Non-financial information as a driver of transformation. Evidence from Italy

The EU Directive on disclosure of non-financial and diversity information (2014/95/EU), transposed in Italy by the Legislative Decree no. 254 of December 30, 2016, in force since January 25, 2017, is contributing to a cultural transformation of corporate governance models. By triggering a growing consideration of all stakeholders’ needs, this transformation may influence the processes at the board level, the behavior of board members as well as companies’ culture, strategy and business models. The 2017 CONSOB Report on Corporate Governance of Italian listed companies provided a first review of governance behavior of Ftse Mib companies on the verge of the 2014/95/EU Directive, focusing on the inclusion of non-financial matters in reporting and at the board level. This Report extends the previous analysis by including all Italian firms with ordinary shares listed on the MTA at the end of 2017 and delving deeper along three dimensions. First, it reviews how Italian listed firms have implemented the Directive 2014/95/UE by referring to the publication of a nonfinancial statement (NFS), whether they have realized the materiality analysis and whether they have applied a process including both an internal and an external assessment. Second, the Report explores whether companies consider non-financial issues relevant also at the board level, by referring to the guidelines issued by companies prior to the 2018 board appointment, the board evaluation process and the board induction programs organised in 2018. Finally, the findings of a survey involving the members of the Italian community of non-executive and independent directors (Nedcommunity) are presented. The documental analysis aimed to ascertain whether non-financial topics are deemed important also for the selection of the board members’, while the survey focused on the independent directors’ engagement in the board activity concerning the governance of non-financial issues and the compliance with the Decree 254/2016.1 The goal of the analysis is to detect whether, beyond compliance, companies reporting on environmental, social and governance (ESG) are also undergoing a strategy and business model transformation. Integration of ESG factors into many different areas of company’s organization and processes may in fact trigger a cultural transformation of governance models: from the company’s purpose to the activation of cross-functional and forward thinking behaviors and projects; the progressive consideration of ESG into monitoring and reporting tools; the engagement with internal and external stakeholders and their contribution in defining the relevance of non-financial issues in the materiality analysis; the inclusion in the risk governance of non-financial risk management. The chart below summarizes and classifies the findings of the analysis by identifying three progressive steps marking the transformation process: awareness, capabilities, engagement.2 The evidence gathered in this Report shows that while a few large companies are now starting to integrate ESG into governance, the majority of firms (predominantly small ones) are still focused on compliance.