The Carbon Border Adjustment Mechanism (CBAM)
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In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
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What is the Non-Financial Reporting Directive (NFRD)?
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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 (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 purpose of the NFRD?
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.
“ 💡 Datamaran's 'Global Insights Report: The Rise of ESG Regulations' shows that there has been a 72% increase in the number of non-financial disclosures between 2013 and 2018. This includes regulations such as the NFRD. They predict that 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 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.
NFRD scope
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.
What are the key components of NFRD?
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:
- 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 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.
NFRD and 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 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).
“ 💡 Companies obligated to contribute to the NFRD must 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. ”
What is the Corporate Sustainability Reporting Directive (CSRD)?
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.
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 easier 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. ”
Transitioning from the NFRD to the CSRD
“ In 2024, companies that were already subject to the Non-Financial Reporting Directive (NFRD) must transition to the Corporate Sustainability Reporting Directive (CSRD). The CSRD, which enhances and broadens the scope of sustainability reporting, is being rolled out gradually over several years. ”
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 |
Key changes from NFRD to CSRD:
- The CSRD introduces more detailed reporting requirements and expands the scope to include more companies.
- It mandates reporting on a broader range of environmental, social, and governance (ESG) factors.
- The CSRD also requires third-party audits of sustainability reports, enhancing the reliability and comparability of the data reported.
Preparing for CSRD:
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.
How have EU countries incorporated the NFRD?
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.
Why is it important to disclose non-financial risks?
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.
“ By focusing on non-financial issues such as environmental and societal issues businesses 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 a win-win situation for everyone involved! ”
Round up
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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How Greenly can help companies with their CSRD reporting obligations
Is your company ready for CSRD reporting? Greenly's platform and experts are here to streamline your CSRD reporting process.
Key features and benefits:
Conduct a Double Materiality Assessment
- AI-powered value chain mapping: Map your value chain and assess climate risks with Greenly’s AI technology.
- Expert collaboration: Work with Greenly-certified implementation partners or internal experts to define material topics.
Streamline your data collection
- Gap analysis: Identify relevant data points following ESRS guidelines.
- Data integration: Simplify data collection with import connectors and integration features compatible with your software.
Ensure audit assurance and high-quality results
- Expert consultation: Consult with Greenly’s network of internal and external experts.
- Auditor access: Provide auditors access to Greenly’s platform for easy progress monitoring and review.
Automatic export
- XHTML format: Export your reports in the required XHTML format, suitable for XBRL tagging.
Greenly provides an intuitive and seamless platform to handle the complexities of CSRD reporting, ensuring your company meets regulatory requirements efficiently and accurately. Embrace a streamlined, audit-ready approach to sustainability reporting with Greenly.
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