Corporate Sustainability Reporting Directive

Contents

• Introduction
• Origins of CSRD
• Who's affected
• What you need to do
• Key aspects
• Timeline
• The implications
• What's next?

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What is the CSRD?

The ‘Corporate Sustainability Reporting Directive’ (CSRD) is a new law governing the requirements for sustainability reporting in the EU and is a significant step up from the existing and relatively limited EU sustainability reporting requirements.

For any reporting company, the CSRD puts new requirements in place for the contents, the format and the processes involving sustainability reporting. The law also requires new European Sustainability Reporting Standards (ESRS) to be developed and define the content companies are required to report on.

The CSRD also expands the number of companies with activities in the European Union to which the mandatory reporting requirements apply. Its effects will inevitably affect companies based outside the EU, either directly or indirectly through competition and the value chain.

What has happened?

On 10 November, 2022, the European Parliament voted ‘YES’ to the Corporate Sustainability Reporting Directive (CSRD) proposal. The legislation was proposed in April 2021 and agreed upon with amendments in the Summer of 2022. Companies are expected to comply with the bill, starting with the largest listed companies for fiscal year 2024, other large companies for fiscal year 2025, and listed small and medium enterprises (SMEs) in fiscal year 2026. The CSRD is part of the broader ‘European Green Deal’ program, that so far has delivered legislation including the EU Taxonomy Regulation and the revised Sustainable Finance Disclosure Regulation.

The law will bring sustainability reporting much closer to the discipline and fidelity of financial reporting and significantly impact which sustainability data will be published, how that will be collected, and which processes need to be in place to meet the additional requirements of the legislation. The effects will be felt both directly by organisations—inside and outside the EU—responsible for reporting under the CSRD norms and indirectly by organisations competing with them or those that are part of their value chains.

What information do organisations need to provide?

Importantly, companies are required to report in accordance with the double-materiality principle, meaning that sustainability information should consider both the impacts caused by the organisation and those incurred. This could impact materiality assessments because understanding the impacts from both perspectives is needed to be able to report on them.

According to the CSRD, relevant “sustainability matters” include all relevant environmental, social and human rights and governance factors.

Specifically, the CSRD outlines the following areas to be covered in organisations’ mandatory sustainability reporting:

CSRD Reporting Requirements
Business model and strategy in relation to sustainability, including: – Resilience to risks – Opportunities – Sustainable economy transition – Stakeholder interests and impacts on sustainability matters – Strategy implementation	Executive and supervisory body sustainability experts
	Sustainability policy
	Sustainability-related incentives
	Due Diligence
	Impacts
	Actions against adverse impacts
Climate targets	Risks, dependencies, and risk management

The ESRS will further define the contents and metrics organisations will use to report within these areas. Those standards are currently being developed by EFRAG, an EU public-private partnership on financial and sustainability reporting. By June 2023, the EU Commission will adopt secondary legislation imposing the ESRS, and by June 2024, complimentary and sector-specific information must be adopted. Different standards for small and medium enterprises and third-country undertakings will be adopted by June 30, 2024.

Organisations must provide “information necessary to understand the undertaking’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the undertaking’s development, performance and position.”

What other changes are coming?

The CSRD prescribes format and process requirements for sustainability reporting. One important requirement is that the reporting shall take place in the management report of the organisation. Another significant change is that the reported information will need to undergo assurance in the future, starting with limited assurance and later to a reasonable assurance standard. These assurance standards are to be developed by the European Commission by 2026 and 2028, respectively.

Who is affected by this change?

We expect many organisations inside and outside the EU to be affected directly or indirectly.

The legislation directly applies to undertakings specified by the CSRD (see table). Indirectly, organisations will be affected through their value chain. The CSRD requires companies to report on their value chain, so suppliers to CSRD-reporting organisations should expect increased requests and requirements for information. Further, we anticipate that competition between undertakings required to report under the CSRD and those that are not will increase the need for the latter to align with CSRD standards for reporting.

