Why is CSRD important?
The Corporate Sustainability Reporting Directive (CSRD) is a groundbreaking piece of legislation adopted in the European Union (EU) that sets a new standard for global sustainability reporting. The CSRD marks a significant milestone in the pursuit of sustainable and responsible corporate practices. The scope of CSRD is also significant as it is expected to impact over 50,000 companies across the globe.
The CSRD builds on the Non-Financial Reporting Directive (NFRD) which was adopted by the EU in 2014. The NFRD generally applies to large public-interest companies operating in Europe with over 500 employees (approximately 11,000 companies). The primary purpose of the NFRD is to promote transparency and informed decision-making with respect to sustainability information. The NFRD requires companies to report relevant non-financial information alongside its financial information.
The scope of CSRD greatly expands that of NFRD. First, through expanding the number of companies who must report – from 11,000 to over 50,000. Secondly, the amount of non-financial information that companies must report on under CSRD has potentially increased.
CSRD requires companies to report against a set of sustainability metrics, the European Sustainability Reporting Standards (ESRS). The ESRS were established by a non-profit organization, the European Financial Reporting Advisory Group (EFRAG). EFRAG released the first draft of the ESRS in April 2022. After an extended feedback period, the EU adopted the final version of the ESRS on July 31, 2023.
Which companies are in-scope for CSRD?
The table below sets out the threshold for companies affected by CSRD.
To the extent any of the following companies is a “micro-undertaking” it is exempt from reporting under CSRD. A micro-undertaking is a company that does not exceed two of these three criteria:
- A balance sheet of at least €300,000
- Annual turnover of at least €700,000
- At least 10 employees
Company TypeEligibility RequirementsCompanies subject to NFRD
- Listed in an EU-regulated market (i.e. a large public-interest entity)
- More than 500 employees
Large companies headquartered in the EU
Large companies that exceed at least two of the following:
- More than 250 employees (on average)
- Annual turnover exceeds €40 million
- Balance sheet exceeds €20 million
Large companies headquartered outside the EU
- Annual turnover exceeds €150 million for each of the past two years
- Has an EU subsidiary with net revenue greater than €40 million
- Has an EU subsidiary that meets the EU’s definition of a large company
Small to medium enterprises (SMEs) listed in EU markets
Small companies that do not exceed two of the following:
- A balance sheet of €4 million
- Net turnover of €8 million
- 50 employees (on average)
Medium companies that do not exceed two of the following:
- A balance sheet of €20 million
- Net turnover of €40 million
- 250 employees (on average)
When does the CSRD start to apply to companies?
CSRD will impact companies on a staged basis with the first companies – those already subject to the NFRD – reporting in 2025 based on data collected in the 2024 calendar year. The table below sets out the timeline for the phased rollout of CSRD.
Company typeReporting start dateCompanies already reporting under NFRDJanuary 2025 using 2024 dataIn-scope companies not currently reporting under NFRDJanuary 2026 using 2025 dataIn-scope SMEsJanuary 2027 using 2026 dataIn-scope non-EU companiesJanuary 2029 using 2028 data
What information needs to be reported?
The ESRS are divided into 12 different cross-cutting and topical standards:
- Cross-cutting: general requirements and disclosures
- Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy
- Social: workers (direct and supply chain), local communities, consumers and end-users
- Governance: business conduct
In addition to the cross-cutting and topical standards that were adopted as part of the first tranche of ESRS, EFRAG is also developing the following additional standards. Exposure drafts of these standards are anticipated for release in mid- to late-2024.
- Sector-specific standards: Applicable to certain sectors, including: (i) mining, quarrying and coal mining, (ii) oil and gas, (iii) road transportation, and (iv) agriculture, farming and fisheries.
- SME standards: Applicable to SMEs reporting in January 2027. These standards will be adopted by the European Commission by June 2024.
- Non-EU standards: Applicable to in-scope entities not headquartered in the EU.
What is a double materiality assessment?
All disclosure requirements and data points within the ESRS are subject to a double materiality assessment. This means that a company need only disclose a certain data point if the relevant ESRS is found to be material to the company. An exception to this rule is made for the general disclosures set out in ESRS 2 and for those disclosure requirements within the ESRS that are required by other EU laws.
Double materiality refers to the assessment of a social or environmental risk on a company (financial materiality) and of a company’s impact on society or the environment (impact materiality). The double materiality lens through which CSRD is applied distinguishes it from other international reporting standards, such as SASB or ISSB, which focus only on the financial risks and opportunities of sustainability information.
Phased-in requirements
The European Commission has provided for the phased-in implementation of certain disclosure requirements. For example, most companies may defer reporting financial effects arising out of sustainability risks and opportunities for the first 1-3 reporting years. In addition, companies or groups of companies with 750 or fewer employees may omit disclosures related to GHG emissions, biodiversity and social matters for the first 1-2 reporting years.
Next steps to address CSRD reporting requirements
Companies navigating the requirements of the CSRD must undertake a multifaceted approach to ensure compliance. By following the steps set out below, reporting companies may establish a solid foundation to meet the heightened standards set forth .
- Establish Applicability: Initially, companies ought to engage legal counsel to conduct a thorough assessment of whether their operations fall within the scope of CSRD, considering factors such as company turnover, workforce and jurisdiction.
- Gap Assessment: Subsequently, a company may look to undertake a gap assessment, ideally conducted with the guidance of an external technical consultant. This evaluation delves into the company’s internal controls and data collection processes to ensure they meet the heightened standards set forth by the CSRD.
- Double Materiality Assessment: Furthermore, companies should undertake a comprehensive double materiality assessment, scrutinizing their own operations and supply chain. This assessment helps identify which sustainability standards are relevant to the companies’ specific circumstances, ensuring that reporting efforts are not only compliant but also reflect the broader social and environmental impact of the companies’ activities.
