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If your company is based in the European Union and has more than 500 employees, you're likely required to adhere to the regulations of the Non-Financial Reporting Directive (NFRD). This directive has been crucial in establishing transparency and accountability in business practices, focusing on essential criteria such as corruption, diversity, human rights, and environmental impacts.
However, as the business landscape evolves and the need for more comprehensive sustainability reporting becomes evident, the NFRD has paved the way for the introduction of the Corporate Sustainability Reporting Directive (CSRD). The CSRD builds upon the foundations laid by the NFRD, expanding the scope and depth of reporting requirements to ensure more detailed, accurate, and comparable sustainability information across the EU.
👉 This article explains the NFRD's impact, its transition to the CSRD, and what companies need to know about the new requirements.
👉 The Non-Financial Reporting Directive, otherwise known as the NFRD, was adopted in 2014 by the European Union, requiring certain companies to provide non-financial disclosure documents along with their annual reports - sometimes known as 'sustainability reports'.
As of 2018, all 28 member states of the EU have adopted the NFRD directive into their national law which means that companies operating in their territories with more than 500 employees may need to comply with the requirements of the directive.
The demand for non-financial disclosure regulations has been rapidly growing over the past few years, particularly within the financial sector – the Non-Financial Reporting Directive was borne from this need. In fact, the NFRD is one of over 4,000 different global disclosure requirements, and this number is only continuing to grow.
The primary purpose of the NFRD is to encourage transparency and accountability by requiring companies to implement sustainability reporting at regular intervals and outline their specific policies.
The NFRD is a leading example to those outside of the EU, showing how accountability can help prevent greenwashing and other issues arising from a lack of transparency regarding corporate sustainability.
Businesses that fail to comply with the requirements of the NFRD risk severe penalties, as well as backlash from their clients, employees, and shareholders.
Companies that are obligated to comply with the NFRD must provide information on both their non-financial disclosures and operations, as well as any third parties that contribute to their supply or value chain.
👉 The NFRD gives potential investors, consumers, and various stakeholders the information necessary to decide if it is a business that aligns with their values. Non-financial disclosures, like the NFRD, encourage large companies to take a more sustainable and socially responsible business approach.
The directive applies to large public-interest companies - ie, listed companies, banks, insurance companies, and other companies designated by the national authorities as public-interest entities - with over 500 employees.
The NFRD is part of the EU's strategy to encourage corporate social responsibility (CSR). In addition to the usual annual management report it requires public disclosure documents on the following non-financial information:
The disclosure asks companies to outline what their risks are concerning these issues, a description of the company's business model and resulting policies that the company has adopted to mitigate these risks, and the outcome of these policies. These detailed reporting requirements are an annual public reporting obligation.
With regards to how the non-financial information should be disclosed, companies can adopt a variety of benchmarks to help them complete the disclosure process, for example, this may be a mix of national, international, and EU guidelines.
Since the adoption of the Paris Agreement in 2016 the EU has taken great steps when it comes to making progress on sustainability and protecting the environment. Regulations such as the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) were adopted before the NFRD and are even referenced within the directive - the NFRD, EU Taxonomy, and SFDR are designed to complement one another.
The NFRD requires companies to disclose allocations of turnover, operating, and capital expenses across environmentally sustainable activities. The EU Taxonomy Regulation complements this by providing the details to help companies classify those activities as well as the methodology for measuring the impact that they have (ie. sustainability risks and opportunities).
The CSRD was introduced by the European Commission in November 2022. Under this new directive, the annual public reporting obligations require all large companies to publish reports on their environmental and social impact activities.
Much like the NFRD, its aim is twofold: regular reporting will allow stakeholders (investors, financial market participants, consumers, policymakers, etc.) to evaluate the non-financial performance of large companies. In doing so it will encourage these companies to adopt stronger practices of environmental and social management.
There will be a phased rollout of the CSRD starting in 2024, with some companies required to submit their first reports aligning with CSRD requirements by January 2025.
Additional important components of the Corporate Sustainability Reporting Directive include:
👉 The European Commission's aim for the CSRD is that it helps to establish a baseline for global sustainability reporting standards. It will be overseen by the Sustainability Standards Board formed by the IFRS Foundation. The IFRS is a non-profit, public interest organization that develops high-quality, easy-to-understand, enforceable, and globally accepted accounting and sustainability disclosure standards).
Another area where the two directives differ is in the disclosure demands themselves - the CSRD contains more detailed reporting requirements.
