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What is the Non-Financial Reporting Directive (NFRD)?

What is the non-financial reporting directive, otherwise known as the NFRD? Why is it so important for the financial future of the European Union?

If your company is based in the European Union and has more than 500 staffing members, you may be required to adhere to the regulations of the NFRD – otherwise known as the non-financial reporting directive.

👉 What is the Non-Financial Reporting Directive (NFRD), and why are nearly 12,000 large organisations within the EU obligated to comply with the regulations? 

What is the Non-Financial Reporting Directive (NFRD)?

👉 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. 

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The NFRD is enshrined in the Treaty on the Functioning of the EU. It permits all EU member states to set environmental goals that exceed existing environmental protection requirements set by the EU.

What is the main goal of the NFRD?

The demand for non-financial disclosure regulations has been rapidly growing over the past few years – 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 Global Insights report from 2013 to 2018 shows that there has been a 72% increase in the number of non-financial disclosures, such as the NFRD – and this trajectory is likely to continue given the growing demand.

The primary purpose of the NFRD is to encourage transparency and accountability by requiring companies to sustainability reporting at regular intervals, and outline their specific policies on them.

The NFRD is a leading example to those outside of the EU, showing how accountability can help to prevent greenwashing and other issues arising from lack of transparency when it comes to corporate sustainability. 

Businesses who fail to comply with the requirements of the NFRD could face severe penalties, as well as backlash from their own clients, employees and shareholders.

Companies that are obligated to comply with the NFRD must provide information on both their own non-financial disclosures and operations, and 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 their values align with. Non-Financial Disclosures, like the NFRD, allow third parties to influence large companies to take a more sustainable and socially responsible business approach. 

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Who does the NFRD apply to?

The directive applies to large public-interest companies - ie. listed companies, banks, insurance companies, and other companies designated by the national authorities as being public-interest entities - where they have over 500 employees.

What are the key components of NFRD?

The NFRD is part of the EU's strategy to encourage corporate social responsibility. In addition to the usual annual management report it requires public disclosure documents on the following non financial information:

  • environmental matters
  • social and employee issues
  • anti-bribery and anti-corruption issues
  • diversity
  • respect for human rights

The disclosure asks companies to outline what their risks are with regards to these issues, the resulting policies that the company has adopted in an effort 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.

What is required of the NFRD with regards to the environment?

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 prior to the NFRD and are even referenced within the directive and in fact they 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 for measuring the impact that they have.

It is important that companies obligated to contribute to the NFRD adhere to other international and European obligations that promote environmental and social responsibility – for example the UN Global Compact, the ISO 2600, or the OECD guidelines. This will help aid the standardization of information. 
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What is the Corporate Sustainability Reporting Directive (CSRD)?

The CSRD was introduced by the European Commission in November 2022. 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.

Companies who must comply with the CSRD must submit their first reports aligning with CSRD requirements by January 2025.

What's the difference between the NFRD and the CSRD?

Where the two differ most is in scope. The Corporate Sustainability Reporting Directive goes further than the NFRD and expands on the sustainability reporting standards of the NFRD. It expands the scope of reporting requirements to companies with 250+ employees, and all listed companies. Approximately 11,000 companies fell under the remit of the NFRD, whereas 50,000 companies will have to comply with the CSRD reporting requirements.
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Additional important components of the Corporate Sustainability Reporting Directive include:

  • mandatory third party verification of reported sustainability data to improve sustainability reporting - this is in response to the criticism that companies reporting information is not always sufficient and that it often omits important information.
  • the establishment of binding sustainability reporting standards - reporting information can be difficult to benchmark from company to company, reporting standards will level the playing field and make it easy to compare

👉 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.  

The NFRD can be thought of as the baseline for CSRD – both aim to establish greater transparency within the business sector, but the CSRD has more requirements than the NFRD. 

How have countries in the European Union adapted the NFRD into their legislation?

All 28 members of the EU have adopted the NFRD into their national law. Though, each country has the discretion to implement it in the way that 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 instance – 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. 

Companies across countries throughout the EU are expected to continue creating different methods in how they report the details on their business – but as long as they adhere to the NFRD, it's all good.

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Why is it so important to disclose non-financial risks?

Money, 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 their 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 demand that companies re-prioritise their business model to accommodate for the environmental and social issues that we face today. 

By focusing on non financial issues such as environmental and societal issues business are more likely to attract investors, customers and employees. In other words, if environmental and social problems are tackled first, then revenue will come later - making the NFRD is a win-win situation for everyone involved!

Is NFRD ultimately good or bad for the European Union?

The Non-Financial Reporting Directive is ultimately great for the European Union all around.

This is because the NFRD helps to establish business transparency in sectors that are equally, if not more important, than the financial sector. By accurately depicting a business's impact and efforts on pivotal criteria such as corruption, diversity, human rights, and both social and environmental impacts – it allows for all future stakeholders, investors, consumers, and employees to obtain all the information necessary to decide if this is a company that they feel aligns with their own values.

The NFRD ultimately helps everyone in the European Union or European Economic Area to make better business decisions, it encourages businesses themselves to adopt a more sustainable and environmentally friendly business model, and to reduce global emissions. 

What about Greenly?

If reading this article has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

It can be hard to figure out how to comply with non-financial reporting directives such as the NFRD, but don't worry – our experts are here to help guide you in making sure your company adheres to all of the current and upcoming directives. Check out our legislation tracker to learn more and click here for a demo.

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

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