Corporate sustainability reporting directive (CSRD)

What is the CSRD?

The European Union (EU) has set a firm goal – to become the first climate-neutral and fully circular continent by 2050. The overarching plan to fulfil these ambitions is called the European Green Deal, which sets out measures across topics such as green energy and sustainable finance. The Corporate Sustainability Reporting Directive (CSRD) is one of these measures that aims to accelerate the transition to a sustainable European economy.

CSRD does not simply address climate change – it requires companies to report the impact they have on society and the environment. It requires both EU and non-EU companies with a presence in the EU, to report on their environmental, social and governance (ESG) risks to promote transparency and comparability with ESG reporting.

Limited assurance is required for all companies reporting under CSRD from the first year of reporting. The assurance may be provided by a company’s statutory auditor. The European Commission will perform an assessment over the feasibility of reasonable assurance.

Will CSRD affect UK companies?

Yes, large EU companies need to report under CSRD, including large EU subsidiaries of non-EU parents. Additionally, CSRD will impact non-EU companies that generate annual revenue of over €150m across the EU, while compliance is required for non-EU companies from January 2028. An exposure draft for an SME standard is being developed for consultation in January 2024. 

Why is CSRD being implemented?

CSRD will replace and enhance the current Non-Financial Reporting Directive (NFRD), introducing more detailed reporting requirements. CSRD goes beyond NFRD to focus on reporting information that is important to stakeholders, as well as increasing transparency and consistency of information. 

The mandating of external assurance over ESG data under CSRD aims to address market concerns on greenwashing.

Who will need to report? 

The CSRD is mandatory for large EU companies initially, meeting two of the following three conditions as of October 2023:

1. €50m in net turnover;
2. €25m in assets; and
3. 250 or more employees.

Large company subject to NFRD reporting - Financial year 2024

Large company not subject to NFRD reporting - Financial year 2025
(eg non-public interest companies)

Small and medium sized listed companies - Financial year 2026
Turnover above €900k, balance sheet above €450k or more than 10 employees

Non-EU companies - Financial year 2028
Turnover of more than €150m and at least one subsidiary or branch in the EU

What are the CSRD requirements?

The European Commission adopted the final European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group in October 2023. 

The ESRS standards cover four areas:

Cross-cutting standards
Governance, strategy, impact, risk and opportunity management and metrics and targets (ESRS 1 and 2).

Environment
Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy (ESRS E1 – ESRS E5)

Social
Own workforce, workers in the value chain, affected communities, consumers and end-users (ESRS S1 – ESRS S4).

Governance
Business conduct (ESRS G1).

Double materiality includes impact and financial materiality. Companies should perform a double materiality assessment to identify the material impacts, risks, and opportunities to be reported. The materiality is first considered at a standard level and then assessed by disclosure requirements and data points.

There are some exemptions in the first year of reporting. For example, companies with fewer than 750 employees can report on Scope 3 emissions from year two. 

The below summarises some of the key points of the CSRD.

Double materiality
Organisations need to incorporate double materiality into their reporting, ensuring disclosures are made on:

1. the financial impact on the business of sustainability topics identified; and 
   
2. the impact the business has on the environment and their wider community. 

ESRS standards
The ESRS has released 12 topical standards, shown on page 1. The second set of standards will include reporting requirements for specific sectors which was initially expected to be adopted by the European Commission in June 2024. However, this has been delayed to 2026.    

Scope 3 emissions reporting
Scope 3 emissions refer to emissions within a company’s value chain (upstream and downstream supply chain activities). CSRD is mandating scope 3 emissions reporting.

Digital tagging
Businesses must digitally tag their sustainability information, with the aim to ensure that information is machine-readable and easy for stakeholders to search or compare. 

Third-party assurance
CSRD requires limited assurance over the compliance of sustainability reporting to ESRS standards, the process to identify material topics and the requirement to digitally tag the disclosure. The European Commission will assess the feasibility of reasonable assurance over CSRD.

If you want to understand how CSRD might impact your business and how to prepare for reporting, please reach out to one of our ESG advisory and assurance team members.