What is the EU’s Corporate Sustainability Reporting Directive (CSRD)?

14 Feb

The EU’s Corporate Sustainability Reporting Directive (CSRD) sets a rigorous standard for companies, requiring them to publish detailed information on their environmental, social and governance activities.

The CSRD builds on the Non-Financial Reporting Directive (NFRD), expanding the scope significantly and adding new, more demanding requirements.

The aim of the new directive is to increase transparency and accountability in sustainability reporting, providing a common standard that is comparable and consistent, as well as driving sustainability improvements globally.

Companies will be required to produce a report outlining disclosures for each topic identified as material, as well as a set of cross-cutting disclosures completed by all in scope organisations. This will form part of the company’s management report.

Scope

The previous legislation, the NFRD, required ~11,000 large, publicly owned companies to make sustainability disclosures. CSRD, in contrast, is expected to bring some 50,000 EU and Non-EU companies into scope by 2029. The CSRD is being rolled out on staggered basis. The first companies in scope, those already subject to the NFRD, will be have to apply the rules from 2025, for financial years beginning 1st January 2024.

2025 Large undertakings already subject to the NFRD

2026 All other large EU undertakings, or large EU groups and other non-EU large undertakings or large groups listed on an EU regulated market

2027 SMEs ex. Micro entities listed on an EU regulated market and EU small and non-complex credit institutions and captive insurance undertakings.

2029 Non-EU companies which generate €150m net turnover in the EU and have at least one entity in the group in scope of the CSRD or an EU branch with a turnover exceeding €40m.

Definitions

Large undertakings & large groups:

· Balance sheet >€25m

· Turnover >€50m

· Employees >250

SMEs ex. Micro-undertakings

· Balance sheets €450k-25m

· Turnover €900k-50m

· Employees – 10-250

Double materiality

When completing a CSRD report, companies will need to disclose against each E, S & G topical standard which is material to their organisation. A key part of the CSRD is the requirement to assess materiality from a double materiality perspective. This means considering both the impact of sustainability issues (e.g. climate change impacts and human rights issues) on a company’s financial performance, as well as the impact of a company’s activities on people and the planet. The CSRD requires companies to identify material ESG issues and assess them across different timeframes, in alignment with a newly established set of standards - the European Sustainable Reporting Standards (ESRS).

ESRS

In-scope organisations will be required to report against the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). There are 12 ESRS, including 10 “topical” environmental, social, governance standards, and 2 cross-cutting standards.

Companies must use the double materiality principle to assess if they meet the materiality threshold for each standard. They will then need to develop a framework to report on the material impacts, risks, and opportunities they face ensuring alignment with the requirements of each standard. There are numerous disclosures associated with each ESRS, with companies required to disclose potentially thousands of data points.

Information required in disclosures will need to cover a range of areas including descriptions of company sustainability governance and due diligence processes, identification of sustainability risks, impacts, and approaches for their management, details of methodologies used in sustainability assessments, and information on sustainability targets, progress against them, and transition plans.

Reporting

Companies are required to report CSRD information including on their own operations and value chain, in a dedicated section of their management reports. This is distinct from frameworks like TCFD which allows companies to publish a separate report, but similar to ISSB which asks signatories to publish information in their annual report.

Recognising the difficulty some companies may experience in accessing relevant data, a “comply or explain” approach is in place for the first 3 years allowing companies to explain what efforts they have made towards finding information, why it couldn’t be found, and what they are planning to do to obtain it in the future.

Companies will also need to digitally tag their sustainability disclosures, using XBRL tagging. The reports must be both machine and human readable.

Limited assurance

Companies reporting against the CSRD will need to provide “limited assurance” on their disclosures from a third-party verifier. Assurance should cover compliance with the CSRD reporting rules, and details of methodologies used to identify information. It is possible that this will increase to “reasonable assurance” as the regulation is adopted.

Alignment with other standards

Companies reporting against the CSRD will be able to use other frameworks like TCFD, SASB, GRI and ISSB to support their reporting, as long as they ensure alignment with the ESRS. Companies reporting to the CSRD will automatically comply with TCFD. However, since the CSRD adopts the double materiality perspective while other frameworks (e.g., TCFD, SASB, ISSB) use only the financial materiality perspective (considering sustainability impacts on a company’s financial performance and NOT impacts caused by the company on the environment), how interoperable these standards will be remains as yet unclear.

In-scope companies will also need to comply with the EU Taxonomy Regulation, enabling investors in companies to fulfil their own SFDR reporting requirements. Companies will therefore need to report against Article 8 requirements, disclosing how and to what extent their activities are environmentally sustainable, and providing information on the proportion of their turnover, capital expenditure and operating expenditure derived from sustainable products or services. ESRS requirements are designed to align with SFDR and the Taxonomy Regulation though it remains to be seen how interoperable they will be in practice.

Whatever the uncertainties, companies should expect to report at a more detailed level for the CSRD, which goes further than other frameworks on several elements including its, materiality, alignment with a 1.5°C global warming scenario (rather than 2°C), climate mitigation actions, and reporting requirements and structure.

CSRD and Asset Managers

As mentioned above, increased corporate sustainability disclosure in line with the CSRD should help asset managers obtain the information they need to fulfil their own SFDR requirements, since the new rules are aligned with the EU’s Taxonomy Regulation.

Where to begin

Scope. Companies should begin by assessing if they will fall in-scope for the CSRD, and if so, when they will need to start reporting.
ESRS. Understanding the ESRS requirements, conducting materiality assessments, and eventually preparing reporting will inevitably take time and resources. Companies will need to allocate both to ensure they are prepared. External assistance may be needed if in-house resources are stretched.
Data. Obtaining relevant quality data is also likely to be challenging for some, so understanding what you will need, what’s available and then assessing any data gaps is an essential first step. Companies may need to engage an external data provider.
Assurance. Companies will need to find an independent assurance provider.

Get in touch if you need help understanding and preparing to report to the CSRD.