What is the Corporate Sustainability Reporting Directive?
The EU's CSRD is setting a new standard in sustainability reporting. Learn what this means for companies, stakeholders, and the environment.
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What is the Corporate Sustainability Reporting Directive?
The EU's CSRD is setting a new standard in sustainability reporting. Learn what this means for companies, stakeholders, and the environment.
Loading reading time...
What is the Corporate Sustainability Reporting Directive?
The EU's CSRD is setting a new standard in sustainability reporting. Learn what this means for companies, stakeholders, and the environment.
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CSRD: the new benchmark in sustainability reporting

What is the CSRD?

You’ve probably heard the acronym CSRD floating around in discussions about corporate accountability and environmental stewardship. But what exactly is the Corporate Sustainability Reporting Directive (CSRD), and why is there so much talk about it?

In essence, the CSRD is a groundbreaking European Union directive that standardises how companies report their impact on society and the environment.

The CSRD applies to a broader range of companies than its predecessor, the Non-Financial Reporting Directive (NFRD), and mandates third-party auditing.

So, why should you care?

Whether you’re an investor, a business leader, or a concerned citizen, the CSRD affects how you interact with companies and make decisions based on their sustainability practices.


Emergence of sustainability reporting

Sustainability has transitioned from a buzzword to a business imperative in the last few decades. Initially, companies would publish sustainability reports as a form of corporate social responsibility, often as a separate document with little to no standardisation.

However, as climate change, social inequality, and governance issues have become more pressing, stakeholders demand more transparency and accountability.

This has led to the evolution of sustainability reporting into a more structured and integral part of business operations.

Think of it like the nutritional labels on food products; just as consumers want to know what they’re ingesting, stakeholders want to understand the ‘health’ of a company in terms of its environmental, social, and governance (ESG) impacts.

The role of the non-financial reporting directive (NFRD) in EU sustainability reporting

Before the CSRD came into the picture, the European Union had the Non-Financial Reporting Directive (NFRD) in place.

Adopted in 2014, the NFRD aimed to increase transparency and accountability by requiring large EU-based companies with more than 500 employees to disclose non-financial information.

While the NFRD was a significant step in the right direction, it had limitations. Third-party auditing was optional, which eased the reporting burden but led to inconsistencies in the quality and comprehensiveness of the reports.

Who did the NFRD apply to?
EU Non-Financial Reporting Directive (NFRD) (Source: ESG Enterprise)

Definition and origins of the CSRD

The European Union introduced the Corporate Sustainability Reporting Directive (CSRD) in January 2023. It is an upgrade to its predecessor, the Non-Financial Reporting Directive (NFRD).

While the NFRD was like a first-generation smartphone, think of the CSRD as the latest smartphone model

  • more features
  • better performance
  • designed to meet current demands

The CSRD aims to modernise and strengthen the rules around the social and environmental information companies must disclose.

Table comparing CSRD to NFRD

Key features and objectives

The CSRD has several key features that set it apart.

For starters, it applies to a broader range of companies—more than 49,000 organisations compared to the NFRD’s 11,700. It also mandates third-party auditing.

One of its most innovative features is the concept of “double materiality.”

This means that companies must report not only on how sustainability issues affect them financially but also on how their operations and activities impact the environment and society at large.

In simpler terms, it’s like a two-way mirror: companies must look both inward at their financial risks and outward at their societal responsibilities.

Relationship between the CSRD and other regulations and standards

The CSRD doesn’t exist in a vacuum; it’s part of a larger ecosystem of sustainability regulations and standards.

It aligns with the European Green Deal and is closely related to EU initiatives like the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.

The CSRD also aims to be in harmony with global standards, such as those set by the Task Force on Climate-Related Financial Disclosures (TCFD) in the UK and the Environmental, Social, and Governance (ESG) reporting rules by the Securities and Exchange Commission (SEC) in the United States.

Chart showing how CSRD connects to other regulations
How does CSRD link to broader regulations and policies? (Source: Carbon Trust)

Why CSRD matters

In a world grappling with climate change, social inequality, and corporate governance issues, the need for transparent and accountable business practices has never been greater.

The CSRD serves as a lighthouse, guiding companies through the foggy waters of sustainability reporting.

