Non-financial information statements: Here are the legal requirements to be considered for 2023

Spain - 10 / 11 / 2022

Before the end of the year, organizations would be well-advised to familiarize themselves with the new legislation that will have a bearing on the obligation to prepare the non-financial information statement (NFIS) for 2022 together with the future sustainability reporting landscape.

This article describes the new legal requirements that will need to be considered in Spain for preparing the 2022 non-financial information statements, which will have to be approved in 2023. The obligation to prepare the NFIS was introduced by Law 11/2018 of December 28, 2018 amending the Commercial Code, the revised Capital Companies Law, approved by Legislative Royal Decree 1/2010 of July 2, 2010, and Audit Law 22/2015 of July 20, 2015 as regards non-financial and diversity reporting.

Mechanisms and procedures that employers have for encouraging workers’ involvement in management of the company

Article 49.6. II Information relating to social and employee-related matters (fourth bullet point) in the Commercial Code, has been given the following wording by Law 5/2021 of April 12, 2021: “Labor relations: organization of the dialog process between employers and employees, including procedures for informing, consulting and negotiating with employees; percentage of employees covered by collective labor agreements, by country; outcome of collective labor agreements, particularly in the field of occupational health and safety; mechanisms and procedures that employers have for encouraging the involvement of workers in management of the company, in terms of information, consultation and participation.”

The new disclosure obligations set out in article two of Law 5/2021, by amending that article 49.6. II, came into force on April 13, 2022, 12 months after the law was published in the Official State Gazette, as contemplated in transitional provision two of that law.

Economic activities considered to be environmentally sustainable

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020, known as the “Taxonomy Regulation”, provides in article 8 that, on their NFIS companies have to disclose the proportion of their turnover, capital expenditure (CapEx) and operational expenditure (OpEx) associated with environmentally sustainable economic activities, and use for disclosure of that information the taxonomy approved in the European Union, and in particular, the technical screening criteria for environmentally sustainable economic activities.

For further information on the European taxonomy, see this commentary drawn up by Garrigues.

This provision is implemented in Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation.

Article 10 of Regulation 2021/2178 sets December 30, 2021 as the date of its entry into force, although it envisages the following periods for fulfillment of the disclosure obligations:

Non-financial companies (undertakings): from January 1, 2022 until December 31, 2022, they only have to disclose the proportion of taxonomy-eligible and taxonomy non-eligible economic activities in their total turnover, capital and operational expenditure and qualitative information (section 1.2 of annex I is relevant for this disclosure).
Financial companies (undertakings): from January 1, 2022 to December 31, 2023, they only have to disclose:

the proportion in their total assets of exposures to taxonomy non-eligible and taxonomy-eligible economic activities;
the proportion in their total assets of the exposures referred to in article 7, paragraphs 1 and 2;
the proportion in their total assets of the exposures referred to in article 7.3;
the qualitative information referred to in annex XI.

Credit institutions also have to disclose the proportion of their trading portfolio and of demand inter-bank loans in their total assets; and insurance and reinsurance companies also have to disclose the proportion of taxonomy-eligible and taxonomy non-eligible non-life insurance economic activities.

The key performance indicators of non-financial companies, including any accompanying information to be disclosed pursuant to annexes I and II to the regulation have to be disclosed from January 1, 2023.
The key performance indicators of financial companies, including any accompanying information to be disclosed pursuant to annexes III, V, VII, IX, XI to the regulation have to be disclosed from January 1, 2024. Sections 1.2.3 and 1.2.4 of annex V apply from January 1, 2026.

GRI standards

Insofar as article 49.6.e) of the Commercial Code states that the key non-financial performance indicators on the NFIS have to meet the European Commission’s guidelines and the Global Reporting Initiative, standards, organizations need to be aware that in 2021 the following GRI Standards were published which will be effective for reporting on or after January 2023:

GRI 1: Foundation. Explains the key concepts for sustainability reporting. It also specifies the requirements that the organization must comply with to report “in accordance with the GRI Standards” and “using the GRI Standards”.
GRI 2: General Disclosures. Includes 30 “disclosures” for organizations to provide information on their reporting practices; activities and workers; governance; strategy, policies, and practices; and stakeholder engagement.
GRI 3: Material Topics. Provides guidance for organizations on how to determine material topics.

