The evolution of European Corporate Sustainability Reporting: a new era of transparency

Introducing the Non-Financial Reporting Directive (NFRD)

The Non-Financial Reporting Directive (NFRD) is a significant piece of legislation adopted by the European Union in 2014 (see figure 1). It requires certain companies to provide non-financial information, often in the form of ‘sustainability reports’, along with their annual reports. This directive applies to large public-interest entities, such as listed companies, banks, and insurance companies, with more than 500 employees, constituting approximately 11.6000 companies and groups within the EU.

The NFRD aims to evaluate the non-financial performance of these companies and encourages them to develop a responsible approach to business. The directive requires public disclosure documents to include topics such as

• environmental protection,
• social responsibility,
• treatment of employees,
• respect for human rights,
• anti-corruption, and
• bribery issues.

The main purposes of the NFRD are to make non-financial information available to stakeholders and investors, and to increase business transparency and accountability. While these EU guidelines are not mandatory, they have set a clear course toward greater corporate sustainability reporting.

The interplay between NFRD and ESG

Environmental, Social, and Governance (ESG) refers to three central factors used in measuring the sustainability and societal impact of a company or business.

• The Environmental aspect focuses on how a company’s operations affect the natural environment, considering elements such as waste management, energy efficiency, and carbon footprint.
• The Social component examines how a company manages relationships with its employees, suppliers, customers, and communities where it operates. This includes aspects like labor practices, diversity and inclusion, and human rights.
• Governance pertains to a company’s leadership, executive pay, audits, internal controls, and shareholder rights. It reflects how a company is governed and the standards it upholds in its business practices.

The European Union’s Non-Financial Reporting Directive (NFRD) is important for ESG reporting. It encourages businesses to take ESG factors into account and report on them, which promotes sustainable business practices throughout Europe.

The emergence of the European Green Deal

The European Green Deal is a set of policy initiatives by the European Commission aimed at making Europe climate neutral by 2050. Unveiled in December 2019 (see Figure 1), it represents a roadmap towards a sustainable economy and involves significant investment in green technologies, sustainable solutions, and innovative businesses. It outlines specific policy initiatives across various sectors, from significantly cutting greenhouse gases, investing in innovative research and innovation, to rolling out cleaner, cheaper, and healthier forms of private and public transport.

The NFRD, on the other hand, is a key tool that aligns with and supports these goals. By requiring large companies to report on their environmental and social impacts, and governance practices, the NFRD helps ensure that the corporate sector is contributing to – rather than hindering – the objectives of the European Green Deal. For instance, a company reporting under NFRD would need to disclose its carbon emissions and plans for reduction, which directly ties into the Green Deal’s goal of reducing greenhouse gas emissions.

In essence, while the European Green Deal sets the broader vision and targets for a sustainable European economy, the NFRD provides a framework for businesses to contribute to this vision through increased transparency and accountability. This reporting not only increases transparency but also encourages companies to develop more sustainable business models and practices.

Figure 1: Timeline of the evolution of the European Corporate Sustainability Reporting Directive

The evolution from NFRD to the Corporate Sustainability Reporting Directives (CSRD)

The NFRD has been a significant step towards enhancing corporate transparency in Europe. However, recognizing the need for more comprehensive and standardized reporting, the European Union has recently introduced a new directive, the Corporate Sustainability Reporting Directive (CSRD), which builds upon and expands the scope of the NFRD.

1. Extending the company scope

One of the key changes brought about by the CSRD is the increase in the number of companies required to provide non-financial information (see Figure 2). While the NFRD applied to large public-interest entities with over 500 employees, the CSRD extends this requirement to all large companies and all companies listed on regulated markets (except for micro-enterprises). This expansion of regulations encompasses a total of 49,000 entities, a significant increase from the previous 11,600.

2. Introduction of mandatory EU reporting standards

The CSRD also provides more detailed reporting requirements. It introduces mandatory EU sustainability reporting standards, aiming to ensure that reports across different companies and sectors are comparable. This is a significant shift from the NFRD, which provided only general guidelines for reporting.

3. Obligatory audit

Furthermore, the CSRD requires an audit (assurance) of reported information, similar to the audits required for financial information. This marks a major step towards ensuring the reliability and accuracy of non-financial reports.

The introduction of the CSRD represents a substantial advancement in the EU’s commitment to sustainable finance and corporate transparency. As companies begin to adapt to these new regulations, they will play a critical role in Europe’s broader ambition to achieve a sustainable, net-zero economy.

Figure 2: Extended coverage from NFRD to CSRD

The implications of the European Sustainability Reporting Standards (ESRS)

The CSRD determines which companies must report, on what topics, where and when. The ESRS provides the ‘how’.

While the CSRD is an overarching directive that mandates companies to disclose specific non-financial information, including their impacts on the environment and society. The European Sustainability Reporting Standards (ESRS), on the other hand, are the detailed standards that companies subject to the CSRD will have to use when preparing their sustainability reports. These standards, drafted by the European Financial Reporting Advisory Group (EFRAG), specify what companies must report on, providing detailed guidelines on various topics such as climate change, water and biodiversity, and employee-related matters.

In essence, while the CSRD determines which companies must report, on what topics, where and when, the ESRS provides the ‘how’ – the specific principles and requirements that companies must follow when reporting on these topics.

Therefore, the ESRS and the CSRD work hand-in-hand to ensure that companies across the EU provide comprehensive, consistent, and comparable sustainability disclosures, supporting the EU’s broader goals of sustainability and transparency in the corporate sector.

Conclusion: the role of data in Corporate Sustainability Reporting

Data plays an integral role in the context of CSRD and ESRS. In the context of corporate sustainability, data can be thought of as concrete evidence that demonstrates a company’s environmental, social, and governance performance. For example, a company might record data on its carbon emissions, its waste management procedures, or its diversity policies.

From CSRD’s perspective, accurate and reliable data is critical as it forms the basis for these disclosures and ensures that sustainability reports across different companies and sectors are comparable. Therefore, maintaining high-quality data is not just a compliance requirement, but a vital element in driving forward the sustainability agenda. Data Governance plays a critical role here , acting as the backbone that ensures the integrity, accuracy, and reliability of reported information. In essence, data governance provides the framework to ensure that companies are able to provide accurate and trustworthy sustainability information, thereby leveraging their data as a strategic asset.

For business executives, the European Green Deal presents both challenges and opportunities, as companies will need to adapt to new regulations and standards, but also stand to benefit from increased investment in the green economy. And in the world of CSRD, data is not just numbers, but a powerful tool for driving positive change. With data governance at its core, companies can ensure that their sustainability disclosures are reliable and trustworthy, positioning them to seize the opportunities presented by this new era of responsible business.

References: EFRAG, “First Set of draft ESRS”

Eager to embark on the journey towards European Corporate Sustainability Reporting?