What happened to NFRD?

What happened to NFRD – the sustainability reporting rulebook that the EU was once very keen on but now seems to have lapsed?

The Non-Financial Reporting Directive (NFRD) once significantly shaped sustainability reporting requirements for businesses in the European Union. 

However, with evolving standards and the increasing importance of ESG (Environmental, Social, and Governance) reporting, the NFRD isn’t really relevant anymore.

The NFRD was an EU directive to enhance transparency in sustainability and social responsibility matters. It required large companies to disclose non-financial information, such as their impact on the environment, social aspects, employee-related issues, human rights, and anti-corruption efforts. 

For many of these areas, it was the EU’s first attempt at getting standardised, comprehensive information into the marketplaces for stakeholders to view and assess.

However, it had its limitations.

The NFRD was replaced by the more in-depth Corporate Sustainability Reporting Directive (CSRD) in 2021. 

The CSRD represents a more “deep-dive” approach to sustainability reporting and reflects the increasing expectations from stakeholders and the global community regarding corporate responsibility. Regulators saw that these stakeholders wanted more information from corporates and responded accordingly.

Not in practice. CSRD’s provisions are much more robust and broader and effectively function as a replacement for NFRD. 

NFRD was an EU directive, and each member state passed laws to implement it. CSRD is an amendment and expansion of those laws, broadening the list of affected companies and setting stricter reporting standards. 

Even if NFRD laws remain on the books in EU member states, there are (or will soon be) more relevant laws on the books for CSRD, which incorporate NFRD provisions anyway. So, NFRD doesn’t carry real weight.

Two major criticisms of the NFRD were its lack of standardisation and enforceability. 

Regulators and other stakeholders felt that companies had too much leeway in interpreting “non-financial information” and reporting on it. This fuelled inconsistencies, difficult comparisons, and reports that weren’t ultimately usable. 

Stakeholders will rapidly lose faith in such reporting if it’s not strict and standardised, meaning NFRD eventually came to be dismissed by many as nothing more than red tape. 

Moreover, the scope of NFRD was limited, only targeting large public-interest entities, which excluded many companies that significantly impacted sustainability.

The CSRD builds on the foundation of the NFRD but introduces several key differences:

• It has a broader scope: CSRD applies to a wider range of companies, including large companies and listed SMEs.
• It requires more detailed reporting: Under the CSRD, companies must provide more detailed information on environmental, social, and governance factors, following European Sustainability Reporting Standards (ESRS).
• It has more audit requirements: The CSRD requires that sustainability reports be audited to ensure accuracy and reliability, which was not mandated under the NFRD.
• Digital access: Reports under the CSRD must be submitted digitally to a centralised platform, making data easier to access and compare.

While the NFRD was important in promoting corporate transparency in non-financial matters, EU regulators have largely moved on. 

Is the NFRD dead? No—its basic principles remain in place. But the new CSRD has expanded the scope of sustainability reporting so much that companies should consult it rather than the NFRD for their reporting requirements.