It addresses the limitations of its predecessor, the NFRD, by expanding the scope and depth of reporting requirements. This ensures that stakeholders have a clearer, more comprehensive view of a company’s sustainability efforts—or lack thereof.

Benefits for stakeholders, the environment, and companies

For stakeholders

The CSRD empowers stakeholders, investors, consumers, and civil society organisations with the information they need to make informed decisions.

It’s like having a nutrition label but for corporate sustainability, allowing stakeholders to ‘digest’ the social and environmental impact of a company efficiently.

For the environment

By making sustainability reporting mandatory and more comprehensive, the CSRD encourages companies to adopt eco-friendly practices.

It’s a win-win: companies reduce their carbon footprint, and the planet breathes a little easier.

For companies

Compliance with CSRD isn’t just a regulatory requirement; it’s a strategic advantage.

Companies that embrace CSRD are more likely to attract investment, foster consumer trust, and identify areas for innovation and cost-saving.

Think of it as a gym membership for your business; it might seem like an expense at first, but the long-term health benefits are invaluable.

Infographic highlighting how companies can benefit from the Corporate Sustainability Reporting Directive by attracting investment, developing resilience, reducing costs, avoiding greenwashing, improving transparency and aligning with global standards
Benefits of CSRD for companies

Real-world examples

Companies like Philips, DSM, and Ahold Delhaize are already leading the way in CSRD-aligned reporting. These companies have not only met the disclosure requirements but have also leveraged them to gain a competitive edge.

Their commitment to transparency and sustainability serves as a blueprint for other companies looking to navigate the complexities of the CSRD.

Compliance guidance for companies and changes to expect

Who needs to comply?

The CSRD is set to have a far-reaching impact, affecting nearly 50,000 companies and making up approximately three-quarters of businesses in the European Economic Area. Here’s a breakdown of who needs to comply:

Companies listed on EU-regulated markets

This excludes listed micro-enterprises but includes large companies. A ‘large company’ is defined as one that meets at least two out of three criteria:

  • More than 250 employees,
  • Turnover exceeding €40 million,
  • Total assets over €20 million.

These companies will also need to consider information at the subsidiary level.

Listed SMEs

Small and Medium-sized Enterprises are also included, although they can opt out until 2028. However, there are significant benefits for SMEs that choose to comply early.

Non-EU companies

Those with a net turnover of €150 million in the EU and at least one subsidiary or branch within the union must also comply.

How will the changes affect your business model?

Companies will have to up their game in sustainability reporting, covering a broad spectrum of issues that include environmental, social, and human rights, as well as governance factors. Here’s what to expect:

Content of reports

Companies must include a dedicated section in their management reports, usually part of their annual report, that covers:

  • Environmental matters, including science-based targets, EU Taxonomy, and climate risk-related reporting.
  • Social matters and employee treatment.
  • Respect for human rights.
  • Anti-corruption and bribery measures.
  • Diversity on company boards, considering age, gender, educational, and professional background.

Quality of Information

The information must be qualitative and quantitative, forward-looking and retrospective, and based on short, medium, and long-term considerations.

Assurance mechanism

The CSRD mandates that an independent assurance service provider verify the reports to ensure the information is accurate and reliable.

Timeline for phased compliance

The timeline is not a one-size-fits-all; it’s a phased rollout stretching from 2024 to 2029, designed to accommodate various company sizes and previous NFRD obligations.

Imagine it as a marathon, not a sprint, with different starting lines for different runners.

Starting in financial year 2024 (reporting in 2025)

If your organisation was already under the NFRD umbrella—meaning you’re listed on an EU-regulated market with 500 or more employees—you’ll need to comply with the CSRD starting this year.

Starting in financial year 2025 (reporting in 2026)

Large listed undertakings not previously mandated under the NFRD will need to begin complying. Essentially, if you’re big and listed, you’re in.

Starting in financial year 2026 (reporting in 2027)

Small and medium-sized undertakings (SMEs) listed on an EU-regulated market join the compliance race. To qualify, companies must meet at least two of the following criteria:

  • At least €4 million in total assets
  • At least €8 million in net turnover
  • An average of at least 50 employees throughout the year

Starting in financial year 2028 (reporting in 2029)

Third-country undertakings, or companies based outside the EU but operating within it, will also need to toe the line.

