Corporate Sustainability Reporting Directive (CSRD), explained

The Corporate Sustainability Reporting Directive (CSRD) will set the standard by which nearly 50,000 EU companies will have to report their climate and environmental impact.

Adopted by the European Commission in November 2022, the CSRD will replace and build on the Non-Financial Reporting Directive (NFRD) by introducing more detailed reporting requirements and expanding the number of companies that have to comply.

Why was the CSRD adopted?

Setting a higher bar

Put simply: the EU believes that consumers and investors deserve to know the sustainability impact of businesses, and the CSRD was created because the existing legislation wasn’t cutting it.

Before the CSRD, the Non-Financial Reporting Directive (NFRD) established the reporting principles for large companies. However, the European Commission discovered that the information reported by companies was insufficient:

“Reports often omit information that investors and other stakeholders think is important. Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.” – The European Commission.

The European Commission reports that low-quality sustainability reporting can have cascading effects, particularly in regards to promoting sustainable investments. To ensure the market for green investments is credible, investors need a clear picture of their investment portfolio’s sustainability impacts. And even investors who aren’t particularly motivated to invest in green companies still need to meet the disclosure requirements of the Sustainable Finance Disclosure Regulation (SFDR). 

The European Commission also cited the “accountability gap” in its reasoning for proposing the CSRD:

“High quality and reliable public reporting by companies will help create a culture of greater public accountability.” – The European Commission.

And so the CSRD was created, with the goal of improving disclosure and providing the data investors need when determining a company’s sustainability.

Global effects

Though it’s an EU directive, the CSRD also applies to companies based abroad that have a presence in the EU.

This means that a hypothetical U.S.-based company with dozens of subsidiaries has to abide by the CSRD if even one of those subsidiaries is in the EU. 

Impacts inward & impacts outward

The CSRD – like the NFRD – requires “double materiality,” which means that businesses will have to disclose not only the risks they face from a changing climate, but also the impacts they may cause to the climate and to society.

For businesses who have historically only analyzed the risks posed to them by climate change – and neglected the role they played in changing the climate – this is a call to do some self-reflection.

Better comparability through standardization

The CSRD will require company sustainability data to be submitted in a standardized digital format.

This is meant to provide a clear format for company sustainability reporting – which is currently rife with many idiosyncratic formats – allowing for better understandability and easier comparison between companies. 

Who does the CSRD apply to?

The CSRD more than quadruples the number of companies required to report on sustainability, from the 11,000 covered by the NFRD to the nearly 50,000 that will be covered by the CSRD.

Large companies – even ones based outside of the EU

Companies meeting two of the following three conditions will have to comply with the CSRD:

1. €50 million in net turnover
   
2. €25 million in assets
   
3. 250 or more employees

In addition, non-EU companies that have a turnover of above €150 million in the EU will also have to comply.

Small and medium enterprises (SMEs)

The CSRD doesn’t place any new reporting requirements on small companies, except for those with securities listed on regulated markets. And to make it easier for listed SMEs, they can report using simplified standards.

But while the CSRD doesn’t apply to non-listed SMEs, the European Commission has also proposed developing separate standards that non-listed SMEs could voluntarily use. These standards would be scaled to fit SMEs’ capabilities and would make it easier for SMEs to report information to banks, clients, and investors – helping SMEs play their role in the transition to a sustainable economy.

What should be reported under the CSRD?

Companies will need to disclose the sustainability information in their management reports, which means that financial and sustainability information will be published at the same time. 

This sustainability data will have to be submitted in a standardized digital format, to allow for easier checking and comparison in the European single access point database.

The submitted data will then be subject to “limited third-party assurance,” meaning that an auditor will need to evaluate the data. 

What we know about the CSRD’s requirements

EFRAG, a private association financed by the EU, was tasked with developing reporting standards for the CSRD. On July 31, 2023, the European Commission officially adopted the European Sustainability Reporting Standards (ESRS). These standards detail the rules and requirements for companies to report on sustainability impacts, opportunities, and risks, and will form a key part of the CSRD. Their adoption marks a significant step towards its implementation.

Under the proposed value chain sustainability reporting, companies would be required to report scope 3 emissions. These indirect emissions result from the company’s upstream and downstream activities. They are notoriously tricky to measure, and it’s not an overnight process – so companies should begin the process as soon as possible, to get ahead of the CSRD mandates and ensure they will be compliant.

When will the CSRD go into effect?

The European Commission adopted the CSRD in late 2022. The rules will start applying between 2024 and 2028:

• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the Non-Financial Reporting Directive (NFRD), with reports due in 2025;
• From 1 January 2025 for large companies that are not presently subject to the NFRD (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
• From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.

Start taking action now

Though 2025 may feel far away, the sooner your company begins planning for meeting CSRD requirements, the easier time you’ll have when they go into effect.

And it’s not just the CSRD – many governing bodies are considering mandatory sustainability reporting. Taking time now to prepare your calculations and reporting will keep you ahead of the curve as new regulations are put in place.