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

By
Stephanie Safdie
updated on Jan 27, 2023
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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 NFRD, and why are nearly 12,000 large organizations within the EU obligated to comply with the NFRD? 

What is the NFRD?

The Non-Financial Reporting Directive, otherwise known as the NFRD – started in all EU member states in 2018. The NFRD is now a national law, and all 28 member states of the EU are expected to comply if their company meets the requirements to participate in the NFRD. 

The NFRD is represented in the Treaty on the Functioning of the EU, and this permits all EU member states to set environmental goals that exceed the ones required of them by the NFRD.

What is the main goal of the NFRD?

The need for non-financial disclosure has been rapidly growing over the past few years, hence – was born the Non-Financial Reporting Directive. 

In fact, the NFRD is one of the over 4,000 different global disclosures – and this number is only continuing to grow as the need for non-financial disclosure grows as well. 

The Global Insights report from 2013 to 2018 shows that there has been a  72 percent increase in how many non-financial disclosures have been reported, and this trajectory is likely to continue given the growing need for non-financial disclosures.

The NFRD is leading the way that non-financial disclosures are produced – and is providing an example to those outside of the EU how accountability can help to prevent greenwashing or other business predicaments created by not establishing the transparency necessary to achieve corporate sustainability. 

Businesses who fail to comply with the requirements of the NFRD could face severe penalties, and backlash in their own businesses. The companies that are obligated to comply with the NFRD are meant to provide information on both their own non-financial disclosures and operations, but also for any third parties that contribute to their supply or value chain. 

For example, a recent law made in France called,  recent French law called “devoir de vigilance des entreprises donneuses d'ordre”, or “the duty of parent care” in English – reveals that regulators are seeking more precise information from companies in order to completely understand how all parts of the business operate. France is one of the first national governments to require large companies to provide data that impacts their business that includes their supply chain. 

Overall, the main goal of the NFRD is to allow potential investors, consumers, and various stakeholders to have all the information necessary to decide if it is a business their values align with for participation in the project or service. Non-Financial Disclosures, like the NFRD, allow third parties to influence large companies to take a more sustainable and socially responsible business approach. 

What are the key components of NFRD?

The NFRD has been growing unprecedentedly in the past five years. In fact, from 2013 to 2018, the number of recorded regulations concerning NFRD has increased by 72% – and is only expected to continue to increase.

It is also important to note that the cost of non-financial risk is increasing, as in the past four years alone – ten of the most globally well-known banks have lost nearly 200 billion dollars to false claims and operational misunderstandings.

While countries around the EU have instilled the NFRD in different ways and levels of intensity, all businesses are required to understand the methods in which financial risk can be mitigated. 

In general, those who are required to comply with the NFRD should report environmental impacts, how employees are treated and various social outcomes, how they plan to respect human rights, how they prevent anti-corruption or bribery, and how they promote diversity. 

The key components of the new and improved non-financial reporting directive, otherwise known as the CSRD or include to audit the information reports, to require more detailed reporting requirements, and to adhere to the compulsory sustainability reporting standards set forth by the EU.

What is required of the NFRD?

The Non-Financial reporting directive demands that companies share their business impact, development, performance and their positioning regarding a list of non-financial disclosures. 

The basic requirements of the NFRD is to provide detailed reports on the company’s environmental impact, such as their production of carbon dioxide or greenhouse gas emissions, their social and employee impact and attempts to sustain equality, overall human rights, how the mitigate corruption, and the tactics used to promote diversity.

While companies obligated to contribute to the NFRD are able to provide the information necessary freely, it is essential that they adhere to European Guidelines – such as the UN Global Compact, the ISO 2600, or the OECD guidelines if the company is established internationally. This is so that all the information can be standardized and understood across the industry. 

What is the difference between NFRD and CSRD?

The NFRD and the CSRD, otherwise known as the corporate sustainability reporting directive have several differences. Generally, the NFRD doesn’t affect as many companies as the CSRD does due to the CSRD’s new, more detailed requirements that seek to improve sustainability reporting.

Only large companies are required to report in conjunction with the NFRD, whereas any large company that meets two of these three standards: such as 250 or more employees, a forty million euro revenue, or twenty million euros in assets – must partake in the CSRD. 

The NFRD is older than the CSRD. The NFRD has been functioning since 2018 and the CSRD is newer, and they are planning to expand upon their current expectations on sustainability reporting. In short, the CSRD is more progressive than the NFRD.

The NFRD only requires 11,700 companies in the EEA to adhere to their reporting requirements , whereas the CSRD demands sustainability reports from nearly 50,000 businesses within the European Union. Therefore, the CSRD concerns more businesses in the European Economic Area than the NFRD does.

With the NFRD, companies are required to publicly delineate five key elements of: 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 required to report with the NFRD can illustrate their commitment to these categories by sharing the potential outcomes of their, their risk factors, and their key performance indicator – or KPIs. 

The CSRD has many of the same requirements of the NFRD, but the CSRD also demands companies to delineate their sustainability risk, and their companies environmental and societal impact.

Finally, the NFRD doesn’t need to be audited by a third party, whereas the CSRD does. Also, the NFRD does not need to accommodate digital reporting while it is imperative for those obligated to participate in the CSRD. 

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?

Twelve countries in total have adopted the NFRD into their legislation, and have done so independently of other EU recommendations. 

Austria, Belgium, Bulgaria, Cyprus, Finland, Germany, Ireland, Italy, Portugal, and Spain are just a few of the countries in the EU to have conveyed the need to follow the requirements of the NFRD. However, France has most notably implemented the regulations of the NFRD in a more intense manner than of all the countries following the NFRD in the European Union.

These countries have done so by placing importance on greenhouse gas emissions, social and employee just, human rights, corruption, bribery and diversity – in other words, these countries have strived to implement the basic principles of the NFRD into their legislation.

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, like France, 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 the NFRD. 

Companies across countries through 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, isn’t the most imperative factor that delineates 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. This is why the Non-Financial Reporting Directive is so important, as it demands companies to re-prioritize their business model to adjust to the environmental and social issues that we face today. 

If those issues are tackled above financial goals, then other investors, customers and employees will be likely to contribute to the business. In other words, if the environmental and social problems are tackled first, then revenue will come later with ease and less effort on the organizations part.

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.

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. Future investors, customers, and employees alike can then decide if they would feel good about being a part of a project or organization depending on the environmental and social impact the company seeks to create or sustain.

The NFRD ultimately helps everyone in the European Union or European Economic Area to make better business decisions, for businesses themselves to create more sustainable and environmentally friendly business models, and to reduce global emissions at the same time by encouraging these more ethical practices across the board.

What about Greenly?

If reading this article about the non-financial reporting directive, otherwise known as NFRD – has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

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.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint.

Don't wait any longer, take the first step towards reducing your carbon footprint by requesting a free and non-binding demo with one of our experts today and finding the solution that best fits your business needs.

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