What are the requirements of the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) will require all companies operating within the EU, and Non-EU companies that do business in Europe to disclose information on the risks and opportunities arising from ESG issues, and the impact of their activities on the society and environment. It's primary objective is to support investors, analysts, consumers and other stakeholders to better evaluate EU companies' sustainability performance and the related business impacts and risks – in line with the commitment made under the European Green deal. It also aims to help investors to opt for sustainable investments.

But what exactly are the CSRD requirements and how should you report?

What is the ESRS reporting framework?

The CSRD requires companies to report in line with the European Sustainability Reporting Standards (ESRS), established by the European Financial Reporting Advisory Group (EFRAG). These represent a significant milestone in sustainability reporting requirements.

These CSRD reporting standards aim to enhance transparency and accountability by promoting sustainable practices and providing a comprehensive framework for disclosing sustainability-related information. Structured around general cross-cutting disclosure requirements and sector-specific disclosures, the ESRS delve into various aspects of governance, strategy, risk management, and performance metrics. By mandating detailed disclosures on sustainability performance, including impacts throughout the supply chain and product life cycle, the ESRS elevate the importance of sustainability reporting and impose greater obligations on companies.

ESRS 1

ESRS 1 outlines the foundational principles for preparing and disclosing sustainability statements under the CSRD, covering reporting requirements, due diligence obligations, and the presentation of sustainability information. It emphasizes the importance of a materiality assessment based on the principle of double materiality, drawing on guidelines such as the Global Reporting Initiative (GRI). This assessment serves as a crucial tool for determining the relevant reporting content, with detailed explanations required for any aspects deemed non-material. ESRS 2 deviates from this approach, providing specific requirements without the need for a materiality assessment.

Double materiality explained

Double materiality extends beyond traditional financial materiality to encompass both the financial impacts of environmental, social, and governance (ESG) factors on a company and the broader societal and environmental impacts of the company's activities (known as 'impact materiality'. This dual perspective acknowledges that ESG and sustainability issues not only affect a company's financial performance but also have significant implications for society and the environment.

To find out more, read our dedicated resource.

Materiality assessments explained

A materiality assessment is a key comply with the CSRD process, aimed at determining which environmental, social, and governance (ESG) issues are significant enough to warrant disclosure in a company's reports. Organisations are required to provide both qualitative and quantitative insights, addressing sustainability issues from short, medium, and long-term perspectives throughout their entire value chain. They must articulate how sustainability risks and opportunities affect their operations and how their activities impact society and the environment.

To find out more, read our dedicated resource.

ESRS 2

ESRS 2 outlines fundamental details, including policies, measures, and objectives that companies must report irrespective of their materiality assessment results. Furthermore, it delineates the format and substance for the ESRS topical standards, encompassing four core disclosure categories: Governance, Strategy, Impact and Risk Management, and Metrics and Targets. These categories align with established international sustainability reporting frameworks like TCFD and ISSB, ensuring coherence across international reporting standards and facilitating comparability in all sustainability information and disclosures.

ESRS topical standards

The initial set of ESRS comprises 10 topical standards centered on environmental, social, and governance domains.

Environmental Categories:

• Climate Change: Addressing aspects like greenhouse gas emissions, climate risk-related reporting, environmental protection and environmentally sustainable practices.

• Pollution: Reporting on measures taken for waste management, emission control, and pollution mitigation.

• Water and Marine Resources: Covering issues surrounding water usage, conservation efforts, and impacts on aquatic ecosystems.

• Biodiversity and Ecosystems: Encompassing impacts on ecosystems and initiatives for biodiversity preservation.

• Resource Management and Circular Economy: Focusing on sustainable resource utilization, recycling practices, and circular economy principles.

Social Categories:

• Workforce: Addressing employees respect for human rights protection within organisational operations.

• Value Chain Workers: Including labor standards, employee rights, and workplace conditions within the value chain.

• Community Impact: Covering ethical business practices, corruption and bribery diversity measures, and compliance with societal norms.

• Consumers and Users: Relating to product safety, customer satisfaction, and the protection of consumer rights.

Governance Categories:

• Business Conduct: Encompassing corporate governance structures, board responsibilities, and engagement with stakeholders.

What are the CSRD reporting requirements?

What are the audit reporting requirements?

