CSRD: A Guide to the Corporate Sustainability Reporting Directive

The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) is legislation that creates comprehensive sustainability reporting requirements for a wide group of EU and non-EU businesses.

The CSRD mandates that private and public European companies, as well as non-EU companies with substantial presence in the Union, provide detailed information on sustainability-related issues. The European Commission published initial estimates that 50,000 companies will be affected by the CSRD. Independent analysis has found over 10,000 non-EU companies that meet the criteria for mandatory CSRD reporting, over 3,000 of which are American.

To assist in the implementation of the CSRD, a body called the European Financial Reporting Advisory Group (EFRAG) has drafted a set of detailed guidelines known as EU Sustainability Reporting Standards (ESRS). The EFRAG guidelines specify exactly what companies subject to the CSRD will need to report.

The CSRD’s sweeping disclosure requirements will provide stakeholders with detailed sustainability information, level the playing field between EU and non-EU businesses, and enable more informed investment decisions. But what is the CSRD and what will it require from businesses around the world?

Below, we will go over current updates, key dates for CSRD implementation, highlights of the CSRD’s requirements, and ways businesses can prepare for these upcoming requirements. Our post provides an overview of the most important details; visit the European Commission’s official website for more information.

Current Updates for the CSRD

As of November 2022, the European Council has given its final approval to the CSRD, allowing the legislative act to be adopted. The adoption of the regulation will be phased in over the next few years. Below is a recap of the most recent updates with the CSRD.

• June 2022: EU reaches a provisional agreement with the CSRD
• August 2022: EFRAG concludes consultation on the first ESRS draft
• November 23, 2022: EFRAG sends the first draft of ESRS to the European Commission for consideration of adoption
• November 28, 2022: The EU Parliament and Council give its final approval on the CSRD; The directive will enter into force 20 days after publication in the EU Official Jounal (December 16, 2022). Members will have 18 months to integrate the CSRD in their respective national law.

Find a full CSRD timeline further below.

Why Did the European Commission Propose the CSRD?

The European Commission proposed the CSRD to improve the quality, comprehensiveness, and consistency of sustainability reporting. The CSRD is the latest successor of past directives and guidelines, evolving from a previous rule called the NFRD and its predecessor, the Accounting Directive.

Under the previous directive, the NFRD, businesses had the ability to report on sustainability issues using any reporting standard. This flexibility, while perhaps appealing in the abstract, was ultimately a fatal flaw. In 2021, the European Parliamentary Research Service (EPRS) released an implementation appraisal on the NFRD that surfaced a number of issues with the NFRD, including:

• Stakeholders found NFDR reports difficult to use and compare due to the lack of consistent detail.
• EPRS anticipated that investors bound by another EU regulation called the Sustainable Finance Reporting Directive (SFDR) would struggle to comply with that directive due to insufficient sustainability information about the companies they invested in.
• Companies faced substantial reporting costs driven by fulfilling information requests from stakeholders who, unsatisfied with the status quo disclosure under NFRD, presented additional requests for data.

As of 2021, the EU found that only 20% of large companies fully applied any sustainability reporting standards to their reports and only 30% sought some form of assurance or verification for reports. 

The European Commission's public consultation on the NFRD yielded a clear solution to the NFRD’s shortcomings: 82% of respondents believed that a requirement for companies to use a common standard would address issues identified in the NFRD. 

With this goal of a common standard in mind, the Commission crafted the CSRD.

The overall goals of the CSRD are to:

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• Standardize and improve the quality of data and disclosures
• Provide investors and other stakeholders with more comprehensive, comparable, and accessible information
• Improve accountability and transparency among businesses for sustainability-related activities
• Support the transition to a more sustainable economy

“Sustainability” for the CSRD refers to areas including governance, human rights, environmental rights, and social rights. 

In addition to more thorough reporting standards, the CSRD also covers a much wider swath of companies versus the NFRD, helping both investors in their quest to achieve greater understanding of the market and the EU in its path towards the European green deal.

