Introduced in 2014, the NFRD aimed to encourage greater transparency by requiring large companies to integrate ESG information alongside financial data in their annual reports.
According to Greenomy, as a key component of the EU’s sustainable finance framework, the NFRD was crucial in beginning structured discussions on non-financial information within corporate reporting spheres.
However, as it became operational, the NFRD showcased significant limitations, including inconsistent reporting standards and a narrow applicational scope. To address these issues, on April 20, 2021, the European Commission proposed the Corporate Sustainability Reporting Directive (CSRD), a robust enhancement aimed at broadening and strengthening reporting requirements and criteria.
Under the original NFRD framework, companies were required to disclose information relating to environmental protection, social responsibility, employee treatment, human rights, and anti-corruption efforts. They could choose from a variety of frameworks such as the OECD guidelines, ISO 26000, or the Global Reporting Initiative (GRI) to structure their reports. These options, while flexible, led to a disparity in reporting quality and comprehensiveness across companies and sectors.
The concept of double materiality was a cornerstone of the NFRD, focusing on both the financial impact of ESG factors on the company and vice versa. Despite its innovative approach, the directive did not mandate strict adherence to this principle, leading to varied applications in corporate reporting.
The NFRD initially applied to over 11,000 large public-interest entities like insurers and banks. The scope was considered narrow as it left out a significant segment of the market, including smaller and private companies. This gap was somewhat addressed by the EU Taxonomy, which came after the NFRD, adding further criteria and disclosure requirements for sustainable activities.
The need for evolution became apparent and was confirmed through a 2019 consultation leading to the CSRD. This new directive aims to include approximately 50,000 companies across the EU, increasing the scope dramatically. It introduces more stringent requirements to ensure comparability, reliability, and relevance of the disclosed non-financial information.
One of the major updates in the CSRD is the formalization and stringent enforcement of double materiality. The directive requires detailed reporting on how ESG factors impact business operations and vice versa, enhancing the quality and scope of information provided. Moreover, it mandates the inclusion of this information in management reports to maintain consistency and transparency across all corporate disclosures.
As companies prepare for the CSRD, which is set to begin phased implementation in January 2024, partnering with sustainability experts and leveraging digital tools will be crucial. These preparations not only ensure compliance but also position sustainability reporting as a strategic asset within the corporate framework.
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