June 17, 2024 • Reading time: 9 Min
The NFRD affects many companies in the EU and imposes specific reporting requirements. But what exactly does this mean for your company? What legal requirements must be met? And how do you prepare an NFRD-compliant report? In this blog article, we give you a comprehensive overview of the NFRD, explain the key differences to the new CSRD (Corporate Sustainability Reporting Directive) and offer practical tips for implementation. Find out which companies are affected by the Non-Financial Reporting Directive, what information must be disclosed and how you can meet the requirements efficiently. Use this guide to optimally prepare for the requirements of the NFRD and take advantage of the benefits of transparent and sustainable reporting.
The Non-Financial Reporting Directive (NFRD) is an EU directive that requires companies to report non-financial information. Introduced in 2014, this directive aims to increase transparency regarding Environmental, Social, and Governance (ESG) aspects, thereby promoting responsible behavior in the economy. It affects large companies with more than 500 employees, which must disclose detailed reports on their ecological and social impacts, employee matters, human rights, anti-corruption and bribery measures, and diversity policies.
This reporting obligation enhances the transparency and accountability of large companies and strengthens the trust of investors, customers, and the public. The requirements must be published in the companies' management reports or in separate sustainability reports. The reporting aims to make companies' ESG strategies and results transparent and comparable by setting clear and strict disclosure requirements.
The European Commission monitors compliance with the directive and continuously works on its further development. The introduction and development of the NFRD marked a significant milestone in the history of ESG reporting and laid the foundation for the upcoming Corporate Sustainability Reporting Directive (CSRD), which will expand the NFRD and introduce additional requirements.
The transition from NFRD to CSRD presents new challenges for companies but also offers the opportunity to improve their sustainability strategies and increase their competitiveness. The CSRD brings stricter audit requirements and harmonized European reporting standards to further enhance transparency and comparability.
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The Non-Financial Reporting Directive (NFRD) is an EU directive that obliges companies to report on non-financial information. This directive, which was introduced in 2014, aims to increase transparency with regard to environmental, social and governance aspects(more on ESG) and thus promote responsible business practices.
The NFRD requires large companies with more than 500 employees to disclose detailed reports on their environmental and social impacts, employee concerns, respect for human rights, anti-corruption and anti-bribery, and diversity policies. This reporting is intended to better inform investors, consumers and other stakeholders so that they can make informed decisions.
The directive requires non-financial information to be included in the management reports of companies or to be published in a separate sustainability report. Companies should explain how they are aligning their business activities with sustainability and what measures they are taking to minimize social and environmental risks.
A central element of the NFRD(on the directive) is the obligation to disclose corporate strategies and results in relation to ESG criteria. This transparency should not only strengthen public confidence, but also encourage companies to make their business models more sustainable. Standardized reporting also makes it easier to compare companies, which promotes competition for sustainable business practices.
The introduction of the Non-Financial Reporting Directive was a significant step by the European Union to embed sustainability in the corporate world while preparing markets for a more sustainable future. While some companies see the implementation of the Non-Financial Reporting Directive as a challenge, many also see it as an opportunity to position themselves as sustainability leaders and achieve long-term benefits.
The European Commission monitors compliance with the Non-Financial Reporting Directive and works continuously to develop and adapt the Directive to ensure that it meets current requirements and developments. By continuously improving transparency and promoting sustainable business practices, the Non-Financial Reporting Directive contributes to creating a more responsible and sustainable economy.
The introduction of the Non-Financial Reporting Directive marked a significant milestone in the history of ESG reporting. But how did this directive come about and what are its objectives? A look at the historical development and background provides interesting insights into the origins and purpose of this groundbreaking regulation.
The roots of the regulation on the disclosure of non-financial information go back to the early 2000s, when awareness of sustainable business practices and corporate social responsibility increased in the European Union. In the face of global challenges such as climate change, social inequalities and corporate scandals, there was growing pressure on companies to make their business practices more transparent and responsible. The European Union recognized the need to create a binding framework to standardize and improve sustainability reporting.
In 2014, the EU adopted the NFRD as part of the CSR Directive Implementation Act (CSR-RUG). This directive obliges large companies with more than 500 employees to prepare detailed reports on their non-financial performance. The aim is to create transparency about the environmental and social impact of their business activities and at the same time ensure that companies take measures to minimize risks in these areas.
The introduction of the Non-Financial Reporting Regulation was a clear step towards a more sustainable economy. By standardizing reporting, the NFRD enables a better comparison between companies and promotes competition for sustainable business practices. Companies must now disclose information on environmental aspects, social issues, employee rights, human rights and the fight against corruption and bribery. This transparency strengthens the trust of stakeholders and contributes to the long-term stability and responsibility of companies.