The Corporate Sustainability Reporting Directive (CSRD) requires EU member states to put audit requirements in place to enhance credibility of sustainability information reported by companies. Independent auditors will certify reports to ensure compliance with the CSRD standards. The EU - commission will allow for limited assurance standards in the beginning to give companies time to adapt to new standards. By 2028 there will be extensive assurance standards (including reasonable assurance) to enhance credibility even further, and transition to a sustainable economy. 

What are the digital tagging reporting requirements of CSRD?

A companies report will need to have digital tags on all sustainability data so that they can be machine readable for the European Single Access Point (ESAP). Digitisation of reports is part of the EU’s digital financial strategy to improve accessibility and reuse of financial data. All reports must have a digital label to enhance the efficiency of digital reporting. This will support the algorithm in organising reports and allow stakeholders to compare reporting data across different companies.

What are the company information reporting requirements?

Strategy

• Business Model and strategy

• Risks regarding sustainability

• Management and Supervisory board's involvement

Implementation

• Due diligence procedures for supply chain management

• Policy regarding sustainability

• Targets and progress towards set targets

Performance

• Key performance indicators relating to business strategy and implementation

• Progress toward strategic targets

For comprehensive and meaningful, sustainability data reporting the CSRD disclosure requirements come at three different levels. These levels are the following:

• Mandatory Industry Agnostic Disclosures

  • Disclosures have been set up by the European Financial Reporting Advisory Group (EFRAG) in line with the European Sustainability Reporting Standards (ESRS). These disclosures cover a range of ESG topics and climate regulations and sustainability related risks pertaining to all businesses. 

• Mandatory Industry Specific Disclosures

  • CSRD mandates that companies will be required to report on activities that pertain to the specific business sector. These disclosures are currently being defined by the European Sustainability Reporting Standards ESRS and will be released in June of 2024. 

• Company Specific Information

  • This section is for companies to report any other information they consider to be important that is not covered in the annual sustainability reports. 

Where should you report?

According to CSRD requirements, companies are required to disclose their information within a specific section of their company management report, typically part of their annual report – meaning that financial and sustainability information will be published simultaneously. The idea is that the reported information will be easy to access by all key stakeholders.

What is the implementation timeline?

The CSRD implements a gradual rollout strategy to provide companies operating in the EU, with adequate adjustment time to the updated reporting standards. By July 2024, EU member states are mandated to incorporate the full CSRD reporting requirements into their national legislation.

Phase 1: Transition for Large Enterprises under NFRD

Beginning January 1, 2024, this initial phase targets large companies and public interest entities operating in the EU with 500 or more employees and a net turnover of more than €50M, already adhering to the Non-Financial Reporting Directive (NFRD). They are required to align their reporting practices with the CSRD compliance standards starting from the 2024 financial year. Notably, both listed and unlisted entities fall within this phase.

Phase 2: Expansion to Additional Large Companies

Commencing January 1, 2025, the second phase extends to large companies meeting at least two of the three specified criteria, previously exempt from NFRD obligations:

• Balance sheet: More than €25M

• Net turnover: More than €50M

• Employees: More than 250

Again, this phase encompasses both listed and unlisted companies.

Phase 3: Reporting for EU Market-Traded Entities

From 2025 onwards, large EU public companies (balance sheet: more than €25M; net turnover: more than €50M) with shares traded on EU markets and employing over 500 staff members begin reporting for financial periods commencing on or after January 1, 2024.

Subsequent Phases:

EU-Based and Non-EU Conglomerates Starting in 2026, EU-based conglomerates and non-EU firms listed on EU markets initiate reporting for financial periods beginning on or after January 1, 2025.

Small and Medium Enterprises (SMEs) Between 2027 and 2029, small and medium-sized EU enterprises and non-EU entities listed on EU regulated markets will embark on reporting, aligning with financial periods starting on or after January 1, 2026. It's noteworthy that the CSRD imposes no new reporting obligations on small companies, except those with securities listed on regulated markets.

Non-EU Companies with EU Subsidiaries Initiating in 2029, non-EU companies with significant EU subsidiaries or branches commence reporting for financial years starting on or after January 1, 2028.

How do these requirements link to other standards?

The ESRS aligns with frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD), the Global Reporting Index (GRI) and the EU Taxonomy regulation. The CSRD can also equip financial organizations with the data necessary for compliance with the Sustainable Finance Disclosure Regulation (SFDR). Reaching harmonized sustainability reporting requirements across the EU relies on aligning various regulations, fostering consistency in conveying companies' environmental impacts to stakeholders and consumers.