Non-Financial Reporting Directive (NFRD)
Large companies in the EU that meet certain conditions are required to disclose certain information about their environmental, social, and governance activities to the public starting in 2018. The reports, which cover five key areas—environmental protection efforts, treatment of employees, compliance with human rights, anti-corruption measures, and equal representation on company boards—are regulated by the Non-Financial Reporting Directive (NFRD).
The NFRD is applicable in all 28 member states of the EU. To be covered by the NFRD, companies must have more than 500 employees. Approximately 12,000 large companies and groups across the EU are covered by the NFRD, including listed companies, banks, insurance companies, and other companies designated by national authorities as organizations operating in the public interest.
The purpose of the NFRD is to enable the assessment of large companies’ non-financial performance by their stakeholders, including investors, civil society organizations, consumers, and other stakeholders, and to encourage companies to develop a responsible business approach by increasing transparency.
Multi-stakeholder partnerships aimed at supporting the green economy are supported to accelerate and consolidate sustainable changes in both production and consumption patterns. In addition to governments and non-profit organizations, the private sector, which is a key actor in promoting the environment, resource efficiency, and the green economy, has also strengthened its relationship with the United Nations. However, the fact that the NFRD is only implemented by large companies and that the information shared is not necessarily verified by third parties has led to the NFRD being perceived by the public as inadequate and unreliable. This situation has accelerated efforts to introduce a new reporting directive in the EU, resulting in the creation of the Corporate Sustainability Reporting Directive (CSRD).
The CSRD requires companies to provide more detailed reporting on their environmental, human rights, and social impacts in line with the EU’s climate goals, the implementation of the UN National Green Development Policy, and the integration of the green economy into local development plans.
Under the CSRD, companies will be subject to independent audit and certification to ensure the reliability of the information they provide. The aim is to give equal weight to financial and sustainability reporting so that investors have access to comparable and reliable data. Companies will also be required to upload their sustainability information to their original platforms to increase accessibility.
CSRD aims to address gaps in existing sustainability reporting rules by introducing more detailed reporting requirements. With the mandatory disclosure of companies’ impacts on society and the environment under the CSRD, it is expected that companies will become more transparent, greenwashing will come to an end, and the reliability of financial markets will increase, enabling investors to play a greater role in the green transition.
What does CSRD cover? Any large company that meets at least two of the following criteria—having 250 or more employees, generating 40 million euros in revenue, or holding 20 million euros in assets—is required to report under CSRD. As a result, CSRD will require sustainability reports from approximately 50,000 companies in the European Economic Area—about 4.5 times the number covered by NFRD—and will be responsible for evaluating the information applicable to these companies. Therefore, CSRD is of greater interest to companies in the European Economic Area than NFRD. For non-EU companies, the obligation to provide a sustainability report in accordance with CSRD applies to all companies that have achieved a net turnover of at least 150 million euros in the EU for two consecutive years and have at least one subsidiary or branch in the EU with a turnover exceeding 40 million euros. These companies must submit a report on their environmental, social, and governance (ESG) impacts as defined in this directive.
What Are the Obligations Introduced by the CSRD? Companies will be required to disclose the following information: A brief description of the business model, strategy, and sustainability risks and opportunities, the setting of ESG targets and the annual publication of progress, information on compliance with the EU taxonomy, the integration of sustainability into vision and economic models, the identification of measures to limit global warming in line with the Paris Agreement and achieve climate neutrality by 2050, Establishing a roadmap for phasing out coal, oil, and natural gas-intensive activities, disclosing sustainability issues that affect the company and the company’s impact on sustainability issues (known as the “double materiality” perspective), and conducting due diligence processes regarding the potential adverse impacts of greenhouse gas emission targets.
CSRD must be implemented in four phases between 2024 and 2028. Specifically:
Large companies subject to NFRD will submit their 2024 financial year reports in 2025.
Large companies not subject to NFRD will submit their 2025 reports in 2026.
SMEs listed in the exempted list, excluding micro-enterprises, will submit their 2026 financial year reports in 2027.
Third-country companies meeting certain conditions in the EU will submit their 2028 financial year reports in 2029.
In summary, the Corporate Sustainability Reporting Directive (CSRD) is a proposed amendment to the Non-Financial Reporting Directive (NFRD). The CSRD aims to enhance the quality, comparability, and reliability of corporate sustainability reporting by introducing new reporting requirements and standards. These directives aim to improve the quality and transparency of information on sustainability issues and thereby support the transition to a sustainable economy following the Paris Climate Agreement and the EU Green Deal.