As already discussed the NFRD requires companies to provide disclosures on their efforts to protect the environment, how they treat their employees, how they plan to adhere to general human rights, how they mitigate corruption or bribery, and how they promote diversity in their work environment. Companies can illustrate their commitment to these categories by sharing the potential outcomes of their risk factors, and their key performance indicators (KPIs).
The CSRD has many of the same requirements of the NFRD, but the CSRD also demands companies to provide disclosure information regarding their sustainability risk, and their company's environmental and societal impact.
Ultimately, the CSRD has more rules than the NFRD.
ESG managers will play a crucial role in this transition, ensuring that their companies comply with the new, more comprehensive reporting standards. So what timings do you need to be aware of?
| Company Type | Start Date | First CSRD Report Due |
|---|---|---|
| Large companies and parent companies of large groups (over 500 employees) | January 1, 2024 | 2025, covering the 2024 financial year |
Large companies meeting at least two of the following criteria:
| January 1, 2025 | 2026, covering the 2025 financial year |
| Listed Small and Medium-Sized Enterprises (SMEs), Small and Non-Complex Credit Institutions, and Captive Insurance Undertakings | January 1, 2026 | 2027, covering the 2026 financial year |
| Non-EU Companies with significant EU activities (net turnover over €150 million in the EU and at least one subsidiary or branch in the EU) | January 1, 2028 | 2029, covering the 2028 financial year |
Companies currently under the NFRD should begin adapting their reporting practices to meet the CSRD requirements immediately. This includes gathering more comprehensive ESG data, ensuring compliance with the new European Sustainability Reporting Standards (ESRS), and preparing for the mandatory audit process.
All 28 members of the EU have adopted the NFRD into their national law. However, each country has the discretion to implement it in the way they best see fit.
The EU encourages each member state to implement the general rules required by the EU individually, which allows for some freedom for each nation to set forth the requirements as they wish.
Some countries have made the NFRD stricter than necessary. Sweden, for example, has required all companies with over 250 employees to adhere to the reporting requirements of the NFRD. Luxembourg has also made the same adjustment, and Greece has established that any company with more than 10 employees with a revenue of 700,000€ is obligated to report under the NFRD.
To the surprise of many, financial success isn't the most imperative factor that determines if a business is successful or not. While money is a vital resource and a key to success for a business advancing in its goals, it is perhaps even more crucial that companies establish transparency and accountability for their social and environmental actions – something directives such as the NFRD help to promote.
This is why the Non-Financial Reporting Directive is so important, as it demands that companies re-prioritize their business model to accommodate the environmental and social issues that we face today.
The Non-Financial Reporting Directive (NFRD) has been a significant step forward for the European Union, laying crucial foundations for transparency in non-financial sectors. The NFRD has played a pivotal role in enhancing business transparency on essential criteria such as corruption, diversity, human rights, and social and environmental impacts. By requiring companies to disclose this information, it has allowed stakeholders, investors, consumers, and employees to make more informed decisions that align with their values.
However, while the NFRD was instrumental in establishing these transparency measures, it had some limitations that needed to be addressed. The directive's scope was relatively narrow, applying only to large public-interest entities with over 500 employees. This meant that many companies were not required to disclose their non-financial information, leading to gaps in transparency across the business landscape.
Moreover, the NFRD's reporting requirements were often criticized for their lack of detail and comparability. Companies had significant leeway in how they reported their non-financial information, resulting in inconsistencies and difficulties in comparing data across different firms and sectors.
Recognizing these shortcomings, the European Union introduced the Corporate Sustainability Reporting Directive (CSRD) to build upon and improve the NFRD framework. The CSRD expands the scope to include all large companies and listed companies, excluding micro-enterprises. It also introduces more detailed and standardized reporting requirements, ensuring greater consistency and comparability of sustainability data.
The CSRD mandates that companies report on a broader range of environmental, social, and governance (ESG) factors, and it requires third-party audits of the reported information. This ensures that the data provided is accurate and reliable, enhancing the overall credibility of sustainability disclosures.
While the NFRD was a positive step for the European Union, promoting greater transparency and encouraging more sustainable business practices, its limitations necessitated the introduction of the CSRD. The CSRD addresses these gaps by expanding the scope and standardizing reporting requirements, thereby advancing the EU's commitment to sustainability and corporate responsibility.
This updated approach will help ensure that the EU continues to lead in global sustainability practices, providing stakeholders with the detailed and reliable information they need to make informed decisions
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