Corporate Sustainability Reporting Directive (CSRD) Overview

Corporate Sustainability Reporting Directive (CSRD)

Corporate Sustainability Reporting Directive (CSRD) Overview

Why CSRD Matters
The Corporate Sustainability Reporting Directive (CSRD) is a major legislative measure embraced within the European Union (EU), setting a new benchmark for global sustainability reporting standards. This directive signifies a pivotal moment in advancing sustainable and responsible corporate behaviors. The expansive reach of CSRD is profound, projected to affect over 50,000 companies worldwide.

Building upon the foundation laid by the Non-Financial Reporting Directive (NFRD) of 2014, CSRD extends its scope significantly. The NFRD primarily applies to large public-interest entities within Europe boasting more than 500 employees, encompassing around 11,000 companies. The core objective of the NFRD revolves around fostering transparency and facilitating informed decision-making by mandating the disclosure of pertinent non-financial information alongside financial data.

The breadth of CSRD far surpasses that of the NFRD. Firstly, it broadens the spectrum of reporting entities from 11,000 to over 50,000. Secondly, the directive potentially augments the volume of non-financial disclosures required from companies.

CSRD mandates companies to report based on a predefined set of sustainability metrics, known as the European Sustainability Reporting Standards (ESRS). These standards were formulated by the European Financial Reporting Advisory Group (EFRAG), a nonprofit organization. EFRAG unveiled the initial draft of ESRS in April 2022. Following an extensive feedback phase, the EU officially adopted the finalized ESRS version on July 31, 2023.

Scope of CSRD Applicability
The table below explains the criteria determining companies eligible under the CSRD.

Micro-undertakings, defined as companies failing to meet two out of three criteria below, are exempt from CSRD reporting obligations:
• A balance sheet totaling at least €300,000
• Annual turnover amounting to at least €700,000
• A workforce comprising a minimum of 10 employees

Company Type Eligibility Requirements
Companies subject to NFRD
  • enlisted in an EU-regulated market (i.e. a large public-interest entity)
  • Exceeding 500 employees
Large companies headquartered in the EU Large companies surpassing at least two of the following:

  • More than 250 employees (on average)
  • Annual turnover surpassing €40 million
  • Balance sheet exceeding €20 million
Large companies headquartered outside the EU
  • Annual turnover exceeds €150 million for each of the past two years
  • Ownership of an EU subsidiary with net revenue greater than €40 million
  • Ownership of an EU subsidiary that meets the EU’s definition of a large company
Small to medium enterprises (SMEs) listed in EU markets

Small companies falling short of 2 of the following criteria:

  • A balance sheet totaling €4 million
  • Net turnover not more than €8 million
  • Staff count below 50 (on average)

Medium companies that do not exceed two of the following:

  • A balance sheet of €20 million
  • Net turnover of €40 million
  • Staff count below 250 (on average)




When will CSRD be Applicable to Companies?
CSRD implementation will occur in stages, with the initial wave affecting companies already under the ambit of the NFRD. These companies will commence reporting in 2025, utilizing data gathered in the 2024 calendar year. The timetable below outlines the phased introduction of CSRD.

Company type Reporting start date
Companies already reporting under NFRD January 2025 using 2024 data
In-scope companies not presently reporting under NFRD January 2026 using 2025 data
In-scope SMEs January 2027 using 2026 data
In-scope non-EU companies January 2029 using 2028 data

Required Information for Reporting

The ESRS encompass 12 distinct cross-cutting and thematic standards:
• Cross-cutting: General requisites and disclosures
• Environmental: Addressing climate change, pollution, water and marine resources, biodiversity and ecosystems, as well as resource use and the circular economy
• Social: Covering workers (both direct and within the supply chain), local communities, consumers, and end-users
• Governance: Focused on business conduct In addition to the initial tranche of ESRS standards, EFRAG is in the process of developing further standards, expected to be released in mid- to late-2024. These include:
• Sector-specific standards: Applicable to specific industries such as mining, quarrying, coal mining, oil and gas, road transportation, agriculture, farming, and fisheries.
• SME standards: Tailored for SMEs reporting by January 2027, to be adopted by the European Commission by June 2024.
• Non-EU standards: Targeting entities within the scope of CSRD but not headquartered in the EU.

Understanding Double Materiality Assessment

All disclosure requirements and data points within the ESRS undergo a double materiality assessment. This entails disclosing a specific data point only if the relevant ESRS is deemed material to the company. However, exceptions exist for general disclosures in ESRS 2 and those mandated by other EU laws.

Double materiality involves assessing both the financial impact of social or environmental risks on a company and the company’s impact on society or the environment. This approach sets CSRD apart from other international reporting standards like SASB or ISSB, which focus solely on the financial aspects of sustainability information.

Phased-in Requirements
The European Commission has introduced phased-in implementation for certain disclosure requirements. For instance, most companies can defer reporting financial effects resulting from sustainability risks and opportunities for the initial 1-3 reporting years. Moreover, companies or groups with 750 or fewer employees may omit disclosures related to GHG emissions, biodiversity, and social matters for the first 1-2 reporting years.

Steps Forward for CSRD Compliance
Companies navigating CSRD requirements should adopt a comprehensive approach to ensure compliance. The following steps outline a structured pathway for reporting companies to meet the heightened standards:
• Evaluate Applicability: Companies should engage legal counsel to assess whether their operations fall under CSRD’s scope, considering factors such as turnover, workforce, and jurisdiction.
• Conduct Gap Analysis: Subsequently, companies may conduct a gap analysis, ideally with the guidance of an external technical consultant. This assessment scrutinizes internal controls and data collection processes to meet CSRD’s heightened standards.
• Perform Double Materiality Assessment: Furthermore, companies should conduct a thorough double materiality assessment, examining their operations and supply chains. This assessment identifies relevant sustainability standards tailored to the company’s circumstances, ensuring compliance and reflecting broader social and environmental impacts.