The European Union (EU) has ushered in a new era of environmental, social, and governance (ESG) reporting with the implementation of the Corporate Sustainability Reporting Directive (CSRD). This directive, effective in 2025 based on 2024 numbers, significantly expands the scope and rigor of sustainability reporting requirements for over 50,000 companies worldwide.
As of May 2023, CSRD released groundbreaking directives that substantially elevates the bar for corporate sustainability reporting, comprehensive disclosures across a wide spectrum of environmental, social, and governance (ESG) practices, in accordance with the European Sustainability Reporting Standards (ESRS) that were established in July 2023.
What is the Corporate Sustainability Reporting Directive and how is reporting done?
The CSRD standards supersede the EU's legacy ESG reporting program, the Non-Financial Reporting Directive (NFRD). Beginning in 2025 based on 2024 numbers, it will require large and listed companies to create a sustainability report through the European Sustainability Reporting Standards (ESRS) annually, with electronically readable and searchable reports. The ESRS is an EU sustainability reporting standard that aims to shed light on a company's sustainability data and how sustainability issues impact company development, finances, and performance. These new requirements will help standardize sustainability metrics across the EU and increase transparency around corporate and sector-specific sustainability disclosures.
While the NFRD had voluntary reporting guidelines, the CRSD will have more specific and mandated disclosure requirements encompassing a much broader range of topics catered to different sectors. While carbon emissions remain a focus, the CSRD compels reporting on additional environmental aspects such as pollution, water usage, waste management, and biodiversity. These disclosures will be integrated into annual reports alongside financial statements, ensuring visibility and accessibility for stakeholders. Moreover, the CSRD introduces mandatory audit assurance for reported sustainability information, as well as mandatory EU sustainability reporting standards that align with the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).
What is the EU Taxonomy?
Created in June 2020 to help fortify the European Green Deal, the EU Taxonomy is a classification system that intends to clarify which investments are environmentally sustainable. The SFDR is an EU regulation intended to improve sustainable investment products, promote transparency, and prevent greenwashing by way of financial disclosure requirements that are centered on ESG criteria, in effect since 2018.
Who is impacted by the Corporate Sustainability Reporting Directive?
While the NFRD covered 11,600 listed companies and banks with over 500 employees, CSRD standards cast a much wider net. The CSRD applies to EU-based public companies (excluding micro-enterprises) and private organizations considered “large” if they meet two of the following:
- 250+ employees
- €50 million or more in annual revenue
- €5 million or more balance sheet
Non-EU parent companies with EU subsidiaries that meet these criteria must also file CSRD disclosures. Voluntary global consolidation is possible.Eventually, non-EU parents with €50m+ EU revenues and a qualifying branch or subsidiary must report consolidated data, including non-EU activities. The CSRD’s technical rules, ESRS, define the disclosure requirements.
This broad scope of compliance could dramatically transform ESG and corporate reporting requirements globally. The 49,000+ companies covered by CSRD account for over 75% of all companies’ net turnover in the EU, that’s 75% of all European business revenue.
Non-Financial Reporting Directive and Corporate Sustainability Reporting Directive
Both NFRD and CSRD are non-financial reporting initiatives, this means corporate reporting that is not tethered to business finances but instead focuses on ESG reporting and other corporate social responsibility partnerships and CSR factors. While CSRD builds off of NFRD, some requirements, like a mandatory third-party review and a searchable CSRD reporting format, will help make assessments of sustainability targets more transparent and concrete. Companies currently under NFRD will have to submit reports through both mechanisms.
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What is the difference between NFRD and CSRD?
Standards under the Corporate Sustainability Reporting Directive
The CSRD outlines specific technical requirements for sustainability reporting through the European Sustainability Reporting Standards (ESRS). These CSRD standards, finalized in July 2023, provide a detailed framework for what companies need to disclose and how. The ESRS encompass a total of 12 draft standards categorized as follows:
- Cross-cutting Standards:
- General requirements: These address overarching governance structures and reporting frameworks.
- General disclosures: These cover broad ESG topics, aligning with the typical structure of an annual report.
- Environmental Standards:
- Climate Change (ESRS E1): This standard mandates disclosure of a company's full scope 1, 2, and 3 greenhouse gas emissions footprint, climate-related risks, carbon pricing strategies, energy usage mix, and a credible transition plan aligned with the Paris Agreement.
- Pollution (ESRS E2): This standard focuses on disclosing a company's air, soil, and water pollution arising from both direct operations and activities across their value chain.
- Water and Marine Resources (ESRS E3): This standard mandates disclosure of water consumption, water recycling and reuse practices, and any potential adverse impacts on marine ecosystems.