A key driver behind the directive on transparency of non-financial corporate practices was the aim of providing investors and other stakeholders with reliable and comparable information. By disclosing ESG criteria, these stakeholders can make more informed decisions and better assess the risk of investments. At the same time, companies should be encouraged to make their business strategies and processes more sustainable and thus make a positive contribution to society and the environment.
However, the Non-Financial Reporting Directive is not the end goal, but an important step towards more comprehensive and detailed reporting. The European Commission is continuously working on the further development of the directive in order to meet the changing requirements and challenges. The forthcoming Corporate Sustainability Reporting Directive (CSRD) will further expand the NFRD and introduce additional requirements to further improve the transparency and comparability of reports.
Overall, the Directive on transparency of non-financial corporate practices has a decisive influence on the way in which companies report on their sustainable activities. It ensures that sustainability becomes an integral part of corporate strategy, helping to create a more responsible and sustainable economy.
With the increasing importance of sustainability in the corporate world, the European Union has developed two important directives: the Non-Financial Reporting Directive and the Corporate Sustainability Reporting Directive. Both directives aim to promote transparency and accountability in companies, but there are key differences and similarities that need to be understood.
The NFRD, introduced in 2014, was the first EU directive requiring large companies to report on non-financial information. The aim was to create uniform standards for the disclosure of environmental, social and governance aspects. Companies with more than 500 employees had to submit reports on their sustainability practices, employee matters, human rights, anti-corruption and diversity. These reports were to be included in the management reports or published as separate sustainability reports.
The CSRD, which was proposed in 2021 and will come into force in 2024, builds on the foundations of the NFRD and significantly expands its requirements. While the NFRD was only applied to large companies, the CSRD(more on the CSRD) now also includes listed small and medium-sized enterprises (SMEs) and other large companies that were previously not covered by the Non-Financial Disclosure Regulation. This leads to a significant expansion of the scope of application.
Another important difference is the scope and depth of reporting. The CSRD requires more detailed and comprehensive disclosures on ESG criteria. Companies must now disclose specific information on their short, medium and long-term sustainability goals and the measures they are taking to achieve these goals. The CSRD also requires reports to be prepared in accordance with uniform European standards and audited by independent third parties.
Both directives have the common goal of improving the transparency and comparability of sustainability reporting and thus strengthening the confidence of investors and the public. Both the Regulation on the Disclosure of Non-Financial Information and the CSRD promote more sustainable corporate governance and contribute to the creation of a responsible economic system.
The transition from the NFRD to the CSRD marks a significant step towards more comprehensive and stricter reporting obligations. Companies are facing new challenges, but must also adapt to improved standards and practices.
One of the main changes is the expansion of the scope of the CSRD. Companies that were not previously required to report must now prepare for the new requirements. This requires a thorough review and adaptation of their internal processes for data collection and reporting.
The CSRD also entails stricter auditing requirements. While reports under the regulation on the disclosure of non-financial information were largely based on self-disclosure, the information under the CSRD must be verified by independent auditors. This is intended to increase the credibility and reliability of the reports and strengthen stakeholder confidence.
The CSRD also introduces harmonized European reporting standards to ensure that all companies report according to the same criteria. This makes it easier to compare and evaluate sustainability performance across different companies and sectors.
The transition from the Non-Financial Reporting Directive to the CSRD presents companies with new challenges, but also offers them the opportunity to improve their sustainability strategies and increase their competitiveness. By complying with the new regulations, companies can not only minimize legal risks, but also strengthen the trust of their investors and customers and make their contribution to a sustainable future.
The Directive is aimed at large companies that play a significant role in the European economy. But which companies are specifically obliged to report?
It applies to all companies that meet the following criteria:
These criteria mean that large capital market-oriented companies, credit institutions and insurance companies within the European Union are obliged to provide non-financial reporting. The aim of this regulation is to increase the transparency and accountability of large companies and thus strengthen the confidence of investors, customers and the public.
It is necessary for these companies to report regularly on their environmental, social and governance practices, which includes information on environmental impacts, social issues, employee rights, human rights and measures to combat corruption and bribery. This comprehensive reporting is intended to encourage companies to make their business strategies more sustainable and minimize risks in these areas.
One key aspect is the obligation to disclose corporate strategies and objectives in relation to sustainability. Companies must disclose how they integrate ESG factors into their business activities and what measures they are taking to promote sustainable development. This transparency should not only improve comparability between companies, but also stimulate competition for sustainable business practices.
However, there are also exceptions and special regulations that can limit the scope of the directive on non-financial reporting. Small and medium-sized enterprises (SMEs) are generally exempt from the reporting obligation, unless they are listed on a stock exchange. Subsidiaries whose parent company already submits a consolidated report in accordance with NFRD requirements may also be exempt from the individual reporting obligation.