Timeline for CSRD compliance
CSRD timelines (Source: PwC)

So, the CSRD train left the station in 2023, but depending on your ‘boarding pass’—your company’s size and previous obligations—you’ll need to be ready to hop on between 2024 and 2029.

CSRD reporting standards and requirements

Specific disclosures: what companies must report

The CSRD mandates a comprehensive range of categories that companies must report on.

These span:

  • Environmental aspects like climate change and pollution
  • Social factors such as workforce treatment and community impact
  • Governance issues like business conduct

Companies must also outline specific policies on sustainability matters—ranging from environmental protection to human rights—and describe due diligence processes for tracking and enforcing these policies.

Furthermore, they must share their sustainability targets, progress toward achieving them, and disclose their due diligence process for identifying and mitigating social and environmental impacts in their value chains.

Characteristics of information presentation: quality and format

Quality trumps quantity when it comes to CSRD reporting. Companies must provide accurate, reliable data that can be audited.

Initially, limited assurance from a third-party auditor is required, but this will transition to reasonable assurance in the coming years.

The information must be presented in a dedicated section of the company’s Management Report, usually included in their annual report.

This report should contain both retrospective and forward-looking information, providing a comprehensive view of the company’s sustainability efforts.

Standardisation efforts: uniformity in reporting

To bring uniformity to the sustainability reporting landscape, the European Financial Reporting Advisory Group (EFRAG) has developed European Sustainability Reporting Standards (ESRS).

European Sustainability Reporting Standards (ESRS)

The European Sustainability Reporting Standards (ESRS) are a set of regulations under the CSRD to enhance corporate transparency and accountability in sustainability.

As of August 2023, there are 12 initial standards: two cross-cutting standards (ESRS 1 and ESRS 2) focusing on general reporting requirements and disclosures and ten topical standards addressing specific ESG issues.

Infographic of the varying ESRS standards
ESRS Standards (Source: PwC)

ESRS 1 outlines mandatory principles for sustainability statement preparation, emphasising double materiality and requiring a materiality assessment for sustainability impacts and risks.

ESRS 2 details general disclosures that companies must report, structured around governance, strategy, management of impacts, risks, and metrics and targets​.

The topical standards (ESRS E1-E5 for environmental factors and ESRS S1-S4 for social aspects, plus ESRS G1 for governance) cover specific sustainability topics, requiring detailed information and data from companies​.

The CSRD stipulates a phased application of these standards, starting with companies previously under NFRD in 2025 and gradually including other large companies, listed SMEs, and third-country companies by 2029.

The ESRS also align with the EU Green Deal’s goals, requiring companies to report on sustainability performance improvement and sustainable management development.

Additional sector-specific standards and guidelines for SMEs and supply chain activities are under development, aiming to supplement mandatory disclosures with sector-specific information and enhance the practicability of sustainability reporting.

Double materiality: a two-fold assessment

All CSRD reporting must meet the standard of double materiality.

This means companies must report on

  1. The impact their businesses have on sustainability matters.
  2. The impact that sustainability matters have on the organisation’s finances.

Most organisations will conduct a double materiality assessment as a first step toward CSRD compliance.

Compliance mechanisms: ensuring accountability

To ensure everyone plays by the rules, the CSRD has implemented compliance mechanisms. EU member states are required to have investigative and compliance entities to impose penalties for non-compliance.

Challenges and criticisms

Every rose has its thorns. One of the main challenges companies face is the cost and complexity of data collection.

Imagine trying to assemble a 1,000-piece jigsaw puzzle; that’s what gathering all the required data can feel like. The scope of information to be disclosed is vast, extending from your company’s direct operations to its entire value chain.

This can be particularly challenging for SMEs with limited resources, although CSRD reporting software can aid the process.

Another criticism is the implementation cost. While the long-term benefits outweigh the initial expenses, the upfront costs can be a significant hurdle for many companies.

This includes financial costs and the time and effort required to train employees, set targets, and align existing reporting structures with the new standards.

