Jul 17, 2023

NFRD Simplified | Why, What and How of the Non-Financial Reporting Directive?



NFRD Simplified | Why, What and How of the Non-Financial Reporting Directive?


The Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD) are key legislations adopted by the European Union. These directives require companies to disclose non-financial information, aiming to promote transparency, accountability, and sustainability in business practices.

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

Adopted in 2014 by the EU, the NFRD requires certain companies to provide non-financial disclosure documents, commonly known as 'sustainability reports', alongside their annual reports. By 2018, all 28 EU member states had incorporated the NFRD into their national law, applying to companies with over 500 employees operating within their territories.

Main Goals and Impact of the NFRD

The NFRD emerged from the increasing demand for non-financial disclosure. Its main goal is to foster transparency and accountability by mandating regular sustainability reporting, thereby addressing issues like greenwashing. Non-compliance could lead to severe penalties and negative stakeholder reactions.

Who Does the NFRD Apply To?

The directive targets large public-interest entities, including listed companies, banks, insurance companies, and other entities designated by national authorities, provided they have more than 500 employees.

Key Components of the NFRD

The NFRD encompasses various non-financial areas: environmental matters, social and employee concerns, anti-bribery and anti-corruption policies, diversity, and respect for human rights. Companies must report risks, policies, and outcomes related to these areas, following various national, international, or EU benchmarks for disclosure.

Corporate Sustainability Reporting Directive (CSRD)

Introduced in November 2022, the CSRD extends the NFRD's principles, requiring all large companies to report on their environmental and social impact activities. The first reports in line with CSRD requirements are expected by January 2025.

Comparison: NFRD vs. CSRD

While the NFRD affected around 11,000 companies, the CSRD expands its reach to about 50,000, including smaller firms (with 250+ employees) and all listed companies. The CSRD also demands more detailed reporting and includes mandatory third-party verification of sustainability data.

Implementation Across EU Countries

All EU member states have adopted the NFRD, but implementation varies. For example, Sweden and Luxembourg have expanded its scope to companies with over 250 employees, while Greece includes companies with more than 10 employees and a revenue of 700,000€.

Importance of Non-Financial Risk Disclosure

Disclosing non-financial risks is vital as it promotes transparency and accountability, particularly in social and environmental matters. This approach helps companies attract investors and customers, emphasizing that addressing environmental and social issues can lead to financial success.

Impact of the NFRD on the European Union

The NFRD has been beneficial for the EU, enhancing business transparency in critical sectors beyond finance. It helps stakeholders make informed decisions based on a company's impact on corruption, diversity, human rights, and environmental and social factors.

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