Navigating the Corporate Sustainability Reporting Directive (CSRD) Landscape

The Corporate Sustainability Reporting Directive (CSRD) entered into force in the European Union (EU) on 5th January 2023, signalling a pivotal moment in the realm of corporate sustainability reporting. Replacing its predecessor, the Non-Financial Reporting Directive (NFRD), the CSRD marks a significant shift towards heightened reporting requirements on the companies falling within its scope. This directive not only broadens the spectrum of sustainability reporting but also elevates its depth and rigor, covering categories ranging from carbon emissions to pollution, water management, waste disposal, and biodiversity. The CSRD’s technical standards known as the European Sustainability Reporting Standards (ESRS) lay out what and how the companies need to disclose. Importantly, disclosures pertaining to these standards are mandated to feature prominently in annual reports alongside financial statements, subject to stringent audit scrutiny to ensure credibility and transparency.  

The CSRD presents a unique opportunity for companies to integrate Environmental, Social, and Governance (ESG) considerations into their fundamental business strategies. By fostering greater transparency, the aim of CSRD is to empower stakeholders including investors, analysts, consumers, and the wider public, to assess EU company’s ESG performance and its consequential business impacts and risks.  

The proposed directive will also entail a dramatic increase in the number of companies subject to the EU sustainability reporting requirements, from the 11,000 covered by the NFRD to the nearly 50,000, that will be covered by the CSRD. 

Large Companies: All large EU-stock listed companies, governed by EU Law or established in EU member states, meeting at two of the following three conditions will have to comply with the CSRD: 

• €40 million in net turnover 

• €20 million in assets 

• 250 or more employees 

In addition, non-EU companies that have a turnover of above €150 million in the EU will also have to comply. 

Small and Medium Enterprises: From the 1st of January 2026 SMEs (small-to-medium-sized companies) with securities listed on regulated markets- have to start reporting CSRD-compliant. However, the listed SMEs have simpler standards for reporting than large companies. Non-listed SMEs can choose if they want to use the CSRD’s reporting standards voluntarily. The reporting standards for SMEs will be adopted on the 30th of June 2024. 

The CSRD directs the European Financial Reporting Advisory Group (EFRAG) to establish a reporting framework called the European Sustainability Reporting Standards (ESRS). ESRS were developed to align with the Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting Index (GRI).  

In total, the 12 chapters of the ESRS contain over 80 disclosures and over 1000 both quantitative and qualitative data points related to those disclosures. The framework includes Cross-cutting standards for reporting, required of all organizations governed by the CSRD, while the Topical standards for reporting - environmental, social and governance are mandatory for only those organizations that consider them material. Below is the summary of the standards: 

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   Mandatory for all companies

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  Mandatory if material

EFRAG provides a required structure for the report, which they call the “sustainability statement,” to help facilitate comparability of reports. The structure is as follows: 

1. General information 
2. Environmental information 
3. Social information 
4. Governance information 

Under CSRD, companies need to include information about their sustainability efforts as a separate section in their regular management reports. This information should be submitted electronically in a specific format called XHTML, following the European Single Electronic Format (ESEF) regulation. It will then be uploaded to a new database called the European Single Access Point (ESAP), making it easily accessible to everyone.  

Implementing robust CSRD practices presents several challenges for institutions: 

• Understanding the Requirements: Compliance with the CSRD, necessitates adherence to the EU Sustainability Reporting Standards (ESRS). With over 80 disclosures available, each with its own set of guidelines, indicators, and reporting requirements, navigating through these standards can be daunting for institutions. 

• Double Materiality Assessment: One of the main differences of the CSRD from current legislation is the requirement of a materiality analysis using a double materiality approach. This assessment is notably complex as it requires companies to identify both their impacts on people and the environment (impact materiality), as well as sustainability matters that financially impact the organization (financial materiality) across short, medium, and long terms and across operations. 

• Data Collection and Measurement: Gathering and collating reliable sustainability data across various departments, operations, and supply chains can prove to be a multifaceted endeavour. 

