NFRD directive - what is it and what does it affect? We explain

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While ESG and CSR are currently the dominant topics in corporate sustainability, it is worth remembering that non-financial reporting has been around for several years. What is the NFRD and what did its entry into force mean for businesses?

What is the NFRD directive?

The NFRD ¹ (Non-Financial Disclosure Reporting Directive) 2014/95/EU of October 22, 2014, amending Directive 2013/34/EU, laid the cornerstones of non-financial reporting for companies. It was an expression of the EU legislator's concern for the practical aspect of sustainability, i.e. that businesses develop with respect for the environment, labor and social aspects.

Quite quickly, however, it became clear that the measures taken were insufficient. Only the largest companies were included in the scope of the NFRD, many requirements were optional and there was a lack of uniform reporting standards. As a result, it was impossible to measure the effectiveness of actions taken by individual companies and compare them with each other. The inconsistency of standards also creates a high risk of greenwashing, i.e. discrepancies between reports and actual performance. Therefore, work began on new guidelines, which took the form of the aforementioned ESG.

Basic Assumptions and Objectives of the NFRD Regulation

The NFRD directive aimed to promote sustainable development among businesses. Its foundation was business transparency, as non-financial reports were to be published on websites and made publicly available. The directive's provisions supported investments aimed at improving company operations in employee areas, green investments, and anti-corruption efforts.

The main reason for introducing NFRD reporting was the need to ensure greater transparency and engage entrepreneurs in areas other than capital accumulation. This was significant because previous reporting models focused solely on the business aspects of running a company.

NFRD Directive – Which Companies are Covered by These Regulations?

The entry into force of the NFRD directive led to changes in national regulations. In the Polish Accounting Act, ² Article 49b defines the scope of non-financial reporting. According to this provision, it applies to:

• Entities operating in the financial market, including banks, investment and reinsurance funds, pension funds, and credit unions (SKOKs);
• Entities applying for registration in the ASI register;
• Issuers of securities seeking admission to trading on one of the regulated markets in the EEA or admitted to the market in the Alternative Trading System (like NewConnect);
• National payment institutions;
• Electronic money institutions.

Additionally, these market participants must be either a capital company or a partnership, where all partners are capital companies or limited joint-stock partnerships. The Act also introduces a third requirement regarding business conditions. In the year of the report and the preceding year, it exceeds:

• An average annual employment volume of 500 people, calculated in full-time equivalents;
• 85 million PLN in total assets at the end of the financial year or 170 million PLN in net revenue from sales of goods and products for the financial year.

It is easy to see that NFRD reporting only concerns the largest market players. Small and medium-sized enterprises are not required to comply.

Implementation of the NFRD Directive – Challenges and Benefits for Enterprises

Companies required to comply with the NFRD directive faced the dilemma of how to present non-financial reporting results and which standards to refer to. The EU legislator (and, consequently, the Polish legislator) left significant freedom in this area. The addressees of the directive could rely on national, community, or international standards, and the report could be part of the financial report or a separate document. The directive recommends referring to standards such as the Global Reporting Initiative or the Integrated Reporting Framework.

The Accounting Act rather generally addresses the content of the non-financial statement. Its elements include at least:

• A concise description of the entity's business model;
• Key non-financial performance indicators related to the entity's activities;
• Descriptions of policies concerning social, employee, environmental, human rights, and anti-corruption issues, along with the results of applying these policies;
• Descriptions of due diligence procedures, if applied by the entity;
• Descriptions of significant risks associated with the entity's activities that may adversely affect the previously mentioned areas covered by internal policies, and how the entity manages these risks.

At the same time, an entity subject to NFRD obligations may include in the report other information it deems essential in light of non-financial reporting regulations. It is worth noting that the legislator applied a comply or explain strategy. If an entity does not apply any policies in one or more areas, it must indicate the reasons for this.

NFRD Directive and Sustainable Development Reporting – What are the Requirements?

Due to its insufficient effectiveness, the NFRD directive was replaced by the CSRD directive (Corporate Sustainability Reporting Directive). Non-financial reporting was replaced with sustainable development and social responsibility, and strict ESG (Environmental, Social, Governance) ³ standards were introduced, which must be implemented according to specific, detailed rules. With the CSRD coming into force, the requirements for businesses have also changed. They are obliged to:

• Conduct a materiality assessment;
• Prepare a report in accordance with European ESRS standards;
• Include taxonomy, i.e., verify whether the business activity is environmentally sustainable;
• Have the report audited by an external specialized entity and publish it.

The replacement of NFR reporting with CSR and ESG means not only more detailed obligations but also a broader scope of new regulations. Reporting will be gradually implemented, initially covering only the largest market participants, but over time, smaller companies will also have to prepare appropriate reports.

NFRD Directive and Business Transparency – Why is it Important?

Business transparency under the NFRD regime is crucial for companies for several reasons. The more accurately NFR reports are prepared, the more likely the entity is to meet ESG/CSR requirements. Publishing information on sustainable development also builds the entrepreneur's image as an entity taking responsibility for decisions not only in the business dimension but also in the social and environmental dimensions.

If your company is subject to NFRD, take advantage of Reo.pl's offer to implement green solutions. This way, you will meet environmental care requirements and increase stakeholder trust in your business.

 

1. https://eur-lex.europa.eu/legal-content/PL/TXT/?uri=celex%3A32014L0095

2. https://isap.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=wdu19941210591

3. https://eur-lex.europa.eu/legal-content/PL/TXT/?uri=CELEX%3A32022L2464