The Non-Financial Reporting Directive 2014/95/EU with respect to non-financial reporting and diversity (“NFRD”)

What is NFRD EU? On December 5, 2014, the Non-Financial Reporting Directive 2014/95/EU with respect to non-financial reporting and diversity, also known as the “NFRD”, entered into force.

The NFRD has two primary objectives:

  • Provide stakeholders, investors, and consumers with non-financial information to assess the value creation and risks regarding sustainability of a company; and
  • Encourage the social, environmental and governance responsibility of the European companies.

In Belgium, the non-financial reporting obligations were included in article 3:6 of the Belgian Companies and Associations Code (“BCAC”) and 3:32, §2 BCAC, which describes all non-financial information that should be included in the annual report of companies in NFRD scope.

Why was the NFRD adopted? The NFRD was adopted as part of the intention of the European Union to strengthen corporate social responsibility. Prior to NFRD, companies were not providing enough information to allow stakeholders, investors, and consumers to understand the development, performance, position, and impact of the activities of the European companies, relating to at least environmental, social and employee matters, respect for human rights, anti-corruption, and bribery matters. Furthermore, it became clear that companies, including some of the largest, did not disclose this non-financial information. As such, an accountability gap existed prior to the promulgation of the NFRD. As such, the NFRD aims to contribute to measuring, monitoring, and managing the performance of companies and their impact to society.

What information must be reported? To achieve its objectives, the NFRD requires companies to share non-financial information within a sustainability declaration/report related to four key areas:

  • respect for human rights,
  • environmental policy and protection,
  • anti-corruption and bribery,
  • employee related matters, such as gender, educational, professional and age diversity, social responsibility, and the treatment of employees.

A more detailed overview of the relevant information is outlined in the NFRD and in article 3:6, §4 and 3:32, §2 BCAC.

How and in what form should the reporting be prepared? The sustainability declaration/report should be included in the annual reports of the companies. However, the sustainability report can be drafted in a separate report. In that case, the annual report should clearly state that all non-financial information was included in a separate report, which will be attached to the annual report as an annex.

Who shall comply with the NFRD? The NFRD requires public interest entities (“PIEs”), being listed companies and bank and insurance companies, meeting at least two of the following criteria:

  • Having more than 500 employees; and
  • Having a balance sheet total of more than EUR 17 million; and/or
  • Having a net turnover of more than EUR 34 million), to include a non-financial statement in their annual reports.

Subsidiary companies are exempt to share the non-financial information if they are included in the annual report regarding the consolidated annual accounts of their parent companies (i.e., the companies that control the management and operation of the subsidiary companies).

Impact outside of the EU? As EU legislation, the impact of the NFRD is primarily felt within the European Union. However, there may be some indirect impact outside the European Union. For example, (i) a non-EU parent company with a European subsidiary that is a PIE may provide certain information to the subsidiary for inclusion in its non-financial statement or (ii) non-EU sub-advisors and non-EU joint venture partners may have information relevant to a European PIE when preparing its non-financial statement.

When will the NFRD be applicable? Companies in scope of the NFRD became subject to the current reporting requirements for the first time in 2018, for information covering financial year 2017.

 What will be the penalties for defaulting companies? Companies, and more specifically their managing bodies, can incur significant penalties for not disclosing the required information in accordance with the NFRD.

Conclusion. The NFRD was one of the first steps towards a harmonized framework regarding the disclosure of non-financial information by companies in scope. Since this is a topic that is high on the agenda within the European Union, related to several other proposals and directives in this respect (see SFDR, CSRD, EU Taxonomy), it is important that companies in scope take all necessary actions to comply with its requirements.