Discover the evolution of EU sustainability reporting from the NFRD to the CSRD. Explore key requirements, challenges, and the future of non-financial disclosure in Europe
The Sustainability reporting, introduced for European companies with the EU Directive 95/2014, represents to date in the international reporting landscape, the starting point of a continuously evolving path that aims to meet numerous challenges, first and foremost the integrated management of non-financial information, structured in a framework that can be as comprehensive as possible, to be placed alongside classic financial reporting.
Purpose and Impact of the NFRD
The primary objective of the NFRD was to enhance corporate transparency on non-financial aspects related to environmental impacts, social responsibility, human rights, and anti-corruption practices.
By amending existing European accounting legislation, the Directive introduced a formal obligation for large public-interest companies to disclose ESG information, moving away from the previously voluntary nature of such reporting.
Specifically, the NFRD applied to companies exceeding at least two of the following thresholds: a balance sheet total of EUR 20 million, net turnover of EUR 40 million, and an average of over 500 employees during the financial year.
From 2017 onward, these companies were required to publish non-financial information, either within their management report or as a separate document submitted alongside their annual financial statements.
The impact of the NFRD was significant: it prompted a cultural and operational shift in how companies addressed ESG issues internally, stimulated the development of best practices, and increased the visibility of non-financial risks and opportunities in corporate strategy.
It also reinforced the role of corporate boards and stakeholders in overseeing ESG performance and accountability.
Key Elements of the Non-Financial Reporting Directive
The NFRD outlined specific thematic areas to be disclosed:
- Environmental matters, including emissions (Scope 1, 2, and 3) and resource use.
- Social and employee-related matters, such as working conditions and diversity.
- Respect for human rights, ensuring responsible supply chain practices.
- Anti-corruption and bribery issues, both active and passive.
In line with these themes, companies were required to report on:
- Their business model and how it integrates sustainability considerations.
- The policies and due diligence processes in place, including outcomes achieved.
- The principal risks related to these areas and the company’s approach to mitigating them.
- Relevant key performance indicators (KPIs).
Although the Directive referenced international reporting frameworks such as the Global Reporting Initiative (GRI), it did not mandate a specific standard.
Companies were free to choose or develop their own methodology, provided they disclosed and justified their approach in a transparent and comprehensive manner.
Auditors were also tasked with verifying the existence and compliance of the non-financial statement with the Directive’s requirements, although not with validating the accuracy of the ESG data itself.
Transition from NFRD to CSRD
Recognizing the limitations of the NFRD in terms of consistency, comparability, and scope, the European Commission proposed a new directive: the Corporate Sustainability Reporting Directive (CSRD).
Officially published on 21 April 2021, the CSRD seeks to significantly expand the scope and rigor of sustainability reporting obligations.
In addition to expanding coverage, the CSRD introduces the principle of double materiality, requiring companies to disclose not only how sustainability issues affect their financial performance (outside-in perspective), but also how their operations impact the environment and society (inside-out perspective).
Challenges and Criticisms of the NFRD
While the NFRD marked an essential first step toward structured non-financial reporting, it was not without its criticisms and shortcomings.
Various stakeholders highlighted limitations that hindered its full effectiveness in delivering consistent and comparable ESG disclosures across sectors and jurisdictions.
Comparability and Standardization Issues
One of the most significant criticisms of the NFRD was its lack of a mandated reporting standard. Although the Directive encouraged the use of recognized frameworks, such as the GRI, companies were not required to follow a single, harmonized approach.
As a result, many disclosures varied widely in depth, format, and terminology, limiting the comparability of ESG data across organizations.
Additionally, the voluntary nature of indicator selection allowed companies to omit material information or emphasize favourable aspects, leading to greenwashing concerns.
The lack of external assurance on the quality and accuracy of reported information further weakened stakeholder confidence in sustainability disclosures under the NFRD regime.
The Future of Non-Financial Reporting in the EU
The evolution from NFRD to CSRD signals a broader shift in the EU’s sustainability reporting landscape, from fragmented, high-level disclosures to detailed, standardized, and verifiable sustainability data.
The CSRD aims to address the shortcomings of the NFRD by creating a more robust and forward-looking framework that aligns with international standards and stakeholder expectations.
Implementing the CSRD
With its broader scope and prescriptive requirements, the CSRD will mandate companies to report in accordance with the European Sustainability Reporting Standards (ESRS), currently being developed by EFRAG (European Financial Reporting Advisory Group).
These standards will define a comprehensive and structured set of ESG disclosures, helping ensure comparability, reliability, and digital accessibility.
The CSRD also introduces mandatory assurance, requiring independent verification of reported sustainability information, thereby increasing the credibility of disclosures.
Moreover, reports must be digitally tagged to facilitate machine-readability and integration into the European Single Access Point (ESAP), enhancing transparency for investors and regulators.
The Role of Technology in Reporting
Technology will play a critical role in enabling compliance with the CSRD’s demanding requirements.
The integration of data management systems, AI-driven analytics, and automated ESG reporting tools will be essential for companies to collect, analyze, and disclose non-financial information efficiently and accurately.
Digital tools can also support the ongoing stakeholder engagement process, facilitating the dynamic and forward-looking materiality assessments required by the CSRD.
Furthermore, advancements in blockchain and cloud platforms may enhance traceability and accountability throughout the value chain, further strengthening trust in sustainability disclosures.
