The NFRD (Non-Financial Reporting Directive), which was the previous directive for non-financial reporting, will be replaced by the CSRD (Corporate Sustainability Reporting Directive), the EU's new initiative that is now applicable. The CSRD aims to ensure that sustainability reporting is on an equal footing with financial reporting.
So, what are the differences between the two directives? Is the CSRD simply a successor to the NFRD, or will companies in the EU have to navigate two different reporting systems?
What is the NFRD?
The NFRD - or the less colloquial Directive 2014/95/EU - set out the rules for the disclosure of non-financial and diversity information relating to the ESG areas for EU companies with more than 500 employees, including listed companies, insurance companies, and banks.
The directive had two main objectives:
- to make non-financial information available to stakeholders and investors
- to encourage society to take responsibility for social and environmental issues.
Under the directive, companies were required to report on, for example, business development, performance, impact, and position in relation to a predefined list of non-financial issues and publish their annual and sustainability reports.
What is the CSRD?
CSRD is a new EU directive that changes and strengthens the current requirements for companies' sustainability reporting.
The purpose of the new directive is to standardize reporting and to a much greater extent enable easy comparison of companies' sustainability data across entities and focus areas. This should increase transparency in the area and encourage an even greater focus on companies' internal and external sustainability efforts.
NFRD vs. CSRD - what are the key differences?
The primary purpose of the switch to the CSRD was to address the shortcomings of the NFRD. For instance, at the European level, the scope of affected companies was expanded from around 11,700 to around 49,000.
Regarding the reporting requirements of the CSRD, there were modifications made compared to those presented by the NFRD. In addition to the NFRD, the following topics were introduced:
- Double Materiality - analyzing and reporting on both the impact the company has on society and the environment (Impact Materiality) and the sustainability risks the company faces (Financial Materiality) - e.g. due to climate change and resource scarcity
- Formulation of long-term environmental, social and governance goals and policies
- Due diligence on the company's operations and supply chain
- Disclosure of information regarding intangible assets (social, human and intellectual intellectual capital)
- Reporting in accordance with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation
- Integrated reporting and mandatory external verification
- Digital tagging of information for machine readability
- External third-party auditing
When does CSRD come into effect and what does it mean for you?
The scope of the new EU measure is broader than its predecessor. It applies to companies that are listed on a regulated market in the EU and meet two of the following three thresholds:
- An average of 250 or more full-time employees
- A balance sheet total of more than €20 million
- €40 million or more in net turnover
In some European countries, the previous directive - the NFRD - has been over-implemented in the sense that since 2018, it has been applied to selected companies with up to 250 full-time employees. This means that the new directive will not include more companies than those already used for non-financial reporting.
For large and listed companies, the CSRD will come into force from January 1, 2024, while SMEs and other companies are expected to comply with the new requirements from 2026.
However, if your business is in the SME segment, you can expect to be affected by 2026. This is because the stricter requirements for large companies will propagate down the supply chain.