Overview of the EU Non-Financial Reporting Directive

June 16, 2020

 What is the law?

Directive 2014/95/EU1 amending Directive 2013/34/EU (the Accounting Directive) as regards disclosure of non-financial and diversity information by certain large undertakings and groups (the Non-Financial Reporting Directive or NFRD), came into force on 5 December 2014. Member states were required to transpose the NFRD into national law by 6 December 2016.

What is the scope and impact of NFRD?

The NFRD requires public-interest entities (PIEs)2 with more than 500 employees (and that have either a balance sheet total of more than EUR 20 million or a net turnover of more than EUR 40 million) to include a non-financial statement in their annual report. Any European based asset managers that meet these criteria would be in scope.  However, the real importance of the NFRD to asset managers is that it is the key source of mandatory reporting by portfolio companies in Europe of non-financial information on which European based asset managers will need to draw on in order to meet their obligations under the new regulation on sustainability disclosures in the financial services sector Regulation (EU) 2019/2088) (the Disclosure Regulation).3

The non-financial statement should include information necessary to understand the development, performance, position and impact of its activity, as it relates to at least environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.  The content should include at least a description of (i) the entities’ business models, (ii) related policies and due diligence process, (iii) policy outcomes, (iv) the main risks arising from the non-financial matters out of the entities’ operations and (v) non-financial key performance indicators.

If companies do not have a policy on any of these environmental and other non-financial areas it should be reporting on, the non-financial statement should explain why not. Companies also have to report on their policy regarding diversity of the board of directors.

Subsidiary Companies – a subsidiary company is not required to produce a statement if the information is included in the report of its parent company (i.e. the company that controls the management and operation of the subsidiary company).

Guidelines and consultations

The guidelines and consultations relating to the NFRD, detailed below, form just one of the many sustainable finance initiatives currently being undertaken by the EU and its institutions. The proposals that the EC are consulting on could require asset managers that are in scope of the NFRD to change the way that they report non-financial information. This is particularly true if the results of the questionnaire (discussed below under the Second NFRD consultation) result in changes to the NFRD to make it more aligned with other ESG focussed EU regulations, (the Disclosure Regulation) and the regulation on a classification system (taxonomy) of sustainable economic activities (the Taxonomy Regulation).4


In 2017, as required by the NFRD, the European Commission (the EC) published non-binding guidelines to help companies report relevant, useful and comparable information.In June 2019, the EC published additional guidelines on how to report climate-related information6 and propose climate-related disclosures for each of the five reporting areas (referenced above) in the NFRD. For each reporting area, the guidelines identify a limited number of recommended disclosures. Entities are encouraged to use these to the extent necessary for an understanding of their development, performance, position and the impact of their activities. The 2019 Guidelines strongly encourage companies and other organisations to continue to innovate and further improve climate-related reporting beyond the content of the guidelines themselves. 

The 2019 Guidelines state that companies should consider using the proposed disclosures in the guidelines if they decide that climate is a material issue from either of the perspective of understanding of the development, performance and position of the company and impact of its activities. 

Consultations for proposal for a regulation

In December 2019, as part of the European Green Deal, the EC committed to review the NFRD in 2020 as part of its strategy to strengthen the foundations for sustainable investment. This also reflects global trends, with a wide variety of different organisations and stakeholders calling for a consideration of a new regulatory approach to non-financial reporting. 

The aim of the EC’s review of the NFRD is to help the EC determine whether the NFRD should be reframed as a Directive by the end of 2020.7

First NFRD consultation

The EC ran its first NFRD public consultation8 from 30 January 2020 to 27 February 2020 which asked for stakeholders’ views as to whether they should:

  • continue the current approach of non-binding guidelines to assist companies when reporting under the NFRD; 
  • explore the use of standards. The EU could, for example, endorse an existing or possible future standard on non-financial reporting, which would remain voluntary; and 
  • revise and strengthen the provisions of the NFRD. Such a revision could modify non-financial reporting requirements.

Second NFRD consultation

The EC has just run a second consultation which looked at how to improve the disclosure of non-financial information. The consultation opened on 20 February 2020 and closed on 11 June 2020.9 This second Consultation took the form of a questionnaire of 45 questions, asking views on matters such as: 

  • Should companies be required to disclose information about other non-financial matters? At present, the NFRD requires information about the environment, social and employee issues, human rights, and bribery and corruption.10
  • Under the current system, will companies in the financial sector have all the information they need about their investee companies to be able to meet the new disclosure obligations under the Disclosures Regulation and Taxonomy Regulation? Banks, asset managers, pension funds and others in the financial sector are concerned that, as things currently stand, they do not have all the information they need from the companies they invest in – which in turn could put financial institutions in breach of their own disclosure requirements.11
  • In order to better align with the forthcoming Taxonomy Regulation, should the NFRD define environmental matters by reference to the same six objectives in the Taxonomy Regulation?12

There is more information on the rationale for the Consultations in the EC’s impact assessment13 (which summarises the problem, possible policy options and likely impacts of this initiative) and in a specific background document prepared in connection with the consultations.14

NFRD and ESG considerations

Forthcoming EU legislation, such as the Disclosure Regulation and the Taxonomy Regulation, can only achieve their objectives if more and better non-financial information is available from investee companies. 

The Disclosure Regulation recognises that NFRD imposes transparency obligations as regards ESG matters in non‐financial reporting, but it states that the form and presentation required by the NFRD is not always suitable for direct use by financial market participants and financial advisers when dealing with end investors.15 Article 11 of the Disclosure Regulation, which requires (amongst other things) a description of ESG related matters to be included in periodic reports, provides that financial market participants may use the information in management reports in accordance with Article 19 and 19(a) of NFRD where appropriate. 

The Taxonomy Regulation (which is currently going through the EU legislative process) will establish an EU-wide framework or ‘taxonomy’ intended to provide businesses and investors with a common language to identify what degree economic activities can be considered environmentally sustainable. It will specifically require companies in scope of the NFRD to disclose certain indicators of the proportion of their activities that are classified as environmentally sustainable according to the taxonomy, such as the proportion of their turnover derived from products or services associated with economic activities that qualify as ‘environmentally sustainable’.16

What is the timeline?

Entities in scope of the NFRD had to meet the current reporting requirements for the first time in 2018, for information covering financial year 2017. 

The EC states that it plans to adopt any decisions it makes as a result of the 2020 Consultations in the fourth quarter of 2020. The Disclosure Regulation will take effect on 10 March 2021, the Taxonomy Regulation has not yet been adopted by the European Parliament and is not yet in force. 

What are the key considerations for asset managers? 

Regardless of the outcome of the Consultations, asset managers in scope of the NFRD will need to prepare themselves to comply with certain provisions of Disclosure Regulation and the Taxonomy Regulation. In addition, one further impact on asset managers is that they will benefit from receiving more information from investee companies, particularly larger investee companies, in relation to the investee companies’ sustainable impact information (such as information on good governance practices including sound management structures, employee relations, remuneration of staff and tax compliance of those investee companies) that the asset managers can use in order to meet its own reporting obligations.

As a piece of EU legislation, the NFRD’s impact is primarily felt in the EU but there may be some indirect impact outside of the EU. For example, (i) a non-EU parent company with an EU subsidiary that is a PIE may provide certain information to the subsidiary for that subsidiary to include in its non-financial statement or (ii) non-EU sub-advisers and non-EU joint venture partners may have information that is relevant for an EU PIE when that PIE is preparing its the non-financial statement. 

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