- Biodiversity and Ecosystems (ESRS E4): This standard requires companies to disclose their business activities' impact on the natural environment and outline a plan to address biodiversity loss.
- Resource Use and Circular Economy (ESRS E5): This standard focuses on disclosures related to a company's use of circular material resources and the types of waste generated during operations.
- Social Standards:
- Own Workforce (ESRS S1): This standard mandates disclosure of quantitative workforce data such as employee location, gender breakdown, and employee type. It also requires reporting on compliance with child labor policies and alignment with the UN Guiding Principles on Business and Human Rights.
- Workers in Value Chain (ESRS S2): This standard focuses on disclosures related to policies and processes concerning upstream workers within the company's value chain. This includes reporting on human trafficking prevention policies and how the perspectives of value chain workers are incorporated into company decisions.
- Affected Communities (ESRS S3): This standard emphasizes a company's impact on affected communities and the measures in place to ensure those communities can voice concerns.
- Consumers and End-Users (ESRS S4): This standard mirrors the focus of ESRS S3 but addresses the concerns of end-users rather than affected communities.
- Governance Standard:
- Business Conduct (ESRS G1): This standard requires a combination of qualitative and quantitative disclosures concerning a company's procedures and processes for fostering transparency within the organization. Qualitative aspects focus on anti-corruption and anti-bribery measures, while quantitative elements provide depth to these policies, potentially including the number of bribery incidents or the amount of political contributions made by the company.
Other considerations
The depth and comprehensiveness of the CSRD extend beyond a company's direct operations, encompassing its entire value chain. This necessitates a broader range of considerations for companies when preparing their reports.
- Data accuracy and assurance: The CSRD implements a phased audit assurance requirement, starting with limited assurance in 2026 and escalating to reasonable assurance by 2028. To comply with the mandatory audit assurance requirements—and avoid greenwashing claims—companies will need to ensure a high level of data accuracy, completeness, and robust internal controls surrounding their ESG data.
- Double materiality assessment: Companies must conduct a "double materiality" assessment to identify both how their operations impact people and the environment, and how sustainability-related developments affect the organization. A topic is considered material if it has a significant impact from either (or both) perspectives. This assessment, involving stakeholders with diverse expertise, plays a crucial role in determining which CSRD components a company needs to report on.
CSRD disclosure: How and when to report
The CSRD implements a phased approach to reporting for different company groups over the coming years. Here's a breakdown of the reporting timeline:
- 2025: Existing NFRD reporters (large listed companies and public interest entities) will submit their first CSRD disclosures in their 2025 management report, using data from 2024.
- 2026:
- Other listed public companies (excluding SMEs and micro-cap companies) will submit their first CSRD disclosures in their 2026 management report, using 2025 data.
- This deadline also applies to large private companies meeting the CSRD criteria.
- 2027: Listed SMEs will begin reporting in their 2027 management report, using 2026 data.
- 2029: Non-EU companies with qualifying levels of business activity in the EU will be subject to reporting requirements for the first time in their 2029 management report, using 2028 data.
Disclosures under the CSRD will be required in a machine-readable digital format to facilitate aggregation into a centralized EU database.
The CSRD is a mandatory regulation, and non-compliance can result in penalties imposed by national authorities.
The future of EU corporate sustainability
The CSRD raises the bar on corporate sustainability reporting in both context and scope. It will impact an overwhelming majority of capital flows within the EU and could affect the sustainable business strategies for international companies who have subsidiaries in the EU. It can also help Europe transition successfully toward 2050 net-zero goals while keeping just transition pathways alive.
In comparison to the new scope 1 and scope 2 disclosure requirements launched by the U.S. Securities and Exchange Commission (SEC), the CSRD and SEC sustainability disclosure requirements are very similar. Companies should expect more required sustainability reporting that aligns with their supply chains, emissions, and ESG; in Europe, the U.S., and elsewhere. ESG and emissions-focused business reporting will change the way companies consider sustainability in their supply chains and will undoubtedly make disclosure tools and sustainability software—like Sustain.Life—even more important.
Sources
1. European Commission, “Corporate sustainability reporting,” https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en Accessed May 24,2024
2. European Parliament, “Non-financial Reporting Directive,” https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/654213/EPRS_BRI(2021)654213_EN.pdf Accessed May 24,2024
3. Eurosif, “SFDR,” https://www.eurosif.org/policies/sfdr/ Accessed May 24,2024
4. Deloitte, “The EU takes a major step forward in sustainability reporting,” https://www2.deloitte.com/fr/fr/pages/sustainability-services/articles/eu-takes-major-step-forward-sustainability-reporting.html Accessed May 24,2024
