The Corporate Sustainability Reporting Directive (CSRD) is the EU’s new sustainability reporting directive, which will revolutionise the vitally important, but previously underexplored area of sustainability reporting. By requiring affected companies to report on environmental, social and governance (ESG) issues across the 12 areas outlined in the European Sustainability Reporting Standards (ESRS), the CSRD will bring sustainability reporting on a par with financial reporting.

The CSRD aims to make it easier for investors and other stakeholders to assess a company’s impact on the environment, and to understand the broader financial risks and opportunities heralded by climate change.

Under the CSRD, companies are required to use the European Sustainability Reporting Standards (ESRS – more on this below), developed by the European Financial Reporting Advisory Group (EFRAG). The standards cover a wide range of topics, including:

• Environmental: climate change, pollution, water and marine resources, biodiversity, and resource use
• Social: working conditions, diversity and inclusion, human rights, and community impacts
• Governance: business ethics, anti-corruption, and anti-bribery measures

Whereas 11,600 companies were required to report on non-financial data under the Non-Financial Reporting Directive (NFRD), nearly 50,000 companies worldwide are estimated to be within the scope of the CSRD. This includes:

• Large EU and non-EU companies that meet two out of the three criteria:
  • More than 500 employees
  • More than €25 million in assets
  • More than €50 million in turnover
• Publicly traded SMEs (small and medium-sized enterprises) meeting 2 out of 3 criteria:
  • More than 10 employees
  • More than €450,000 in balance sheet assets
  • More than €900,000 in turnover
• Large non-EU companies with EU revenue of over €150 million

Compliance start-dates vary depending on the size of the company, with those currently obligated under the NFRD required to report first, in 2025.

2025: Large EU and non-EU companies subject to the NFRD:

• • 500 employees
  • €25m balance sheet
  • €50m turnover

2026: Publicly traded SMEs in EU markets meeting 2/3 criteria:

• • 10 employees
  • €450k balance sheet
  • €900k net turnover

2027: Publicly traded SMEs in EU markets meeting 2/3 criteria:

• • 10 employees
  • €450k balance sheet
  • €900k net turnover

2029: Large non-EU companies which generate > €150m on the EU market

Another novel aspect of the CSRD is the introduction of a new principle in sustainability reporting: double materiality. This is the criteria for determining which of the ESRS topical standards you must include in your report.

When conducting a double materiality assessment, two materiality perspectives need to be considered.

• Impact materiality – this refers to the impacts on people and the environment that are either directly caused by your operations, or linked to your operations through your supply chain.
• Financial materiality – this refers to the impact sustainability issues will have on the financial position of your company.

The ESRS are the new reporting standards that underpin CSRD. Detailing specific disclosure requirements, the ESRS covers 12 areas. Two are cross-cutting standards, which are mandatory for all companies, whilst the remaining ten topical standards are split into three categories, one for each ESG area.

On the whole, companies are only required to report on a topical standard subject to a double materiality assessment. However, there are 34 datapoints from the Environment standard which are mandatory regardless of the outcome of the double materiality assessment.

In addition to these sector-agnostic disclosures, sector-specific disclosures are currently being developed. Whilst originally planned for June 2024, the EU decided to delay their release until June 2026, giving companies more time to focus on implementing the first set of ESRS and limiting the reporting burden.

Companies that fail to meet CSRD requirements may face penalties. Each EU member state will determine its own enforcement measures, but they will be required to ensure adequate sanctions are in place.