Adopted in 2014, the NFRD is the first European directive mandating large companies to report on non-financial matters. The objective: to factor in environmental impacts, social concerns, and governance into the overarching performance metrics of organizations.
While this European regulation fosters more environmentally responsible business models, it was deemed inadequate for achieving the goals set by the Paris Agreement. As a result, the NFRD has been succeeded by the CSRD as of January 1, 2024.
What is the NFRD?
The NFRD (Non-Financial Reporting Directive) is a directive that mandates European firms with more than 500 employees to undertake non-financial reporting. Such reporting includes the assessment of ESG (environmental, social, governance) performance, beyond just financial outcomes.
This framework is predicated on the double-materiality principle, positing that financial and non-financial matters are intricately connected. They both are pivotal to the composite performance of organizations.
Good to know: in France, the NFRD is implemented as the Annual Declaration of Non-Financial Performance (decree of August 9, 2017). This represents the non-financial reporting expected from firms under the European directive.
What are the objectives of the NFRD?
The NFRD aims for a triad of objectives:
- Introducing corporate accountability: every decision made can impact the environment or society. The intention is firstly to raise awareness about these impacts. But also to hold them accountable by disclosing the outcomes of their actions.
- Improving transparency: consumers, partners, suppliers, prospective employees, can all access the ESG data of companies. And in an era where environmental consciousness is escalating, it behooves companies to pursue more sustainable practices.
- Combating greenwashing: faced with the increasing consumer demand for sustainable corporate behavior, numerous firms highlight their ecological initiatives. The issue lies in these claims not always being substantiated. With the NFRD, it’s the data that speaks. Firms can no longer tout initiatives they do not uphold.
The adoption of the NFRD has amplified the publication of non-financial information. According to the Global Insights report, there was a 72% increase from 2013 to 2018.
What comprises the non-financial elements?
Although the NFRD necessitates a non-financial report from companies, what specific non-financial information should be included? In fact, there is no explicit framework. Nonetheless, firms are encouraged to adhere to the guidelines of esteemed reporting standards such as those from the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). And, all these reports are underpinned by ESG principles:
- Environment: this chiefly involves assessing and mitigating environmental impacts. Strategies may include improved waste management, more sustainable consumption of resources, reduction of air, soil, and water pollution, among others.
- Society: this encompasses upholding human rights within organizations, inclusion of workers, personnel management, and more.
- Governance: this pertains to implementing control policies, combating bribery and corruption, board composition, and so on.
For each dimension, firms are encouraged to delineate the risks associated with their operations and the strategies adopted to alleviate these risks.
NFRD and CSRD: What are the differences?
In 2018, the European Commission concluded its assessment of the NFRD, determining that there was a need to enhance the quality, comparability, and pertinence of the non-financial information disclosed by companies. This led to the replacement of the NFRD by the CSRD. Since January 1, 2024, this new European directive is in effect.
So, how do the two differ?
- The scope: the CSRD broadens the mandate for reporting to include a wider range of organizations. Apart from firms with over 500 employees, the CSRD also covers publicly listed SMEs, European companies with more than 250 employees, and non-European companies generating more than 150 million euros in turnover within the EU. This impacts over 50,000 companies (as opposed to 11,000 with the NFRD).
- The information required: the significant innovation of the CSRD is in the expanded criteria for non-financial reporting. Whereas the NFRD lacks a specific reporting framework, companies can now utilize a genuine and even more detailed standard; the ESRS (European Sustainability Reporting Standards).
- Standardization: the CSRD consolidates all ESG reporting throughout Europe to standardize them.
While the CSRD is broader than the NFRD, it also introduces more complexity. Hence, proper preparation is crucial.
Prepare for the CSRD with DataScientest
The revised NFRD standards ramp up the ESG transparency requirements. To meet these demands, companies will need to depend on vast amounts of data. Some data points are relatively straightforward to gather (like gender parity), while others are markedly more intricate (like carbon footprint).
Companies must, therefore, establish robust data governance to accurately measure this carbon impact. And for this, there is an increasing demand for data experts. Aspire to be among them? Train with DataScientest.
