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Jan 23 2024

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

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

If you're a large company operating in the European Union, you're likely to be caught in the web of the Non-Financial Reporting Directive (NFRD). You now have to disclose nearly 3X more information about your environmental, social, and governance (ESG) performance, and yet you're grappling with the complexity of the reporting requirements.

Why the NFRD?

The EU introduced the NFRD to enhance transparency and accountability of large companies on their ESG performance. The directive aims to provide investors and other stakeholders with comparable and reliable non-financial information to make informed decisions. It's part of the EU's broader sustainable finance agenda to redirect capital flows towards sustainable investments.

What does the NFRD require?

Under the NFRD, large public-interest entities with more than 500 employees must disclose information on their policies, risks, and outcomes related to environmental matters, social and employee issues, respect for human rights, anti-corruption and bribery, and diversity on company boards. The directive applies to around 6,000 large companies and groups across the EU.

How to comply with the NFRD?

Companies must include a non-financial statement in their annual report or publish a separate report. They can use existing reporting frameworks such as the GRI Standards, the UN Global Compact, or the ISO 26000, or develop their own reporting methodology. The NFRD allows for flexibility in the choice of reporting framework, but requires companies to explain their approach.

If you haven't started preparing for the NFRD, you're likely to get nudges from your stakeholders to comply. At some point, you'll cave in because a little over half of the large companies in the EU are already reporting under the directive. Companies are scrambling to gather data and prepare reports. The EU ranked 14 globally in the number of companies reporting under the NFRD in the quarter ended December, according to a report by the Global Reporting Initiative (GRI) earlier in April.

There's much to brag about one of the most comprehensive non-financial reporting frameworks in the world, even though the EU is not providing any financial incentives for compliance. Still, companies, per the GRI report, are not happy about the quality of the reported information or feel no difference between the NFRD and other reporting frameworks.

The EU's sustainable finance story is riddled with contradictions. A fresh review of the NFRD is slated for 20 May. It's going to be a muted_review_—it may well be just a _tweak_like before—because no company really needs new reporting requirements, except in small chunks to replenish the expiring provisions in some areas.

It's time to get off the NFRD high horse and assess the directive for what it is. The European Commission—the executive branch of the EU—and global sustainability experts portrayed the NFRD as an almost utopian solution. They oversold it: as an enhanced transparency tool for investors; as a window to new sustainable finance opportunities; and as a channel to launch low-carbon transition plans.

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