NFRD stands for Non-Financial Reporting Directive, or in Dutch “richtlijn niet-financiële rapportage” (abbreviated to NFI Directive). To learn more about the requirements from the NFRD, it is important to first understand what non-financial reporting is and where it comes from.
What is non-financial reporting?
Non-financial reporting entails the reporting on environmental, social and human resources issues, respect for human rights, and the fight against corruption and bribery that certain large companies are required to include annually in their directors’ reports. In a so-called “non-financial statement,” they must present a fair and complete picture of their risks, policies and their results in these areas. This should lead to a good understanding of the company’s development, performance and position, and the impact of its activities on society.
In 2013, the European Parliament (EP) concluded that it is important for business to provide sustainability information to indicate sustainability risks and increase investor and consumer confidence. According to the EP, non-financial information (NFI) reporting is important to bring about change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. In this context, such reporting helps to measure, monitor and manage the sustainability performance of companies and their impact on society.
What does the law say about non-financial reporting?
Europe
The EP position mentioned above led to the adoption of the European Non-Financial Reporting Directive in October 2014. The inclusion of the word “at least” in Article 1 NFRD shows that the list of thematic aspects to be reported on is non-exhaustive. Thus, other non-financial aspects can also be covered. The company itself must assess which information is relevant (“material”). This is based on its own analysis of how important that information is to understand its development, performance, position and impact.
Under Article 2 NFRD, this guideline was followed in 2017 and 2019 by (non-binding) guidelines on non-financial reporting from the European Commission (EC). The purpose of these guidelines is “to help companies disclose high-quality, relevant, useful, consistent and more comparable non-financial (environmental, social and governance) information in a way that promotes resilient and sustainable growth and jobs and ensures transparency for stakeholders.”
The 2017 guidelines include many frameworks that companies can use as a starting point in their non-financial reporting, such as those of the Global Reporting Initiative, the International Integrated Reporting Frameworks and the United Nations Sustainable Development Goals. The 2019 guidance complements that of 2017 on climate reporting, taking as its starting point the recommendations of the Task Force on Climate-related Financial Disclosures.
The Netherlands
Because the NFRD is a directive, in order to become applicable, it first had to be transposed into national legislation in all EU member states. For the Netherlands, this was done through two decrees: the Decree on Disclosure of Diversity Policy of December 2016 and the Decree on Disclosure of Non-Financial Information of March 2017. These decrees require large listed companies, banks and insurers since 2018 (for the reporting year 2017) to include a non-financial statement in their management report and a diversity statement in their corporate governance statement. ‘Large’ here means that at least two of the three following requirements must be met:
- a balance sheet total of more than €20 million;
- net sales of more than €40 million;
- an average number of employees for the fiscal year of more than 250 (diversity policy reporting) or more than 500 (the other non-financial reporting), respectively.
Non-financial reporting in practice: what does the AFM think?
In 2018 and 2019, the Financial Markets Authority (AFM) investigated compliance with these new reporting rules.
Based on the report ‘In Balance 2018’, it can be concluded that the regulator was far from satisfied with it. Following its thematic investigation into NFI in the management reports of 89 companies, the AFM concluded that reporting on various non-financial aspects “can and must improve.” Thus:
1. the NFI is not complied with in all areas;
2. companies could report this information more relevant, comparable and balanced; and
3. they should report more and more broadly on diversity.
According to its report “In Balance 2019,” the follow-up to the 2018 thematic survey shows a mixed picture regarding compliance with the BNFI. This is based on 33 board reports examined. Further transparency on non-financial aspects, in particular on climate change impacts, is “urgent and necessary,” according to the AFM.
In both reports, the AFM has included good practices with which it hopes to inspire companies to further improve. In addition, the AFM emphasizes:
- to expect companies to fully comply with both decisions;
- to expect their auditors to be alert to insufficient compliance as part of their statutory audit and to mention this in their audit report where appropriate; and
- that they themselves will take enforcement action in the event of non-compliance.
Evaluation NFRD: where to go from here?
Article 3 NFRD contains an evaluation provision. Based on this, the EC conducted a public consultation on the NFRD between February and June 2020. To this, 588 respondents responded. At the end of July 2020, the EC published its Summary Report. This showed that the vast majority of NFI users felt that the published NFI was deficient in terms of comparability (84%), reliability (74%) and relevance (70%). Furthermore, 82% favor a common reporting standard, which is currently lacking. It was found that the NFRD, combined with the EC guidelines, did not have the desired effect and improvement was needed.
In its report, the EC indicated that it would propose a revision of the NFRD in the first quarter of 2021. On April 21, 2021, the EC published its proposal for the Corporate Sustainability Reporting Directive (CSRD), as the successor to the NFRD. Our CSRD Wiki page discusses this in more detail.
How can we help?
Do you need help with compliance with the NFRD or other laws and regulations? Through a compliance quick scan or gap analysis, our consultants can provide clear insight into the extent to which your company is complying with the current legal regulations in light of regulatory expectations. They can also advise you on the impact of future laws and regulations on your organization. In order for you to be as prepared as possible for what is to come. Please feel free to reach out to us