Reporting per CSRD	Explanation
All large undertakings in the EU	Any company meeting two of the following criteria:(a) balance sheet total: EUR 20 000 000; (b) net turnover: EUR 40 000 000; (c) average number of employees during the financial year: 250.
All publicly listed undertakings on EU-regulated markets, except for micro-undertakings	Any company publicly listed in the EU, except micro undertakings which are defined as undertakings that do not exceed two of the following criteria:(a) balance sheet total: EUR 350 000; (b) net turnover: EUR 700 000; (c) average number of employees during the financial year: 10.
All undertakings that are parent undertakings of large groups	Large groups consisting of parent and subsidiary undertakings which (on a consolidated basis) meet two of the three following criteria:(a) balance sheet total: EUR 20 000 000; (b) net turnover: EUR 40 000 000; (c) average number of employees during the financial year: 250.
Third-country undertakings with a subsidiary or a branch in the EU	Undertakings established outside the EU, but with significant activity – minimum EUR 150MLN turnover in each of the two previous fiscal years – on the EU territory through either a subsidiary or a branch. In the case of a subsidiary, it concerns either large or publicly listed undertakings; micro-undertakings are exempt. A branch with a turnover of more than 40 MLN.

What happens next?

Over the next two years, the EU and its Members States will take the following actions:

• Member States need to formally transpose the legislation into their national laws within eighteen months after the official publication of the CSRD
• The ESRS first tranche needs to be adopted by the EU Commission by June 30, 2023
• The ESRS second tranche needs to be adopted by the EU Commission by June 30, 2024

Companies should be aware of the following important reporting milestones:

• Large, listed companies need to report sustainability information under the CSRD and ESRS for FY 2024 data
• All large companies need to report sustainability information following the CSRD and ESRS for FY 2025 data
• SMEs need to report sustainability information per the CSRD and ESRS for FY 2026 data

Our focus is two-fold: first, to prepare your organisation for compliance, as required, and second—perhaps more important—to empower your organisation for long-term success beyond regulatory requirements.

Frequently Asked Questions

Why is CSRD important?

The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring both large and small companies to report on their environmental and social impact activities. It’s being directed by the EU in a bid to help cash flow towards sustainable activities.

In 2021, the European Commission adopted the Sustainable Finance Package, bringing with it one of the proposed measures, CSRD. With CSRD, for the first time the European Commission has defined a common reporting framework for non-financial data. Ultimately, it supports stakeholders to evaluate the non-financial performance of organisations. In the long run, it aims to encourage in-scope companies to develop more responsible approaches to business conduct.

As part of the EU Green Deal, the regulation has been developed in response to the challenge that, according to the European Commission, “reports often omit information that investors and other stakeholders think is important”.

CSRD aims to address this challenge, providing a standard reporting framework for businesses to tie their non-financial reporting to.

Who is affected by CSRD?

Currently, around 11,600 companies are required to report sustainability information. The introduction of CSRD means nearly 49,000 companies will now have to report non-financial information.

The CSRD applies to all large companies that are established in an EU member state or are governed by EU law, including those who already fall under the NFRD. These companies would include both large and SME public interest entities.

It also applies to all European stock exchange-listed companies (except micro companies) and global businesses that have operations (subject to thresholds) / listed securities on a regulated market in Europe.

The directive defines a large company as one that meets at least two out of three criteria:

• €40 million in net turnover;
• €20 million total assets on the balance sheet;
• 250 or more employees.

Is double materiality included in CSRD?

Yes. Companies will be required to follow a double materiality process. In short, this means assessing sustainability risk affecting the company, as well as the company’s impact on society and the environment.

With the sustainability reporting landscape evolving rapidly, reporting trends are likely to lean towards double materiality in the future, so understanding the impacts from both sides will be vital for accurate reporting.

Is CSRD already in force?

The CSRD will be formally introduced on 1st January 2024. The first cohort required to report are companies already subject to NFRD. They will need to comply with the amended rules, reporting in 2025 for the 2024 financial year.

Other large companies not subject to the NFRD must start reporting from 1st January 2026 on the financial year 2025.

SMEs will not start reporting until 1st January 2027 on the 2026 financial year. However, SMEs are granted the option to voluntarily opt-out until 2028.

For non-European companies that have branches or subsidiaries based in the EU, the new requirements apply from 1st January 2029 for financial year 2028. These companies will have a net turnover of more than €150 million in the EU at consolidated level, and have at least one subsidiary (large or listed) or branch (net turnover of more than €40 million) in the EU.

The CSRD requires companies to report on their value chain, so suppliers to CSRD-reporting organisations should expect increased requests and requirements for information.