Understanding the Corporate Sustainability Reporting Directive (CSRD)
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Understanding the Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is a new piece of legislation that will impact around 50,000 companies in the EU and beyond. And for some organisations, this impact could hit as early as next year.
If you’re not yet sure what this directive means and how it will affect your business, don’t worry — we’re here to clear things up.
Here’s what this article will cover:
- What the CSRD is all about
- Which companies will be impacted
- What (and how) you’ll have to report
- What you can do to prepare now
Ready? Let’s jump in.
What is the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is a piece of legislation that came into effect in January 2023, and which EU member states need to transpose into national law by July 2024.
The directive sets a new standard for sustainability reporting across the EU, requiring thousands of companies to report regularly on various ESG topics.
Of course, the idea of corporate social responsibility reporting isn’t new. The CSRD expands on an existing piece of legislation, the Non-Financial Reporting Directive (NFRD). However, the scope of the new directive is much wider. We’ll talk more about the differences between the old rules and the new ones further on.
The reporting requirements set out in the directive will be phased in gradually from 2025. In other words, depending on your company’s specific situation, you may have less than a year to prepare.
What’s the point of the CSRD?
So, what’s the idea behind this directive? Essentially, its purpose is to encourage sustainable business practices by increasing accountability for companies operating in the EU. This gives both customers and investors the information they need to make more informed decisions about where their cash is going.
Ultimately, the point is to build a sustainable and inclusive economic environment that’s in line with both the Green Deal and the UN Sustainable Development Goals. Remember, the EU is working towards a goal of making Europe carbon neutral by 2050. And the CSRD is expected to play a huge role in this by moving the flow of commerce away from unsustainable businesses and technologies and towards sustainable ones.
Summary of key changes:
As we mentioned, the CSRD is not a totally new idea. It builds on existing legislation — specifically the Non-Financial Reporting Directive, or NFRD. Here are some of the key differences that the CSRD will bring in:
- Wider scope: Under the NFRD, only large public interest companies (such as banks and insurance firms) with more than 500 employees were required to report, adding up to a total of around 11,000 companies. The CSRD massively widens this scope, and will impact an estimated 50,000 companies across Europe and beyond.
- More reporting requirements: As well as increasing the number of companies that will have to comply, the CSRD also requires companies to provide much more comprehensive details about their ESG practices and objectives.
- Independent assurance: Once the rules in the CSRD come into play, companies will need to provide independent assurance for the information they disclose. This was optional under the NFRD.
- Inclusion of non-EU companies: As well as businesses headquartered in EU countries, the CSRD will also impact some non-EU companies. This will only be the case if they have significant business activity in the EU — we’ll get to the specifics in a moment.
- Double materiality: Under the CSRD, companies will need to report on both societal and environmental risks for the company, and the impact that their company has on the environment and society. This is distinct from other international ESG reporting standards.
- Digital reporting: The NFRD has no specific requirements for digital reporting. But under the CSRD, companies will have to format and publish their reports in a standardised digital format. This will make it easier to compare stats between different companies.
Which companies will the CSRD apply to?
According to the EU Commission, the CSRD is expected to impact around 50,000 companies worldwide — making it far more wide-reaching than the current NFRD rules.
Companies within the EU will have to comply with the directive if they meet at least two of the following three conditions:
- Have a net turnover of more than €40 million
- Have balance sheet assets greater than €20 million
- Have more than 250 employees
Small and medium enterprises (SMEs) that are listed on a regulated EU market will also have to comply, although the reporting requirements for these businesses will be lighter.
What about companies outside the EU?
Despite being an EU directive, the CSRD will impact certain companies that are headquartered outside of the EU.
Specifically, companies that meet both of the criteria below will have to comply with the rules:
- Having securities listed on EU regulated markets or generating more than €150 million in net turnover within the EU.
- Having at least one subsidiary that is large or listed on an EU regulated market or a branch with more than €40 million in turnover for the last financial year.
As you can tell, figuring out whether or not your company falls within the scope of the directive is not going to be simple for non-EU companies. If your business is headquartered outside of the EU but you have some activity in at least one member state, we’d strongly recommend consulting with an expert to figure out where you stand.
There’s also an exemption for some non-EU companies if they already comply with sustainability reporting standards that the European Council considers ‘equivalent’. Again, it’s worth checking with an expert to find out whether this applies to you.
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What will companies have to report
The CSRD greatly expands the reporting requirements set out in the NFRD, meaning that in-scope companies will have to understand and prepare a vast amount of data in order to comply.
Companies must provide their disclosures in line with the European Sustainability Reporting Standards (ESRS). This is a set of common standards adopted by the EU Commission to help companies complete their reports.
Because they standardise the information that companies need to provide, they also make it easier for investors and consumers to make accurate comparisons between companies.
There are 12 ESRSs that businesses will need to report on if they are ‘material’ to the company (more on this in a moment).
They are:
- General requirements
- General disclosures
- Climate
- Pollution
- Water and marine resources
- Biodiversity and ecosystems
- Resource use and circular economy
- Own workforce
- Workers in the value chain
- Affected communities
- Consumers and end users
- Business conduct
The EU Council is also in the process of developing a set of standards for sector-specific disclosures, as well as standards for non-EU, non-listed companies that are impacted by the CSRD, which should be available by June 2024.
Double materiality
Companies only need to report on information that is ‘material’ to its business model and activity. For example, a large banking corporation might not need to disclose data related to water and marine resources.
However, the CSRD takes a ‘double materiality’ perspective, which means that businesses have to consider both:
- The company’s impact on people and the environment
- The risks and opportunities for the company created by social and environmental factors
Companies have to consider each materiality perspective in its own right, and they have to disclose information even if it’s only relevant from one perspective.
When will the directive come into effect?
The provisions of the CSRD came into force on 5th January 2023, and member states were given until 6th July 2024 to transpose them into national law. After this date, the reporting requirements will be rolled out in stages for companies falling into different categories.
Here’s a snapshot of what that will look like:
- 2025: Companies that are already required to comply with the NFRD will have to report on their 2024 financial year.
- 2026: Large companies that are not subject to the NFRD will have to report on their 2025 financial year.
- 2027: Listed SMEs will have to report on their 2026 financial year.
- 2029: Non-EU companies that are subject to the CSRD will have to report on their 2028 financial year.
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Getting ready for the CSRD: What to do to prepare
The CSRD is a wide-ranging and complex piece of legislation — and some companies will have to submit their first reports as soon as next year. Whatever your situation, it’s important to start preparing for the CSRD now, so you’re ready when your time comes.
Here are some of the things you can do to get started:
- Establish whether you’re impacted: The first step is to figure out whether your organisation will be subject to the CSRD, and when you’ll be expected to file your first report. It’s a good idea to consult with experts to make sure you don’t make any mistakes here.
- Conduct a gap analysis: Next, you need to know if your internal controls and data collection processes will enable you to provide the required information. If not, you’ll need to determine what you need to do to put the necessary systems in place.
- Conduct a double materiality assessment: You’ll also need to spend some time determining which sustainability standards are ‘material’ to your business, by conducting an in-depth assessment of your operations and supply chain. Remember, you need to consider both your business’ impact on the environment and society and the risks and opportunities these things present to your business.
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Where to find more information
The CSRD is a complex topic, and it would be impossible to describe all of its ins and outs in one blog post. If you want more information about the CSRD, you can keep an eye on this blog for future posts, or check out these resources:
- Article from the EU Commission explaining the directive
- In-depth guide to the CSRD and its reach from Deloitte
- Guide to complying with the CSRD from PwC
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