Who Is Subject to the CSRD Requirements?

The CSRD applies to three primary groups of companies: (1) all large companies in the EU, (2) small & medium enterprises listed on EU-regulated markets, and (3) non-EU companies with substantial business in the EU.

Large EU companies must comply with the CSRD, regardless of whether they are public or private entities. Large companies are defined as enterprises that satisfy at least two of the following:

• More than 250 employees
• Net turnover of more than €40 million
• Balance sheet total of more than €20 million

These companies will need to start reporting on fiscal year 2024 (if already subject to the NFRD) or fiscal year 2025 (if not currently subject to the NFRD).

Listed small and medium-sized EU enterprises (SMEs) must also comply with the CSRD. These listed SMEs are companies whose securities are traded on a regulated market in the EU but do not qualify as “large” companies per the above definition. All listed SMEs are captured by the the CSRD, except those categorized as a micro-enterprises, which are companies that do not exceed the limits of at least two of the three following criteria:

• Balance sheet total of €350,000;
• Net turnover of €700, 000;
• 10 employees

Listed SMEs will need to start reporting on fiscal year 2026 using SME-specific standards. However, for a transitional period of two years, these listed SMEs can opt out of the sustainability reporting requirements as long as they briefly explain in their management report why the climate information has not yet been included.

Non-EU  companies will be subject to CSRD requirements if they generate a net turnover of  €150 million in the EU and fulfill either of the following:

• At least one large or listed subsidiary in the EU OR 
• At least one branch in the EU with more than €40 million in net turnover

For non-EU companies captured due to the “subsidiary in the EU” condition, the reporting requirements are likely to be proportional to the requirements that would apply to EU companies. In other words, a non-EU company with a SME-sized listed subsidiary in the EU is likely to be required to report against similar standards that apply to a listed EU SME. A non-EU company with large operations in the EU is expected to be required to report against similar standards that apply to a large EU company. The standards for non-EU companies will come into effect for fiscal year 2028.

There is one important caveat companies should be be aware of: non-EU companies that issue securities that trade on a regulated EU market will be subject to the same timing requirements as European companies for compliance with the CSRD (i.e., their reporting requirements will kick in between fiscal year 2024 and fiscal year 2026 depending on size).

Companies must understand which category they fall under to determine when the CSRD’s requirements will apply to them, as outlined in our CSRD Timeline below. 

All companies not covered by mandatory reporting under the CSRD are encouraged to voluntarily create reports to help support the overall transition to a sustainable economy.

CSRD Requirements

The CSRD requires companies to report comprehensive sustainability-related information and share their progress in those areas. It inherits some reporting requirements from the NFRD while introducing more specific guidance.

Types of Information and How It’s Reported

Like the NFRD, the CSRD requires all companies to report on the following types of information:

• Environmental impact
• Social matters and treatment of employees
• Respect for human rights
• Anti-corruption and bribery
• Diversity on the board of directors relating to gender, age, and professional and educational background

In relation to those topics and their overall operations, the CSRD requires companies to disclose the following:

• Strategy
• Targets
• Role of the board and management
• Main adverse impacts related to the company and its value chain
• Intangibles
• How companies have identified reported information

Additionally, the CSRD requires a further depth of reported information:

• Qualitative and quantitative information
• Forward-looking and retrospective information
• Information that covers short, medium, and long periods of time when appropriate
• Reporting in line with the ESRS

EFRAG will provide businesses with specific reporting requirements in the ESRS. Once companies have assembled this information, they must include these disclosures in company management reports improving stakeholder accessibility. Companies can review EFRAG’s first draft of the ESRS for more detailed information.

Assurance Requirement

The CSRD is also implementing an assurance requirement to improve the credibility of reports. Accredited independent auditors or certifiers will audit and certify reports to ensure companies comply with the new reporting standards. The CSRD will give EU member states the option to allow any independent assurance service providers to conduct these audits.

