CSRD: Comprehensive Overview of the Corporate Sustainability Reporting Directive

CSRD: Key Concepts and Background

The Corporate Sustainability Reporting Directive (CSRD) is a significant regulatory framework designed to enhance and expand the Non-Financial Reporting Directive (NFRD). The CSRD requirements directly affect approximately 50,000 companies globally, making reporting on topics such as climate change, pollution, biodiversity, resource use and the treatment of workers in a value chain structured and mandatory.

Apart from extending to a much larger number of companies, including non-EU firms with significant EU operations, other key aspects that set the CSRD apart include:

1. Double materiality assessment: Companies must report on impact materiality (how a company impacts people and the environment) and financial materiality (how sustainability issues might create financial risks for the company).
2. Mandatory third-party assurance: All companies in scope must obtain limited assurance from an external provider from their first reporting year, with reasonable assurance foreseen once possible.
3. Digital tagging: Sustainability reports must be prepared in a specified digital format (ESEF) to ensure data is machine-readable and easily accessible.

CSRD Reporting Timeline

CSRD implementation follows a phased approach, giving companies of different sizes ample time to prepare. Large companies with over 500 employees (previously subject to the NFRD) already need to report in 2025 for the financial year 2024. Notably, non-EU companies with subsidiaries or branches within the EU must also comply if they exceed a specified threshold.

The phased introduction of CSRD reporting:

1. FY2024 (reporting in 2025): entities already mandated to comply with the NFRD (includes companies listed in EU-regulated markets with 500+ employees).
2. FY2025 (reporting in 2026): Other large listed entities listed in an EU-regulated market that meet at least two of the three criteria: 250+ employees, €25 million+ in assets, €50 million+ in net sales.
3. FY2026 (reporting in 2027): SMEs listed in an EU-regulated market that meet at least two of the three criteria: 10+ employees, €450,000+ in assets, €900,000 in net sales.
4. FY2028 (reporting in 2029): Third-country entities with subsidiaries or branches in the EU (only applies if they exceed a threshold of €150 million in net sales).

Transposing CSRD Requirements into National Laws

As a directive, the CSRD is not automatically enforceable under domestic laws; EU member states must transpose it into national legislation. Each country has the latitude to define penalties for non-compliance and establish enforcement procedures, resulting in potential variations across jurisdictions. A summary of the transposition status for member states across the EU, including information a member country has sought to amend or extend CSRD requirements, is available here.

CSRD vs. ESRS: What Are the European Sustainability Reporting Standards?

To facilitate the implementation of the CSRD requirements, the European Commission has tasked the European Financial Reporting Advisory Group (EFRAG) with developing detailed disclosure standards known as the European Sustainability Reporting Standards (ESRS).

The ESRS are a practical implementation tool of the CSRD: While the directive sets a legal framework determining which companies need to report sustainability information and when, the ESRS detail these reporting requirements. By adhering to the ESRS, companies can ensure their reporting fulfills the regulatory obligations required by the CSRD.

The first set of 12 ESRS standards, released in July 2023, consists of two cross-cutting and ten topical standards encompassing general disclosures applicable to all sectors. In January 2024, these standards became effective for companies within the scope of the CSRD (reporting in 2025 and later).

EFRAG periodically publishes guidance on applying the ESRS. Organizations can also expect sector-specific and tailored standards for small and medium-sized enterprises (SMEs).

Overview of European Sustainability Reporting Standards (ESRS)

Cross-cutting standards

ESRS 1 General Requirements sets general rules for reporting according to ESRS. However, it does not set specific disclosure requirements. ESRS 2 General Disclosures specifies essential information to be disclosed regardless of which sustainability matter is being considered. It is mandatory for all companies under the CSRD scope.

Topical standards

All other standards detailing disclosure requirements and data points are subject to a materiality assessment. This means that a company may exclude information considered irrelevant (not material) to its business model and activities. Suppose a company concludes that climate change (ESRS E1) is not material and, therefore, does not need to be reported on. In that case, it must provide a detailed description of the materiality assessment results regarding this standard. This requirement reflects the fact that climate change has far-reaching and systemic impacts.

A sustainability topic is material if it meets the criteria of impact materiality, financial materiality, or both. For every material issue, companies must disclose their identified impacts, risks, and opportunities (IROs), including their policies and actions to manage the IROs and relevant metrics and targets. The ten topical standards cover the full range of environmental, social, and governance issues.

ESRS E1: Climate change

The ESRS E1 standard requires companies to disclose their climate-related impacts, risks and opportunities, including greenhouse gas emissions, energy use and transition plans toward Paris Agreement-aligned climate targets.

ESRS E2: Pollution

ESRS E2 addresses how organizations identify and manage pollution. This standard applies to various forms of pollution, including air, water, and soil, and the management of hazardous substances. In more detail, companies must disclose their pollution-related policies, actions, and resource allocation, including how they identify and address pollution risks and opportunities.

ESRS E3: Water and marine resources

Under ESRS E3, organizations must disclose how they address water use, sourcing, treatment and pollution prevention and promote the design of products and services that reduce water consumption and protect marine ecosystems, especially in areas of high water stress.

ESRS E4: Biodiversity

ESRS E4 outlines specific reporting requirements related to biodiversity and ecosystems. It requires companies to evaluate their impacts on biodiversity and formulate concrete action plans to support global biodiversity preservation and restoration efforts.

ESRS E5: Resource use and circular economy

This standard provides a framework for disclosing information about resource use and the circular economy. It concentrates on the inflows and outflows of resources — such as materials, products, and waste — to promote transparency in how businesses manage these processes.

ESRS S1: Own workforce

The first social standard requires organizations to disclose their positive and negative impacts, financial risks and opportunities. Aspects such as employment practices and employee well-being also need to be included, and this standard calls for transparency about past, present, and future initiatives to improve working conditions.

ESRS S2: Workers in the value chain

In contrast to ESRS S1, which is concerned with the internal workforce, the second standard within the social pillar of ESRS focuses on workers outside the company walls. The disclosure requirements in ESRS 2 guide companies in reporting how they address the social and human rights impacts, risks and opportunities related to value chain workers.

ESRS S3: Affected communities

ESRS S3 centers on how businesses affect and engage with affected communities. It outlines the expectations that companies openly disclose their policies, procedures, and initiatives related to these communities in their activities and across the broader value chain.

ESRS S4: Consumers and end-users

ESRS S4 mandates that companies explain their approach to identify and manage the impacts on consumers and end-users across the value chain. Companies should also explain how impacts and dependencies on these groups can result in material risks or opportunities.

ESRS G1: Business conduct

The one governance standard specifies disclosure requirements that provide an understanding of organizational strategy, approach, processes and procedures regarding a company’s business conduct. Potentially material topics include corporate culture, management of supplier relationships, corruption and bribery prevention, conflicts of interest, whistle-blowing policies, payment practices and animal welfare.

CSRD Assurance Requirements

Under the CSRD, disclosed information must be verified for its accuracy, reliability and compliance with the ESRS requirements. Companies will begin with limited assurance and then move toward reasonable assurance. The European Commission will adopt reasonable assurance standards in the reporting year 2028.

The difference between limited and reasonable assurance lies in how thorough the auditor is and how confident they are in the results. When auditors provide limited assurance, they conclude they are unaware of any material modifications that would misstate the reported information. In contrast, when auditors offer reasonable assurance, they state there is enough evidence to confidently say the reported information is materially accurate and prepared in line with the reporting criteria.

Preparing for CSRD Compliance