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KPMG: "Belgian Framework on Sustainability must be clarified"

Belgian Framework on Sustainability must be clarified

Reporting on sustainability and corporate social responsibility has not yet reached the top of the agenda in Belgian firms, despite new legislation that has been in force since last year. This conclusion, from consulting and audit firm KPMG, is based on the annual reports published for the past fiscal year by firms affected by the new legislation. Although the vast majority of these companies do report "non-financial information", the quality and content of this reporting falls short. KPMG urges that the framework on sustainability in Belgium, in which the authorities, firms and auditors have their role to play, be clarified.

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KPMG: "Belgian Framework on Sustainability must be clarified"

The 2014 EU Directive on the reporting of so-called "non-financial data" was transposed into Belgian law in September 2017 - after a nine-month delay. This means that, from fiscal year 2017, many companies were legally obliged to report their non-financial data. Primarily, this concerns listed companies, insurance companies and financial institutions with a balance sheet of more than EUR 17 million or a turnover of more than EUR 34 million and more than 500 employees. 

Mike Boonen, Corporate Societal Responsibility Partner for KPMG: "The legislator wants these companies to report on, amongst other things, diversity, social affairs, environmental impact, human rights and the fight against corruption and bribery. These corporations declare which European or international framework they have used as a model and incorporate all of this into their annual report, or in special reports that are published alongside the annual report."

Quantitative leap forward; qualitative catching-up needed

What is positive is that today 91% of the surveyed companies reported non-financial information. This is a significant increase from 2017, when just 62% of the companies reported on this, as an earlier KPMG study showed. The fact that less than 100% of the companies currently report may be due to the previously-mentioned late transposition of this requirement into Belgian legislation.

Steven Mulkens, Senior Manager at KPMG: "Belgian firms are busy catching up, spurred on by the new legislation. We are gradually getting back in line with the worldwide trend. This is positive. On the one hand, the reporting on non-financial performance shows the social relevance of these organizations. On the other hand, the quality is in many cases inadequate. Both in terms of the letter and spirit of the law, a great deal of the required and relevant content is often missing. In our country, only a minority have this non-financial reporting attested to by an external party, while the worldwide trend is the reverse. The Belgian legislation does not require external validation, although this could bolster society's trust in such non-financial reporting."

Data Missing from the Reporting

KPMG's analysis shows that the quality and content of the reported data fall short in a large number of areas. Not all companies report their general policy with respect to legally-required matters. Just 67, 72, 74, 81 and 84%  of the companies report on their policy with regard to human rights, bribery and corruption, diversity, social issues and the environment respectively.

Improvement is certainly needed on the methodological front. Just 68% of the organizations referred to the European or international framework on which they modeled their reporting. Nonetheless, this is also a legal obligation. The reference model, which the majority of organizations use as a basis is the Global Reporting Initiative (GRI Standards). Often there is only limited fulfillment of the basic principles of such frameworks.

The study also showed that numerous issues are not fully dealt with in depth. This is because, aside from their policy on the aforementioned issues, organizations also have to record results, risks and performance indicators. With regard to human rights for example, just 39% of the aforementioned companies reported the results of their policy, only 34% summarized the greatest risks, and a mere 26% linked these to the legally-required performance indicators.

Despite increased attention from stakeholders and the public, very few companies go into specific detail on the issue of climate change. Just 25% of the companies see climate change as an operational, financial or a business risk and barely 7% also report on the potential impact. Steven Mulkens: "Climate change is increasingly becoming a probable risk with quantified impact reporting on the horizon. Under the leadership of Michael Bloomberg, clear guidance is being given, which has also been endorsed by the Belgian State, Euronext, the National Bank of Belgium and the FSMA since March 2018. Sooner or later there will probably be legislation for this."

Auditor Operates in a Regulatory Vacuum

Current Belgian law creates ambiguity for auditors. According to the legislation, an auditor must assess the completeness of non-financial information because it is a component of the annual report. But there is no targeted form of certainty or certification required by the legislator. In other words: the correctness of the non-financial information does not have to be verified, with the exception of any final reconciliation of the non-financial and audited financial data. Similarly, the auditor is simply required to verify the reference to the framework, without examining whether the reporting also respects the reference model. 

KPMG research shows that almost all company auditors included a paragraph on non-financial information in their reports to shareholders. Interestingly, only a small minority of these auditors had a reservation about the completeness of the information, although part of the required information was missing in the majority of reporting. 

Mike Boonen: "Due to the late implementation of the Belgian legislation, there is still an apparent lack of clarity among companies and their auditors. It was an especially short initial phase and the transition was not smooth. Many issues remain open. Which framework is to be applied and what is the anticipated auditor's role with respect to increasingly extensive and integrated annual reporting? The public expects nothing less than the elimination of this regulatory vacuum in the near future and that Belgium will also catch up in qualitative terms." 

KPMG is also launching a three-pronged appeal: "We urge the federal government to further clarify the legal framework, by, for example a Royal Decree, to first and foremost clarify the requirements for reporting. Not only should authorities, but also corporations adhere to legal and international standards, and more fully and qualitatively define and report their relevant objectives and performance. And finally auditors should fulfill their current, limited role to its fullest extent, as well as providing wider options for assurance. As experts and forerunners, we are happy to share our experience in these areas, as it truly calls for continuous commitment from all involved to meet the ever-increasing societal expectations regarding sustainability," concludes Boonen.

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