In addition, EU Member States may set additional requirements or facilitations that go beyond or adapt the minimum requirements of the NFRD. Companies should therefore carefully examine the specific regulations in their respective Member State and ensure that they comply with all relevant national regulations.
The directive on non-financial reporting is flexible and adaptable thanks to the exemptions it contains. It promotes comprehensive and uniform reporting throughout the EU. This helps the EU to establish sustainable and responsible corporate governance and increase transparency for all stakeholders.
Fulfill all NFRD and CSRD requirements in one tool
The Non-Financial Reporting Directive sets clear and strict requirements for the reporting and disclosure of non-financial information. Companies must submit comprehensive reports on their environmental and social activities as well as their corporate governance. These reports should not only create transparency, but also strengthen the trust of investors and other stakeholders.
Companies are obliged to disclose information on the following aspects:
This information must be published in the management reports of the companies or in separate sustainability reports. The reports should be prepared in accordance with recognized reporting standards, such as the guidelines of the Global Reporting Initiative (GRI) or the standards of the Sustainability Accounting Standards Board (SASB). This ensures a high level of comparability and reliability of the information.
The creation of an NFRD report begins with careful preparation and planning. This first step is crucial to ensure that all relevant information can be collected and presented in a structured way. First, companies should form an internal team or working group responsible for coordinating the reporting process. This team should consist of representatives from various departments, including finance, sustainability, human resources and legal, to ensure a comprehensive perspective.
A clear project plan with defined milestones and deadlines is essential. It is important to understand the specific requirements of the NFRD and select the reporting standards to which the report will be prepared, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). Companies should also consider external consultants or auditors to ensure that the report meets the legal requirements and is of high quality.
The next step is to collect and analyze relevant data. This is often the most time-consuming part, as a lot of different information has to be collected and evaluated. Companies need to collect data on the environment, social aspects, employee rights, human rights and anti-corruption. This data comes from internal sources such as environmental management systems, employee surveys, supplier evaluations and compliance reports.
The data collected must be analyzed in detail in order to identify trends and risks and derive measures to improve sustainability. A thorough analysis helps to identify weaknesses and develop targeted measures to improve ESG performance. The data must be valid and reliable to ensure stakeholder confidence.
The final step is to write and submit the report. The report should be clear and structured to maximize readability and comprehensibility. A typical structure could include the following elements:
Once completed, the report should be reviewed by independent auditors to confirm its accuracy and completeness. The report must then be submitted and published in accordance with legal requirements. This can be done on the company website, in annual reports or in special sustainability reports.
Once completed, the report should be reviewed by independent auditors to confirm its accuracy and completeness. The report must then be submitted and published in accordance with legal requirements. This can be done on the company website, in annual reports or in special sustainability reports.
The EU directive on non-financial reporting promotes transparency and sustainability in European companies. It requires large companies to report comprehensively on their environmental and social activities as well as their governance practices. The aim is to promote responsible corporate governance and strengthen the confidence of investors and the public.
A key point is the obligation to disclose information on the environment, social aspects, employee rights, human rights and anti-corruption. Comprehensive reports make risks and opportunities in sustainability visible and enable better comparisons between companies. This promotes competition for sustainable practices and motivates companies to continuously improve their ESG performance.
The EU directive on non-financial reporting has introduced more transparency and responsibility in the corporate sector. It presents companies with new challenges, particularly when it comes to collecting and reporting data. Nevertheless, the directive offers many opportunities: companies that demonstrate their sustainability performance clearly and credibly can position themselves as responsible market participants and gain the trust of investors, customers and other stakeholders.
The EU directive on non-financial reporting has paved the way for the Corporate Sustainability Reporting Directive (CSRD), which will apply from 2024. The CSRD expands the requirements and now also includes smaller listed companies and other large companies that were previously not required to report. Uniform European reporting standards will improve the comparability and reliability of reports, which will increase the information content for stakeholders.
The EU directive on non-financial reporting has strengthened sustainability reporting in Europe. It forces companies to take a closer look at their environmental and social impact and to take action. The continuous adaptation of the directive shows the EU's commitment to a more sustainable economy. Companies must improve and make their ESG performance transparent. The Directive and the upcoming CSRD will enable sustainable practices to be integrated into corporate strategy to meet legal requirements and ensure long-term success.
At a time when sustainability is becoming more important, the Non-Financial Reporting Directive is an important driver for change in companies. The reporting obligation motivates companies to act more responsibly and contribute to a sustainable future. This not only helps the environment and society, but also improves the competitiveness and reputation of companies worldwide.
In conclusion, the Non-Financial Reporting Directive is more than just a legal obligation - it is a call to action. Companies that take advantage of the opportunities presented by the directive can position themselves as pioneers in sustainability and have a positive impact on society and the environment. The ongoing development of reporting standards by the CSRD will further promote this process and ensure that transparency and sustainability remain key issues in corporate governance.