• Reporting Standardization: Integrating ESRS reporting requirements with the existing reporting frameworks, management systems, and processes, such as management reporting, Pillar 3 reporting, TCFD reporting, financial reporting, risk management, and strategic planning, presents a challenge for institutions. Ensuring alignment and consistency across different reporting frameworks and initiatives necessitates careful coordination and collaboration across various departments and functions. 

• Resource Constraints: Allocating sufficient resources, including financial, human, and technological resources, to CSR reporting poses a challenge for organizations, particularly smaller ones. 

• Complex Stakeholder Expectations: Balancing the diverse expectations of stakeholders while maintaining transparency and authenticity poses a significant challenge. 

• Mandatory Assurance: Companies reporting under the CSRD will need to obtain limited assurance on their sustainability information. While not as stringent as a financial audit, this assurance requires collaboration with an independent organization or auditor experienced in sustainability reporting to review the data for accuracy and reliability. 

The Corporate Sustainability Reporting Directive makes it mandatory to report on sustainability indicators as defined by the ESRS, but adjusting to the new requirements is not easy, and firms have to start preparing now. 

1. Scoping requirements

Conduct a legal entity analysis to ascertain which entities within the organization fall under the purview of the CSRD. Determine the most suitable reporting strategy based on business needs, such as reporting at the group level or individual in-scope legal entity level. This decision should be tailored to the specific circumstances of the business.

2. Governance Structure Establishment

Establishing a clear governance structure with defined roles and responsibilities for the management body is paramount at every stage. The board and senior management should bear the responsibility of overseeing sustainability issues and evaluating potential sustainability and climate risks in alignment with the company's overall strategy. Defining the management's roles, structure, and processes related to sustainability, including committees dedicated to sustainability matters, resource allocation, and disclosure, is essential for implementing action plans, data collection, tracking sustainability Key Performance Indicators (KPIs), and ensuring effective oversight.

3. Double Materiality Assessment

Before commencing data, collection or preparing the initial report, it is imperative to conduct a "Materiality Assessment" to determine sustainability goals, targets, and priorities that align with CSRD requirements and compliance.

4. Gap Analysis

Evaluate the organization's adherence to the European Sustainability Reporting Standards (ESRS) requirements based on the Double Materiality Assessment findings. Use this assessment as the foundation for an implementation plan outlining practical changes necessary to align with regulatory standards.

5. Data Availability and Time Horizon

Considerations such as IT systems and controls organization, the number of required reports, operational homogeneity, subsidiary targets and goals, and the relative size of in-scope versus out-of-scope entities are crucial for assessing data availability and determining the appropriate time horizon for reporting.

6. Limited Third-Party Assurance

Organizations reporting under the CSRD will be required to seek limited assurance (third party) on their sustainability information from a neutral, trusted, and experienced third party who reviews the data.

According to the latest ESRS guidelines, all companies are required to report general disclosures. In relation to topical standards, companies are only obligated to report on those standards deemed material. However, the process by which companies determine the materiality of standards, whether they are material or immaterial, must be clearly outlined and assured in the general disclosures. The CSRD stipulates that materiality must be assessed through a "double materiality" lens, considering both impact and financial materiality. Consequently, the majority of organizations will undertake a double materiality assessment as an initial step towards CSRD compliance.

Double materiality assessment involves evaluating matters from two perspectives:

The diagram below illustrates the circular nature of double materiality, highlighting the interconnection between financial materiality and impact materiality:

A topic is deemed material if its impact is significant from either or both perspectives of Double Materiality. Conducting a double materiality assessment is pivotal for laying the groundwork for strategic ESG planning, budget allocation, risk management, and reporting. This assessment aids in identifying and prioritizing climate-related impacts that could potentially influence a company's performance, value creation, reputation, and legal standing. Moreover, the application of double materiality can empower companies to refine their risk management strategies, bolster business resilience, and position themselves more competitively in a market increasingly emphasizing sustainable and socially responsible practices.

Matters deemed material under one or both of these standards must be disclosed. Importantly, companies do not make these determinations in isolation, as materiality assessments are subject to external, third-party assurance in accordance with the CSRD. Additionally, when certain matters are deemed immaterial, companies are required to explicitly state such determinations and provide a comprehensive analysis in their reports.