Everything You Need to Know About the NFRD

NFRD content

What does the NFRD require?

The NFRD requires large European companies to publish detailed information on their sustainability performance in their annual management report. These obligations are not limited to a simple statement of intent: companies must provide a structured explanation of their approach and results across several key themes.

The areas covered by the NFRD include:

• Environmental impact (greenhouse gas emissions, energy consumption, natural resource management, biodiversity protection).
• Social and human resources issues (working conditions, gender equality, social dialogue).
• Respect for human rights throughout the value chain.
• The fight against corruption and the prevention of unethical behavior.

Beyond listing existing policies, the directive requires an explanation of how these policies are implemented, the results achieved, as well as the main risks identified and how they are managed. Companies must also present the key performance indicators (KPIs) they use to measure their progress.

A key principle introduced by the NFRD is double materiality: this involves analyzing both the impact of ESG issues on a company’s financial performance and the company’s impact on the environment and society.

Thus, the NFRD requires companies to provide a clear, comprehensive, and verifiable vision of their sustainability strategy. These requirements are gradually changing the way large companies approach their corporate social responsibility.

Which companies are concerned?

The NFRD applies primarily to large European companies with a significant impact on the economy and society. These companies must meet at least two of the following three criteria:

• Employ more than 500 employees.
• Have a turnover exceeding €40 million.
• Have a balance sheet total exceeding €20 million.

This directive applies to both companies listed on regulated markets and certain large unlisted companies, if they meet the size criteria. It also targets banks, insurers, and other financial institutions that, by the nature of their business, have a major influence on the financing of the economy. Groups of companies are also included: if the parent company meets the thresholds at the consolidated level, it must publish a non-financial report for the entire group.

By targeting these organizations, the NFRD seeks to hold accountable those with the greatest impact on the environment, society, and the economy.

Impact of the NFRD on companies

The NFRD has profoundly transformed the way companies approach their environmental, social, and governance (ESG) responsibilities. By imposing structured non-financial reporting, it has pushed large organizations to rethink their governance and strategy to better integrate sustainability issues.

Internally, the directive has required companies to assess their ESG risks much more rigorously, with the creation of new teams dedicated to CSR or sustainable development, the implementation of reliable ESG data collection processes, and the adoption of concrete policies on climate, human rights, diversity, and anti-corruption.

Furthermore, risk management has also evolved. ESG impacts are now considered on the same level as traditional financial risks. This influences strategic decisions, supplier relationships, and internal investment policies.

The NFRD has also increased pressure from investors, regulators, and consumers for greater transparency and accountability. A company that can demonstrate its sincere commitment to sustainable practices benefits from a better reputation, a competitive advantage, and easier access to green financing.

However, meeting the NFRD requirements has also resulted in additional costs for companies: investments in specialized reporting tools, hiring sustainability experts, and internal and external audits. Solutions like D-Carbonize allow organizations to structure their ESG reporting more efficiently while reducing these costs.

The transition from NFRD to CSRD

The transition from the NFRD to the CSRD (Corporate Sustainability Reporting Directive) marks a major shift in the way European companies will have to report on their sustainability impacts. Adopted in 2021 and gradually coming into force starting in 2024, the CSRD addresses the limitations observed in the application of the NFRD.

Why replace the NFRD?

The NFRD had enabled significant progress, but it displayed several weaknesses: a lack of precision regarding the expected information, insufficient comparability of reports between companies, and a lack of mandatory external verification. Many investors and regulators felt that the published data was often incomplete, difficult to use, and not always reliable for assessing real ESG risks.

What are the main new features of the CSRD? 

• Broader scope: The CSRD applies to a wider range of companies, including listed SMEs, large unlisted companies, and subsidiaries of international groups operating in the EU.
• Harmonized reporting standards: Companies must follow the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG), to ensure greater consistency and comparability of information.
• Mandatory external verification: Published data must be verified by an independent third party, thus strengthening its reliability and credibility with investors.
• Strengthened double materiality principle: Companies will have to analyze both how ESG issues affect their financial performance and how their activities impact the environment and society.
• Digitization of reports: Information must be published in a standardized electronic format (XHTML), compatible with the single European database for financial and non-financial reports.