Corporate Sustainability Reporting Directive (CSRD): An Explainer Guide

This landmark legislation replaces the Non-Financial Reporting Directive (NFRD) with impactful updates. The NFRD required about 11,000 EU companies to disclose nonfinancial and diversity information.

The CSRD aims to standardize and improve the comprehensiveness of these disclosures while expanding requirements to nearly 50,000 companies. To achieve this, the European Financial Reporting Advisory Group (EFRAG) is drafting the upcoming EU Sustainability Reporting Standards (ESRS) that the CSRD will adopt as its reporting standard.

The CSRD may seem like an EU-specific directive on the surface, but corporations based in other regions with just a branch or subsidiary in the EU are also subject to mandatory reporting. Businesses without offices in the EU should also take note, as other countries and jurisdictions may soon follow suit.

These improved sustainability reports enable businesses to make more informed investment decisions and compare sustainability efforts with peers in the EU. But what is the CSRD and what will it require from EU businesses?

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.

Who Is Subject to the CSRD Requirements?

The CSRD applies to all large companies in the EU, all companies listed on EU-regulated markets, and certain non-EU companies with branches or subsidiaries in the EU.

The EU defines a large company as a business that satisfies at least two of the following:

• More than 250 employees
• Turnover of more than €50 million
• Balance sheet of more than €43 million

Listed small and medium-sized enterprises (SMEs) will have a simpler set of reporting requirements in comparison to large companies. SMEs in transitional periods can apply for an exemption that will last until 2028.

The EU defines SMEs as companies with:

• Fewer than 250 employees
• Annual turnover at or under €40 million
• Total assets of €20 million

Microenterprises are also included in this general definition of SMEs, but they are excluded from complying with the CSRD.

Non-EU companies may be subject to CSRD requirements if they fulfill both of the following:

• Generate a net turnover of €150 million in the EU
• At least one branch or subsidiary in the EU

Companies must understand which category they fall under to determine when the CSRD’s requirements will apply to them. For example, large companies that were already subject to the NFRD must begin reporting in 2025 on the fiscal year 2024.

All other companies are encouraged to voluntarily create reports to help support the overall transition to a sustainable economy.

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 the NFRD and its predecessor, the Accounting Directive.

Under the NFRD, businesses had the flexibility to use any reporting standard. However, the reports omitted information important to stakeholders. These reports were difficult to use for decision-making due to the lack of detail.

The lack of standardization under the NFRD created the following issues:

• Stakeholders did not have a reliable or trustworthy overview of the company as a result of omitted information and a lack of information depth, even after the European Commission published additional guidelines in 2019.
• Stakeholders struggled to compare companies as a result of non-standardized reports.
• Non-standardized reports lacked the information investors needed to fulfill their Sustainable Finance Disclosure Regulation (SFDR) requirements.
• The market for green investments can lack credibility if sustainability information is not comprehensive and comparable enough for investment decisions.
• Reporting costs can increase for companies reporting against overlapping standards and fulfilling multiple information requests.

The European Parliamentary Research Service (EPRS) released an implementation appraisal on the NFRD that surfaced many of these issues. They also cited findings from the European Commission’s public consultation on the NFRD:

• 71% of respondents believed the NFRD reports believed the non-financial information was deficient in terms of comparability
• 64% of respondents who are or represent prepares said that additional requests for non-financial information was a significant problem
• 82% believed that requirements for companies to use a common standard would address identified issues

The official text of the original 2021 CSRD proposal says 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 CSRD tackles these issues with its comprehensive guidelines and firmer reporting requirements. For example, the CSRD requires businesses to report in line with the upcoming ESRS to ensure reports are comparable and reliable.

The overall goals of the CSRD are to:

• 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 like governance, human rights, environmental rights, and social rights.

Additionally, stakeholder demand played a part in expanding the number of companies mandated to report via the new CSRD requirements. Investors in particular want sustainability information to supplement their investment decisions.

What Are the CSRD’s Reporting 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

The CSRD will have sector-specific requirements that EFRAG will incrementally implement over three years. EFRAG’s progress update on these requirements proposes to create 40 sector standards from 2023 to 2025.

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.

Corporate Sustainability Reporting Directive 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?

The CSRD will align with requirements from the SFDR and EU Taxonomy Regulation.

CSRD-mandated reports will contain information needed for SFDR disclosures. Specifically, the information provided by companies via CSRD disclosure will help financial advisors and financial market participants accurately label financial products in alignment with the SFDR.

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 is part of a concerted effort to create harmonized sustainability reporting requirements for all parties in the EU. This will help minimize the burden of reporting and repetitive requirements. This and other legislation are also part of the EU’s overall effort to be more resource-efficient and reduce net greenhouse gas emissions to zero by 2050.

In addition to EU laws, the CSRD is also Task Force on Climate-Related Financial Disclosures (TCFD)-aligned to ensure that corporations provide the most important and relevant information to stakeholders. This allows them to accurately assess climate change-related risks. With the CSRD, the EU follows the G7 nations’ 2021 commitment to mandating TCFD-aligned climate-related reporting.

Who Is Responsible for Drafting the CSRD?

EFRAG is responsible for developing the draft standards on behalf of the European Commission. They are 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 and the European Environment Agency.

These consultations help various EU entities reach an overarching agreement on the standards and ensure coherence between the CSRD and relevant EU laws. EFRAG is also responsible for creating the ESRS.

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?

Companies can prepare by educating team members who will be directly responsible for reporting, staying up to date on CSRD developments, and beginning to use reporting software to measure emissions.

The CSRD can result in a major shift in data management and reporting for most companies. As a result, this can become a large upfront investment that can leave some teams overwhelmed.

Educating team members, especially those who will be responsible for data collection, can help ease the intimidation and overwhelm that can come from these stringent requirements. Businesses might also consider informing team members of the CSRD’s impact on the business, what they’re responsible for, and the many reasons why it is important to collect accurate data.

Understanding the CSRD and related legislation timelines will 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.

Lastly, reporting software like climate management and accounting platforms 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 have evolved from baselines that rely on quantitative and qualitative information, rather than the latter alone.

Preparing for new reporting requirements can be tedious. Collecting the necessary amount of data can take extensive resources, while also opening the door to human error. Errors with CSRD reporting, in particular, can get companies in financial and legal trouble.