Learn: Regulation & reporting

Understanding the EU's Non-Financial Reporting Directive (NFRD)

If your company is based in the European Union and has more than 500 employees, you may need to comply with the Non-Financial Reporting Directive (NFRD). But what exactly is the NFRD, and why is it important for businesses to adhere to its regulations?

Please note, the European Commission has now launched their Corporate Sustainability Reporting Directive (CSRD), that will expand and override the existing NFRD. The NFRD now exists as a predecessor of current reporting requirements and this article serves as an explainer for the context behind the EU’s current regulatory framework.

What is the NFRD?

The Non-Financial Reporting Directive, otherwise shortened to the NFRD, was introduced by the European Union in 2014. The directive mandates companies (depending on size and revenue) to provide non-financial disclosure documents alongside their annual reports, which are commonly known as sustainability reports. All 28 EU member states have adopted this directive into their national law since 2018, affecting companies operating within their territories with over 500 employees.

The Goal of NFRD: Encouraging Transparency and Accountability

The main objective of NFRD is to promote transparency and accountability among large companies. It does so by requiring regular sustainability reporting and outlining specific policies related to environmental, social, and governance (ESG) matters. This initiative is part of a global trend, with a significant increase in non-financial disclosures worldwide. NFRD sets a leading example for the world by demonstrating how corporate accountability can combat greenwashing and improve transparency in corporate sustainability.

The NFRD is a leading example of a changing landscape of business reporting. Accountability is evolving from a voluntary initiative to a mandated one and getting started early will help your business to avoid delays and any associated backlash for non-compliance. 

There are also rising costs associated with non-financial risks that 93% of investors believe companies are unprepared for. Mandating reporting on these risks (and opportunities!) is allowing business to get prepared for ESG related risks and mitigate their impacts. 

Who Must Comply with NFRD?

NFRD applies to large public-interest companies. This includes listed companies, banks, insurance companies, and other entities designated as public-interest entities by national authorities, provided they have more than 500 employees. Compliance with NFRD is crucial, as companies not meeting these obligations could face severe penalties and backlash from clients, employees, and shareholders.

Key Components of NFRD Reporting

NFRD falls under the European Union's strategy to encourage corporate social responsibility. In addition to regular annual management reports, NFRD requires public disclosure documents covering several non-financial aspects, including:

1. Environmental Matters: Report on a business’ environmental activities, ensuring they align with voluntary and mandated sustainability goals.

2. Social and Employee Issues: This aspect focuses on policies and practices related to the treatment of employees, affected communities, and vulnerable people. 

3. Anti-Bribery and Anti-Corruption Issues: Disclosure of a business’ efforts to combat bribery and corruption.

4. Diversity: Information on diversity within company boards, including age, gender, educational, and professional backgrounds.

5. Respect for Human Rights: Companies need to detail how they respect human rights in their operations, including their supply chain in areas such as anti-slavery and ethical treatment. 

The reporting also requires companies to outline the risks associated with these issues, the policies implemented to mitigate these risks, and the outcomes of these policies. This reporting is an annual and public obligation.

Environmental Reporting under NFRD

NFRD aligns with EU initiatives to protect the environment. Companies are required to disclose financial allocations to environmentally sustainable activities, encompassing turnover, operating expenses, and capital expenses. Regulations such as the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) complement NFRD by providing guidelines for classifying environmentally sustainable activities and measuring their impact.

The Transition to CSRD

It's worth noting that the NFRD is in the process of being replaced by the Corporate Sustainability Reporting Directive (CSRD). This new directive will amend the scope and reporting requirements of the NFRD. Companies within the scope of NFRD will need to file their first CSRD report in 2025 for the financial year 2024.

However, the NFRD has played a crucial role in promoting transparency and accountability in corporate sustainability. It empowers investors, consumers, and stakeholders to make informed decisions about the businesses they engage with, fostering a more responsible and sustainable approach to business. Stay informed about the transition to CSRD, as it will further shape the landscape of non-financial reporting for companies within the European Union.

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