The CSRD will begin with limited assurance (minimal auditing) requirements since it will be difficult and costly to immediately implement more demanding measures, especially since the European Commission does not have existing standards to build from.

The European Commission will adopt limited assurance standards in October 2026 and reasonable assurance (more extensive auditing) standards in October 2028.

Digital Tagging

Companies must also digitally tag information so that it is machine-readable for use in the European Single Access Point (ESAP). Digitizing this information is part of the EU’s digital finance strategy that aims to improve the accessibility and reuse of financial sector data.

The European Single Electronic Format (ESEF) Regulation will include the tagging system companies must follow. ESEF more recently included more information on the level of granularity expected for tagging the information along with other technical guidance.

Sector-Specific Requirements

EFRAG is developing 40 sector-specific standards to guide CSRD implementation, which companies will leverage in tandem with the general reporting requirements already drafted. EFRAG intends to craft these sector-specific standards over a multi-year period from 2023 to 2025, prioritizing the most high-impact sectors for 2023 and 2024.

What Are the Main Differences Between NFRD and CSRD?

The CSRD encompasses more companies and includes more rigorous reporting requirements compared to the NFRD. Below is a summary of the most notable changes. The CSRD:

• Provides more comprehensive reporting requirements, including the type and depth of information needed
• Extends reporting requirements to all large companies, companies listed on regulated markets (excluding microenterprises), and certain non-EU companies with branches or subsidiaries in the EU
• Mandates reporting in line with the ESRS
• Requires digital tagging for reports, so they are machine-readable
• Mandates the inclusion of reported information in company management reports
• Requires audits of all reports from accredited third-party auditors and creditors
• Clarifies and defines principles like double materiality, sustainability measures, and intangibles

The NFRD first introduced a double-materiality perspective in which companies reported on their impact on the environment and on people, while also reporting on how sustainability issues affect their business. This differs from how the U.S. focuses on single materiality that only looks at how sustainability impacts affect a business. Double materiality generally has more stringent requirements since it requires both an “outside-in” and “inside-out” approach.

The CSRD takes this one step further to ensure businesses disclose the same amount of comprehensive information that will be useful for all stakeholders, which can help investors who must meet disclosure requirements under the SFDR.

CSRD Timeline

The CSRD is undergoing review and will have phased implementation. The timeline below summarizes major milestones and is subject to change.

• April 2021: European Commission presents CSRD proposal
• June 2022: Final agreement between EU institutions on CSRD
• August 2022: EFRAG concludes consultation on the first ESRS draft
• November 2022: EFRAG sends the first draft of ESRS to European Commission for consideration of adoption
• November 2022: EU Council gives final approval to the CSRD.
• December 2022: The final text on CSRD is published in the Official Journal of the EU; Member States will have 18 months to integrate the CSRD in their respective national law
• November 2023: EFRAG to propose the second draft of ESRS to the Commission that will include standards for sectors, non-EU companies, and listed SMEs; voluntary guidance for non-listed SMEs; and an amendment to the first draft to implement a cap on value chain emissions
• June 2024: Anticipated adoption of the second draft of ESRS, which are set to include sector-specific standards; Specific reporting standards for SMEs are also due to be adopted by June 2024
• January 2025: First CSRD reporting required (for the fiscal year 2024) from companies currently subject to NFRD
• January 2026: First CSRD reporting required (for the fiscal year 2025) for all other large EU companies
• *January 2027: First CSRD reporting required (for the fiscal year 2026) for SMEs
• October 2026: Anticipated adoption of limited assurance standards by the Commission
• October 2028: Anticipated adoption of reasonable assurance standards by the Commission
• January 2029: First CSRD reporting required (for the fiscal year 2028) for non-EU companies with EU branches or subsidiaries

*SMEs have the option to opt-out until 2028

Frequently Asked Questions About the CSRD

The CSRD brings sweeping changes to EU sustainability reporting. Below, we will review other questions businesses may have about the new requirements.

