Understanding the Non-Financial Reporting Directive(NFRD): A Guide for Professional Investors

Non-financial factors such as environmental, social, and governance (ESG) performance are gaining prominence in the financial landscape. The Non-Financial Reporting Directive (NFRD), a regulatory framework established by the European Union to encourage transparency and accountability among large corporations, is a key player in this shift. The purpose of this article is to decode the NFRD and its implications for professional investors, as well as to provide practical compliance strategies.

Breaking Down the NFRD

The NFRD was created to shed light on large organisations' social and environmental performance. The directive specifies specific criteria for companies that must disclose non-financial information, as well as guidelines to ensure uniformity and consistency.

The NFRD applies to large listed companies, banks, or insurance companies that meet certain criteria, such as having a balance sheet total in excess of €20 million, a turnover in excess of €40 million, or an average number of employees in excess of 500 during the fiscal year. Notably, when countries implement the directive into national law, these companies are exempt from reporting Taxonomy figures.

Implications for Asset Owners and Managers

The NFRD has far-reaching consequences for asset managers. All non-NFRD investee companies, also known as "undertakings," must be excluded from these financial entities' entity-level disclosures. As a result, asset managers must identify companies that fall under the scope of the NFRD and include them in their EU Taxonomy KPI calculations, which are based on revenues, capital expenditures, and operating expenses.

Navigating Compliance with the NFRD

The use of technological tools can help to facilitate compliance with the NFRD's requirements. Some modern platforms, for example, provide features that accurately label companies that fall under the NFRD's scope based on the directive's defined thresholds. This enables users to recalculate their portfolio's alignment with the EU Taxonomy, taking only NFRD companies into account.

Furthermore, these advanced platforms can quickly adapt to changes in regulation or additional guidelines established by the European Commission, providing a dependable solution for NFRD compliance.

Looking Ahead: The Corporate Sustainability Reporting Directive (CSRD)

Changes to the proposed Corporate Sustainability Reporting Directive (CSRD) are already on the horizon as businesses and investors adapt to the NFRD. This directive will modify the NFRD's scope and reporting requirements, essentially replacing it. Companies subject to the NFRD should be aware that the first CSRD report for companies subject to the NFRD's scope is due in 2025 for the fiscal year 2024.

Conclusion

For professional investors, the NFRD presents both challenges and opportunities. It promotes transparency and accountability by assisting investors in assessing large companies' non-financial performance and promoting responsible business practises. While navigating the directive's requirements may appear difficult, innovative technological solutions provide a streamlined path to compliance and insight-driven investment decisions. Understanding and navigating regulations like the NFRD will be critical as the financial landscape continues to evolve towards greater ESG integration. Stay informed and ready for the CSRD transition, a significant step in this progressive journey.

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