislation. We are aiming for a conducive business climate, transparent and with legal certainty. And most importantly, helping to attract investment.”
We were pleased to share our own suggestions for how to approach a 25% simplification with the EC as their work got underway. However, the three key areas we identified are just as relevant to all legislators and other policy setters if they’re thinking about simplification:
First, rule makers need to establish consistency and alignment across different reporting requirements. Corporate reporting regulation typically evolves by individual subject area. This can lead to inconsistencies and duplication between different pieces of legislation issued within the same jurisdiction; this can be unhelpful - or even misleading - to users. Any review should not only take this into account, but also consider whether the legislation is interoperable - that is, compatible - with any other requirements that companies have to comply with from outside their territory.
A much-talked about example is where a non-EU company uses international sustainability standards for its group sustainability reporting but also falls under Corporate Sustainability Reporting Directive (CSRD) requirements because it has a large EU subsidiary2. Consistency in definitions, in this case between the CSRD and international standards, is therefore critically important. Collaboration and compromise between rule makers (and others, including standard setters) is key to achieving this.
Second, rule makers need to consider whether reporting requirements would benefit from further clarity around their objective, intent and scope. If the overarching objective of a reporting requirement is unclear or vague this could cause a company's management to spend a lot of time gathering, analysing and assessing potentially unnecessary information. If they know the objective - what the reporting is for - they can target their efforts on gathering and disclosing relevant, or material, information. In turn, and given disclosure of excessive amounts of information can be confusing for users, this should facilitate more focused, useful information for readers.
Third, rule makers need to consider introducing ongoing assessments. It’s difficult to get everything perfect the first time when new rules are complicated and need to be finalised quickly. So conducting a post-implementation review of new reporting requirements is vitally important. This can shed light on whether the rules are relevant and appropriate, and whether they achieve what was originally intended. These reviews also offer the chance to think about how requirements fit, complement or overlap with other reporting requirements.
The EC has made a smart move in announcing that its plan to reduce the reporting burden will be carried out in several stages, rather than as a one-off exercise. This approach acknowledges that the amount and complexity of required disclosure continues to increase, for example in relation to sustainability and technology, and also that it takes time for company reporting of new requirements to evolve and settle.
Published a couple of years ago, the Organisation for Economic Co-operation and Development (OECD)’s regulatory policy outlook3 looks at regulation more broadly than corporate reporting but its message is similar; governments are encouraged to “move past the traditional ‘set and forget’ rule-making mindset and develop ‘adapt and learn’ approaches”.
We’re now seeing governments and industry bodies engaging in the subject. The German government published a paper4 proposing better law making, highlighting the importance of impact and cost-benefit assessments and calling for more straightforward, understandable regulation and less duplication. In addition to the high number of reporting requirements, Insurance Europe5 has highlighted the burden created by duplication, overlap and short time frames for implementation and a lack of clarity and provision of timely guidance.
When embarking on a programme to simplify corporate reporting regulation it may also be helpful for legislators to set a starting point and a target and establish how to measure progress over a chosen time period. This will help to drive momentum and focus.
Before any changes are made, however, it is critically important to seek input from key stakeholders right across the reporting ecosystem, such as preparers, industry group representatives, investors and the assurance providers. This will help to identify the information that users find most important, to spot any duplicate or inconsistent rules and highlight areas of significant burden where there may be opportunity to further simplify the rules. There is a great precedent for this - drafts of the first batch of European Sustainability Reporting Standards (ESRSs) were simplified in response to stakeholder feedback, before being finalised in July 2023.
Looking ahead
No-one is saying that any of this will be straightforward. There will be some big hurdles ahead, not least because legislators are still issuing new corporate reporting rules at a pace, so there is continuing risk that companies end up working with concurrent but conflicting requirements. This is a real challenge for both preparers and users. However by simplifying its own legislation the European Commission is leading the way and setting a positive example for other legislators to follow.
Straightforward and consistent corporate reporting means greater clarity and transparency - and reduced costs. Most importantly it enables users to get the information they need. We fully support any steps taken towards achieving this.
1 https://state-of-the-union.ec.europa.eu/index_en
2 Companies must comply with the CSRD if they exceed two of the following three size thresholds: total assets of €20 million, revenue of €40 million and an average of 250 employees during the fiscal year on two consecutive balance-sheet dates.
3 https://www.oecd-ilibrary.org/sites/38b0fdb1-en/index.html?itemId=/content/publication/38b0fdb1-en
4 Bürokratieentlastung in Zeiten wie diesen – Papier zu einer Besseren Rechtsetzung und modernen Verwaltung in Europa. Für die Kabinettsklausur in Meseberg am 29./30. August 2023.
5 In a letter to President von der Leyen’s Head of Cabinet, Michaela Koller, Director-General for Insurance Europe.
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