The standards for the oil and gas sector (GRI 11), coal sector (GRI 12), as well as agriculture, aquaculture and fishing sectors (GRI 13), were published in 2021 and 2022 and are available for public use. GRI 11 and GRI 12 will be effective for reports published on or after January 1, 2023. GRI 13 will be effective for reports published on or after January 1, 2024.

Other important points to consider in Spain

Additionally, there are other notable elements that have to be considered in Spain, in both the NFIS and in any other reports prepared voluntarily, as part of companies’ sustainability reporting in the coming years:

Annual report on financial exposure to climate change

Under article 32 of Law 7/2021 of May 20, 2021 on climate change and energy transition, all companies that are required to include a NFIS in their directors’ report, will have to publish in their directors’ report (and on their corporate website), a yearly report containing an assessment of the financial impact on the company of risks associated with climate change created by the exposure of the company’s activity to its effects, including the risks associated with the transition to a sustainable economy and any measures that are adopted to deal with those risks.

According to this article, the report’s contents (which must be determined by royal decree within two years from approval of the law) will have to include the following elements in the disclosure obligations that will be laid down:

The organization's governance structure, including the functions that its various bodies carry out, in relation to identifying, assessing and managing climate-related risks and opportunities.
Its strategic approach, in terms of both adaptation and mitigation, to managing the financial risks associated with climate change, from the standpoint of the existing risks when the report is drafted, and any that may arise in the future, with identification of the actions needed at that time to mitigate those risks.
Real and potential impacts of the risks and opportunities associated with climate change in the organization's activities and its strategy, as well as in its financial planning.
Processes for identifying, assessing. controlling and managing climate-related risks and how they are integrated into the organization’s overall risk management.
Metrics, scenarios and objectives used to assess and manage significant climate-related risks and opportunities and, if it has been calculated, the scope 1, 2 and 3 emissions in the organization’s carbon footprint and how their reduction is confronted.

Proposal for a Corporate Sustainability Reporting Directive (CSRD)

On April 21, 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive, which amends the existing reporting requirements in Directive 2014/95/EU (amending Directive 2013/34/EU).

The proposal for a directive contains amendments to the following provisions:

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC.
Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC.
Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC.
Regulation (EU) 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC.

The directive is addressed to the member states. Article 4 on the amendment of Regulation 537/2014 will, however, be binding and directly applicable in all Member States.

Sustainability reporting standards:

The European Financial Reporting Advisory Group (EFRAG) is working on developing draft European Sustainability Reporting Standards (ESRS) for which it is drawing on the expertise of various European agencies.
It is expected that by June 30, 2023, the Commission will adopt the first delegated acts specifying the information that companies have to disclose.

The standards will be effective in three stages:

January 1, 2024 for companies already subject to the non-financial reporting directive.
January 1, 2025 for large companies that are not presently subject to the non-financial reporting directive.
January 1, 2026 for listed SMEs, small and the other companies that will have to apply the directive.

On June 21, the European Union announced a provisional agreement on this directive which will have to be approved by the European Council and the European Parliament before continuing through the formal steps of the adoption procedure.

We will have to wait, however, for the approval of both the final wording of the directive to find out what specific objectives must be achieved in the member states and for the delegated acts specifying the information that companies have to disclose.

Moreover, the necessary transposition into Spanish domestic law (in principle, the member states will have to do this within 18 months from when it enters into force), with the exception mentioned above in relation to direct application of article 4, will define the rights and obligations that are ultimately written into law.

The United Nations Global Compact

The preamble to Law 11/2018, of December 28, 2018 states that when providing non-financial information obliged companies must base themselves on domestic rules, European rules or on international rules. The United Nations Global Compact is expressly mentioned among these rules.. It is therefore important to be aware that the United Nations Global Compact has approved a new policy on Communication on Progress (CoP), which includes a standard questionnaire supported by a digital platform and which participating companies will be required to use from January 2023.

Other relevant international standards

Lastly, attention will also be needed to the work being performed by other institutions such as the IFRS - International Sustainability Standards Board.

In November 2021, the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB) tasked with developing the IFRS Sustainability Disclosure Standards. The first two standards they are working on are: one on climate-related disclosures and another on general sustainability-related disclosures.