Does the CSRD Align With Other EU and Global Reporting Standards?

With regards to the SFRD, the CSRD-mandated reports will contain information needed for financial entities to comply with the SFDR. The SFDR requires financial advisors and financial market participants to accurately label the extent to which their financial products and services are sustainable. The information provided by companies via CSRD disclosure will help financial advisors and financial market participants meet these SFDR obligations.

With regards to the EU Taxonomy Regulation, Article 8 of the Taxonomy Regulation requires companies to disclose the extent to which their activities are sustainable. Companies will need to account for and report on this in their CSRD-mandated reports.

This alignment among EU disclosure regulations is part of a concerted effort to create harmonized sustainability reporting requirements for all parties in the EU. This effort will help minimize the burden of reporting while providing stakeholders with comprehensive and comparable information. The CSRD, SFDR, and Taxonomy Regulation are all key elements of the EU’s overall effort to be more resource-efficient and reduce net greenhouse gas emissions to zero by 2050.

On a global level, the CSRD is also aligned with the Task Force on Climate-Related Financial Disclosures (TCFD), which aims to help stakeholders accurately understand corporations’ climate-related risk and opportunities. By enacting the CSRD, the EU follows the G7 nations’ 2021 commitment to mandate TCFD-aligned climate-related reporting.

Who Is Responsible for Drafting the Disclosure Standards for Reporting Under the CSRD?

EFRAG is responsible for developing the draft standards on behalf of the European Commission. EFRAG is a private association that is financed primarily by the EU. EFRAG’s overarching goal as an organization is to advise the European Commission on adopting international reporting standards for EU legislation.

EFRAG is consulting with several entities for technical advice before adopting standards, including the European Banking Authority (EBA), European Securities and Markets Authority (ESMA), European Insurance and Occupational Pensions Authority (EIOPA), and the European Environment Agency (EEA).

These consultations help various EU entities come to agreement on standards and ensure coherence between the CSRD and relevant EU laws.

What Are the Consequences of Noncompliance?

The original proposal broadly mentions consequences like public statements identifying non-compliant companies, an order to cease and desist from conduct contributing to the infringement, and sanctions or fines.

It also requires EU member states to implement investigations and sanctions regimes to hold auditors and reporting organizations accountable. However, the CSRD does not currently define penalties for noncompliance.

Companies that do not comply may also find themselves excluded from investment portfolios as more investors begin to prioritize ESG in their decision-making.

How Do I Prepare for the CSRD?

The CSRD will result in a major shift in data management and reporting behaviors. As a result, many companies may face substantial upfront investment needs that can leave teams feeling overwhelmed if insufficiently supported.

Companies can prepare today for CSRD compliance with 3 key steps:

1. Educate team members, especially those who will be responsible for data collection. This education can help ease the intimidation that may come from these stringent requirements. Businesses should consider informing team members of the CSRD’s impact on the business, what aspects of CSRD compliance they are responsible for, and the many reasons why it is important to collect accurate data.

2. Understand the CSRD and related legislation timelines to help keep teams on track before mandated reporting takes effect. It is crucial to stay on top of information that may change between now and then.
   
   For example, since the ESRS is still under development, teams may need to prepare to disclose certain information they have not previously collected.

3. Consider leveraging reporting software like climate management and accounting platforms, which can save companies resources they would have spent on manual data collection, input, and analysis. 
   
   Businesses can improve efficiency by automating typically manual time and resource-consuming processes early on. Effective strategies for analyzing performance information has evolved from baselines that rely on quantitative and qualitative information, rather than the latter alone.

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Persefoni’s all-in-one carbon management and accounting solution can take calculations a step further by helping corporations explore results and reduce their carbon footprint.

Learn more about how Persefoni’s carbon accounting platform can help your team prepare for upcoming CSRD-mandated reporting.