CSRD vs. NFRD: Key Differences and Why It Matters

Introduction

Sustainability reporting has become a crucial aspect of corporate transparency, enabling stakeholders to assess a company's environmental, social, and governance (ESG) performance. The Non-Financial Reporting Directive (NFRD)has been the primary EU framework for such reporting but is now being replaced by the Corporate Sustainability Reporting Directive (CSRD). Understanding the key differences between these directives is essential for businesses to ensure compliance and leverage sustainability reporting strategically.

What is the NFRD?

The Non-Financial Reporting Directive (NFRD), introduced in 2014, required certain large companies to disclose non-financial and diversity information. It applied to approximately 11,700 companies in the EU, specifically large public-interest entities (PIEs) with more than 500 employees. The directive aimed to enhance transparency by mandating disclosures on environmental matters, social and employee issues, human rights, anti-corruption, and bribery efforts.

What is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD), adopted in 2022, expands the scope and depth of sustainability reporting requirements, aligning with the EU's broader sustainability goals. It replaces the NFRD and introduces more comprehensive reporting standards, requiring companies to provide detailed sustainability information in line with the European Sustainability Reporting Standards (ESRS). The CSRD significantly increases the number of companies subject to reporting obligations and enhances the quality and comparability of sustainability disclosures.

Key Differences Between CSRD and NFRD

• SCOPE
  
  NFRD: Applied to large PIEs with over 500 employees (~11,700 companies)
  
  CSRD: Extends to all large companies (meeting two of: >250 employees, >€40M turnover, >€20M total assets), all companies listed on EU-regulated markets (except micro-enterprises), and non-EU companies with significant EU operations (~50,000 companies)
  
  

• REPORTING STANDARDS
  
  NFRD: Allowed flexibility; companies could choose frameworks (e.g., GRI, SASB)
  
  CSRD: Mandates compliance with European Sustainability Reporting Standards (ESRS)
  
  

• REPORTING FORMAT
  
  NFRD: Non-financial statements included in annual reports
  
  CSRD: Requires integration into management reports, ensuring a stronger connection with financial data
  
  

• AUDIT AND ASSURANCE
  
  NFRD: No formal assurance required
  
  CSRD: Requires limited assurance, with a future move towards reasonable assurance
  
  

• DIGITALIZATION
  
  NFRD: No specific digital format required
  
  CSRD: Mandates use of European Single Electronic Format (ESEF/XHTML) for digital access
  
  

• MATERIALITY
  
  NFRD: Focused on financial materiality
  
  CSRD: Emphasizes double materiality (considering both financial impact and the company's impact on sustainability)
  
  

Why This Matters

1. Broader Compliance Scope: Many companies previously exempt under the NFRD must now prepare for sustainability reporting under the CSRD.

2. Standardization and Comparability: The adoption of the ESRS ensures consistent and comparable data across companies, benefiting investors and stakeholders.

3. Higher Accountability: The requirement for third-party assurance strengthens the reliability of sustainability disclosures.

4. Integration with Financial Data: Sustainability reporting becomes an essential component of corporate strategy, influencing risk assessment and investment decisions.

5. Digital and Transparent Reporting: The shift to machine-readable data enhances accessibility and analysis by regulators and stakeholders.

Conclusion

The transition from the NFRD to the CSRD represents a significant shift in sustainability reporting within the EU. Companies must proactively adapt to the new requirements by enhancing their data collection, integrating sustainability into corporate strategy, and preparing for external assurance. As sustainability continues to shape regulatory and business landscapes, aligning with the CSRD will not only ensure compliance but also position companies for long-term resilience and success in an increasingly ESG-focused world.

For businesses preparing for CSRD compliance, it is advisable to assess existing reporting processes, invest in sustainability expertise, and leverage digital tools for streamlined ESG data management.