NFRD and CRSD are EU Directives that oblige a number of institutions that, in accordance with a legal obligation, must comply with the Directives.
NFRD
The Non-Financial Reporting Directive is Directive 2014/95/EU of the European Parliament and of the Council of October 22, 2014, which requires public interest companies in EU member states with more than 500 employees to disclose certain types of information on non-financial business and diversity.
What is included in non-financial reporting? Non-financial information is often defined as environmental, social, and corporate governance (ESG) information, referring to the three central components in measuring the sustainability and social performance of an enterprise.
Topics that institutions must cover in reporting are:
- Ecological aspects
- Social issues and employee issues
- Fight against bribery and anti-corruption
- Diversity in governance structures
- Human rights
The main goal of the NFRD is to enable potential investors, consumers, and various stakeholders to have all the necessary information to decide whether this is a business with which their values are aligned to participate in a project or service. Non-financial reports, such as the Free Trade Directive, allow third parties to influence large companies to take a more sustainable and socially responsible business approach.
CSRD
Corporate Sustainability Reporting Directive – In April 2022, the European Commission presented a proposal for a Corporate Sustainability Directive (CSRD) and adopted it and expects from 2023 that, as part of legal obligations, all large organisations in the EU must report on their sustainability and performance policies.
CSRD will apply to all large EU companies (including EU subsidiaries of non-EU parent undertakings) that exceed at least two of the following criteria:
- More than 250 employees;
- Financial transactions of more than EUR 40 million; or. total assets of EUR 20 million.
The EU taxonomy is aligned with the current Sustainable Finance Disclosure Regulation (SFDR), which focuses on financial reporting. The taxonomy also supports the Corporate Sustainability Reporting Directive (CSRD), which will replace SFDR.
Reporting must contain the following components:
- Data based on the principle of dual materiality:
- (1) what sustainability risks and opportunities may result in an impact on the financial significance of the institution (for example, shortage of raw materials or production disruptions due to extreme weather conditions, but also transition risks such as reputational damage) and
- (2) what material impacts society has on people and the environment (such as biodiversity loss, or human rights violations in the value chain)
- Forward-looking information: information on society’s long-term sustainability goals and progress towards these goals (as opposed to results in a given year)
- Results on the environmental impact (where appropriate, in accordance with the EU Taxonomy Regulation), as well as the social impact; at the very least, on social and employee issues, diversity, the fight against bribery and corruption, and human rights; and
- Connecting reporting in line with other recent European regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
Comparative analysis of NFRD and CSRD
The NFRD requires only 11,700 Companies in the EEA to comply with these reporting requirements while CRSRD requires sustainability reports from nearly 50,000 companies within the European Union.
Finally, the third party does not have to revise the NFRD, while CSRD must achieve this. Also, the NFRD does not have to adapt to digital reporting, while this is necessary for those who are required to report under CSRD.
From the picture below it is evident that in the coming years the application of such regulations will be transferred as a legal obligation on small and medium-sized enterprises (SMEs).