Steps companies can take to comply

Navigating the CSRD landscape might feel like learning a new language, but fear not! Here’s a step-by-step guide to get you started:

  1. Assessment: The first step is to assess whether your company falls under the CSRD regulations. This will help you understand the scope and scale of the reporting required.
  2. Data inventory: Create a checklist of all the data points you must collect. This is your ‘shopping list’ for compliance.
  3. Team formation: Assemble a dedicated team or designate a CSRD compliance officer. Think of this person as your ‘tour guide’ through the CSRD journey.
  4. Training: Train key employees on the nuances of CSRD reporting. This will ensure everyone is on the same page and understands the importance of accurate data collection.
  5. Consult external experts: Sometimes, getting a second opinion is good. Consult with sustainability and compliance experts to ensure you’re on the right track.
  6. Draft reporting: Start with a draft report to identify gaps or areas needing improvement. Treat this as your ‘practice run.’
  7. Review and revise: Once the draft is ready, review it meticulously. Make necessary revisions and prepare for the final submission.
  8. Assurance: Before submitting, it’s advisable to get your report verified by an external auditor for accuracy and completeness.
  9. Monitoring: After your first report, the journey doesn’t end. Keep monitoring your sustainability metrics and update your reports annually. Also, stay abreast of any updates to the CSRD regulations to ensure ongoing compliance.

Global impact

How CSRD could influence or interact with other international regulations and standards

The CSRD isn’t just a European affair; its ripples are felt globally. Think of it as the ‘Olympics’ of sustainability reporting—setting a high bar that other nations might aspire to reach.

  • United States: In the U.S., the Securities and Exchange Commission (SEC) has its own rules around Environmental, Social and Governance (ESG) reporting. While not as comprehensive as the CSRD, the SEC is considering extending these rules to include climate risk. The CSRD could serve as a blueprint for such extensions.
  • United Kingdom: The UK has the Task Force on Climate-Related Financial Disclosures (TCFD), similar to the CSRD. The robustness of the CSRD could inspire the UK to enhance the TCFD, especially post-Brexit.
  • Asia-Pacific: Countries like Japan and Australia are also ramping up their sustainability reporting requirements. The CSRD could serve as a model for these nations as they develop or refine their regulations.
  • Global Frameworks: The CSRD could align with international frameworks like the United Nations’ Sustainable Development Goals (SDGs). This would create a more unified approach to sustainability reporting worldwide.
  • Investor Behaviour: As European companies adhere to CSRD, global investors might demand similar transparency from companies in other parts of the world. This could accelerate the adoption of CSRD-like regulations globally.
  • Trade Relations: Companies outside the EU that trade with European companies may also need to align their sustainability reporting to meet the CSRD standards. This could create a ‘domino effect,’ encouraging non-European companies to adopt similar practices.

Final thoughts

We’ve taken quite the journey and covered a lot of acronyms, haven’t we?

From understanding the emergence of sustainability reporting and the limitations of the NFRD to diving deep into the CSRD. We’ve explored who it affects, its key components, reporting requirements, and potential global impact.

The CSRD is not just another piece of legislation; it’s a monumental step towards a more sustainable economy. It’s like the ‘GPS’ for companies navigating the complex terrain of sustainability.

By setting stringent reporting standards, it not only holds companies accountable but also empowers stakeholders, from investors to consumers, to make informed decisions.

What’s next?

But remember, the CSRD is a living, evolving entity. As we’ve seen, it’s set to influence not just European companies but potentially set a precedent for global sustainability reporting and reducing greenhouse gas emissions.

So, what can you do? Stay informed. Keep an eye on updates and how they might affect you or your organisation. And most importantly, get involved. Whether you’re an investor, a consumer, or someone who cares about the planet, your voice matters.

Additional resources

For those who wish to delve deeper into the complexities and nuances of the CSRD, here are some highly authoritative sources that can provide further insights:

European Commission – CSRD Overview

  • Straight from the horse’s mouth, this resource provides the most official and comprehensive information on the CSRD, including its legislative history and future plans.

Deloitte – CSRD – A Simple Step-by-Step Guide

  • Deloitte offers a business-centric view of the CSRD, focusing on its implications for companies and how they can prepare for compliance.

KPMG – CSRD Insights

  • KPMG provides a multi-faceted look at the CSRD, including its impact on various sectors and industries. It’s an excellent resource for understanding the broader implications of the directive.

Philips – Transparency is our Guide

  • Philips obtained one of the highest grades regarding CSRD, and it shares its efforts and successes.
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Jose Antonio Barba Gomez
Jose is a sustainability researcher with a thirst for knowledge. He has a Bachelor's in Chemical Engineering, a diploma in Finance, and a Master's in Environmental Engineering.

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