NFRD vs. CSRD: What are the differences?

Before the world began to care about organizations’ non-financial information, particularly, annual reports just focused on financial information. Although responsibility was attached to non-financial information in general, investors and other stakeholders were not particularly concerned.

A lot has changed as more attention is paid to non-financial information, and the Non-Financial Reporting Directive (NFRD) was created to extend the reporting directives.

The Corporate Sustainability Reporting Directive (CSRD) has been proposed as another guideline for reporting non-financial information and could be described as an extension of the NFRD.

This article highlights the distinct differences between NFRD and CSRD. Read to know more.

What is NFRD?

The NFRD came into effect in 2018 and was specifically targeted at two main goals. Firstly, the directive aims to provide stakeholders and investors with non-financial information for assessing the value creation and risks of the establishment.

This directive is also aimed at encouraging responsibility to social and environmental issues. The NFRD requires that organizations share information about five core aspects in their annual reports.

The aspects to be reported, according to the NFRD, include respect for human rights, environmental protection, anti-corruption and bribery, gender, education, profession and age diversity, social responsibility, and the treatment of employees.

Organizations whose non-financial reporting is guided with NFRD are allowed to follow any of the available frameworks. These frameworks include GRI, ISO 26000, OECD, and SASB. Organizations to which the NFRD apply are particularly the bigger companies. A basic requirement is a 500-employee count.     

The NFRD became necessary when it was noticed that organizations were not providing sufficient information to equip stakeholders to decide on the organization’s responsibility. Before enacting the directive, organizations, including some of the large ones, were not reporting their non-financial information. As such, an accountability gap existed before the enactment of the NFRD.

It is noteworthy that organizations can incur significant costs when the required information is no documented according to the guideline. The penalties could result from the non-adherence to the requirements, which could be a result of the existence of different frameworks and the lack of a standard framework per se.

A limitation of this guideline is the eligibility criteria. The commonest criterion is based on the number of employees in that financial year, a lower limit of 500. This means that a significant proportion of companies could get away with not reporting their non-financial information.

CSRD vs NFRD

A proposal of the CSRD was made in April 2021 to extend the existing requirements of the NFRD. The focus of the proposal includes extending the scope of the requirements to all listed companies and large companies. However, the proposal only exempted the listed micro-enterprises.

Another focus area of the proposal is the digital tagging of the information to be fed into a central system.

The proposal also pushes for the auditing of the reports. The reporting requirements are also extended in the proposal, with the companies required to report according to the mandatory reporting sustainability standards of the EU. 

This guideline can be described as the future of sustainability reporting. With the CSRD, many more organizations are bound to report with their sustainability data. Therefore, the data will also be reported more extensively.

There are indications that as opposed to the 11,000 companies currently reported their non-financial data extensively, about 50,000 companies will be reporting their data with the CSRD.

The CSRD aims to develop special requirements for the large companies, with the small companies having other requirements. The listed micro-enterprises that are not required to report the data could voluntarily apply the requirements that apply to the small companies.

What are the NFRD and CSRD differences?

Both NFRD and CSRD are two directives for the documentation of non-financial data. The former is currently in place, while the latter has been proposed as a replacement. Therein lies the difference between NFRD and CSRD.

The CSRD is still at the proposal stage and more details will be unveiled in the future. Therefore, more information about this guideline will be available in the near future. However, even at this proposal stage, this directive can be seen as an upgrade of the NFRD for improved sustainability reporting.