Understanding the NFRD and Its Evolution to the CSRD

The Non-Financial Reporting Directive (NFRD), introduced in 2014, marked a significant step in the European Union’s efforts to promote transparency around ESG issues. As a pioneer of sustainability reporting, the directive required large companies under certain criteria to provide stakeholders with insight into how organisations manage ESG challenges. However, the NFRD revealed limitations over time, including inconsistent reporting standards and a narrow scope that left many businesses unaccounted for.

This article provides background on the NFRD, how the market has evolved to expose its weaknesses, and its evolution into the Corporate Sustainability Reporting Directive (CSRD), aiming to expand on the original scope.

In this article, you will learn about:

• What is the NFRD?
• NFRD's Reporting Requirements
• The Scope of the NFRD
• The NFRD and EU Taxonomy
• Why the NFRD Needed to Evolve
• The CSRD as Replacement for the NFRD
• NFRD vs CSRD: Key Differences
• How to Prepare for CSRD Reporting?
  ‍

What is the NFRD?

Introduced in 2014 and implemented in 2018, the Non-Financial Reporting Directive (NFRD) was designed to provide companies with guidelines on reporting companies’ management of environmental and social challenges, integrating these aspects into their annual reports alongside financial data. The goal of the sustainable finance framework was to create a better structure to report non-financial information in annual corporate reports. 

On April 20, 2021, the European Commission proposed the Corporate Sustainability Reporting Directive (CSRD) to replace the NFRD. This new directive introduced stricter eligibility criteria and reporting requirements, which we will explore further in this article.

NFRD's Reporting Requirements

Originally, companies that fell under the NFRD had to disclose details on their policies related to five core factors in their annual reports: Environmental Protection, Social Responsibility and Treatment of Employees, Respect for Human Rights, Company Board Diversity regarding Gender, Age, Education & Profession, and finally Anti-Corruption and Bribery.

The NFDR allowed companies to choose from various International, European, or national frameworks. These frameworks included the OECD guidelines for multinational enterprises, ISO 26000 for Social Responsibility or the EC’s guidelines to help companies disclose environmental and social information, GRI, and SASB to name a few.

Double Materiality: The Novelty of the NFRD

Since its implementation, the NFRD aimed to fulfill two core objectives: providing investors and stakeholders with essential information on a company’s non-financial activities and encouraging companies to adopt stronger social and environmental practices. This approach, known as ‘double materiality,’ examines both the impact of ESG factors on the company (financial materiality) and the company's impact on these ESG factors (impact materiality). While the NFRD promoted double materiality, it did not enforce specific guidelines for its application.

The CSRD, however, further built on and formalised double materiality as a foundational reporting principle. It requires companies to assess both financial materiality and impact materiality more rigorously. We will further examine this principle below.

The Scope of the NFRD

The NFRD applied to insurance companies, banks, public interest entities, and publicly listed companies with more than 500 employees. These criteria covered approximately 11,000 companies. While other companies could report voluntarily, this left a significant portion of the economy unaccounted for.

The NFRD and EU Taxonomy

Developed shortly after, the EU Taxonomy introduced additional disclosure requirements for companies already subject to the NFRD. While the NFRD required companies to report the allocation of turnover, operating expenses (OpEx), and capital expenses (CapEx) related to environmentally sustainable activities, the EU Taxonomy provided detailed criteria for classifying these activities and a methodology for measuring and disclosing the impact a company achieves in those areas.

Why the NFRD Needed to Evolve

Following revisions to the NFRD based on a 2019 consultation, the European Commission released the Implementation Appraisal of the NFRD on January 21, 2021. This appraisal consolidated feedback from market participants and identified several key shortcomings of the NFRD that needed to be addressed:

• Lack of comparability, reliability, and relevance of non-financial information disclosed by companies.
• Overlaps between different sustainability reporting regulations lead to uncertainty about reporting requirements and increased financial costs for companies.
• Strong demand for common reporting standards, digitalisation of non-financial information, and stricter audit requirements.
• Demand for all relevant information to be included in the management report to improve consistency and transparency in disclosures.
• Concerns were raised that requiring all information to be included in the management report would enhance consistency and transparency.
• Limited scope: the directive needed to be expanded to cover a broader range of companies, including all listed and private companies, regardless of size. However, reporting requirements should remain proportionate for SMEs to ensure feasibility.
  ‍

The CSRD as Replacement for the NFRD

In response to the shortcomings of the NFRD, the European Commission announced the proposal for the Corporate Sustainability Reporting Directive (CSRD) on the 20th of April 2021. The new directive was created to strengthen and broaden the existing regulatory framework of the NFRD. The eligibility criteria became stricter, expanding the scope from 11,700 companies under the NFRD to around 50,000 in the EU, starting phased implementation in January 2024.

The announcement of a CSRD proposal was especially important as it was made when the EU Taxonomy First Delegated Act was released, demonstrating the EC's clear intention to proactively integrate all EU sustainability regulations - including the CSRD, the Taxonomy and SFDR. 

For more information read our dedicated article on the essentials of the CSRD.

NFRD vs CSRD: Key Differences

The CSRD sought to correct the inconsistent reporting of the NFRD. For this reason, the European Commission introduced reporting requirements and reporting standards, along with the Directive. The European Sustainability Reporting Standards (ESRS) are introducing different sets of standards for different actors within and outside the EU.  The European Commission has so far only adopted the first set of standards, which split the reporting requirements into 12 separate sector-agnostic standards covering over 1,200 data points. 

More specifically, the implementation of the CSRD addressed the shortcomings of the NFRD by focusing on these key changes:

• Extend the scope of the reporting requirements to additional companies, with mandatory reporting starting from Listed SMEs (with 10 employees or more) and including all large listed companies (with 250 employees or more).  
• Establish binding sustainability reporting standards that set scope and content, both quantitative and qualitative, and require the inclusion of taxonomy-aligned data.
• Require to report on the company’s strategy, targets, and the role of the board and management. The CSRD also mandates to report on the Impacts, Risks and Opportunities (IROs) connected to the company and its value chain, intangibles, and how they have identified the information they report.
• Require third-party verification of reported sustainability data.
• Publish disclosures in XHTML format, adhering to the European Single Electronic Format (ESEF) regulation.
• Integrate sustainability reporting with all required management reporting in a singular, digitally accessible format.
• Establish collective, active management responsibility for sustainability reporting.
  ‍

How to Prepare for CSRD Reporting?

Now that ESG reporting was extended to cover a broader range of companies under the CSRD, it is crucial for organisations to stay ahead of the curve. Collaborating with sustainability experts like Greenomy offers valuable guidance and support, ensuring your organisation not only meets regulatory requirements, but also utilises its sustainability reporting as a strategic asset. 

Discover Greenomy's innovative CSRD solution to streamline data capturing and reporting for long-term efficiency. In combination with our Sustainability Advisory services, where our experts guide you in starting your CSRD reporting journey, Greenomy empowers you to achieve long-term reporting independence. Book a demo for further details.