CSRD FAQ

Answers to the Corporate Sustainability Reporting Directive

Key Acronyms
Why is the CSRD important?
Who is affected by the CSRD?
How is the CSRD linked to the NFRD?
Is double materiality included in the CSRD?
What should be reported under the CSRD?
Is the CSRD already in force?
Is the EU taxonomy part of the CSRD?
Does the CSRD apply to non-EU companies?
Is the CSRD mandatory?
Sanctions
Guidance for Internal Carbon Pricing
Comparing the CSRD to other regulations

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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.

While EU-specific, this legislation has broad implications for companies across the globe and will have direct and indirect impacts and ramifications on many organisations. The first companies will be expected to comply with the Directive as soon as the 2024 fiscal year.

Our experts have answered the most frequently asked questions surrounding the CSRD.

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Key acronyms

CSRD: Corporate Sustainability Reporting Directive
EU: European Union
EFRAG: European Financial Reporting Advisory Group
SME: Small/Medium Enterprise
ESG: Environmental, Social, Governance
TCFD: Taskforce on Climate-Related Financial Disclosures
GRI: Global Reporting Initiative
SASB: Sustainability Accounting Standards Board
SFDR: Sustainable Finance Disclosure Regulation

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.

Guide to the CSRD

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Who is affected by CSRD?

Currently, around 11,600 companies are required to report sustainability information through the Non-Financial Reporting Directive. However, the introduction of the CSRD means around 49,000 companies in the EU 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.

How is CSRD linked to the NFRD?

The CSRD has evolved from the previously applicable Non-Financial Reporting Directive (NFRD). The CSRD aims to strengthen the nature and extent of sustainability reporting, significantly enhancing the scope of NFRD.

There are some key differences between the directives.

Primarily, the number of companies that are covered by the regulation. Where NFRD was focused on public interest entities, listed companies, banks and insurance companies with more than 500 employees, CSRD includes public interest entities, companies with securities admitted to trading on a regulated market in the EU, in addition to all large companies meeting at least two out of three criteria.

This means that while around 12,000 companies were subject to NFRD reporting, an estimated 49,000 companies will be required to report under CSRD.

Companies reporting under NFRD were to include information on environmental protection, social responsibility relating to employees, human rights, anti-corruption and bribery, and diversity on company boards. Under CSRD, companies must follow the double materiality process, evaluating sustainability risk affecting the company, as well as the company’s impact on society and the environment.

Finally, CSRD requires a least a limited level of assurance on reported data, which has not previously been mandated under NFRD.

Crucially, companies that have previously fallen within the scope of reporting under NFRD will be some of the first to report under CSRD – first reporting from 1 January 2025 on 2024 data.

Is double materiality included in CSRD?

Yes. Organisations will be required to follow a double materiality process. In short, this means assessing sustainability risks and opportunities affecting the company, as well as its 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.

What is double materiality?

What should be reported under CSRD?

The CSRD has been put in motion to ensure companies publicly disclose accurate information regarding the sustainability risks, opportunities and impacts they have on people and the environment, as well as those impacting the company (double materiality).

The Directive has stated that sustainability reporting should be “comparable, reliable and easy for users to find and make use of with digital technologies”.

To support the implementation of the CSRD, the European Financial Reporting Advisory Group (EFRAG) has developed the European Sustainability Reporting Standards (ESRS). The ESRS acts as the mechanism under the CSRD, outlining the aspects that companies will be required to report on. The first set of ESRS topical standards in final stages of approval and should be adopted in June 2023.

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

Is CSRD already in force?

The CSRD was 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.

Is the EU taxonomy part of CSRD?

Yes. All companies reporting to CSRD will have to report on their alignment with EU Taxonomy. CSRD also takes other frameworks including TCFD, GRI and SASB into consideration. Furthermore, the indicators of the standards from SFDR will be aligned with the reporting of the CSRD.

The SFDR already governs how financial market participants should disclose sustainability information about the companies they invest in. To successfully do this, those financial market participants need to have enough robust information from those companies. The information is released as part of the CSRD, which aims to ensure that investee companies report the information financial market participants need to fulfil their own SFDR reporting requirements.

Does CSRD apply to non-EU companies?

Potentially. The scope of mandatory CSRD reporting expands to non-EU companies which annual EU-generated revenues more than €150 million, and which have a large or listed EU subsidiary or branch generating €40 million in revenues. The subsidiary or branch will be required to publish CSRD-style reports for these non-EU undertakings at a consolidated level from 2028 onwards, reporting in 2029.

Is CSRD mandatory?

Yes. The ESRS is expected to be adopted in June 2023, and the first group of in-scope companies will have to report from 2025, on 2024 data.

Will companies be sanctioned for not complying with CSRD?

Although sanctions for non-compliance with CSRD are expected to be significant, it is unknown when the EU Commission will start to place sanctions on businesses failing to comply with CSRD.

The nature of the sanctions and the value of fines will depend on the different Member States.

What guidance does the CSRD provide for Internal Carbon Pricing?

The draft ESRS contain several references to Internal Carbon Pricing (ICP) and some guidance that supports the implementation of ICP schemes.

Section E1-3 (Actions and resources in relation to climate change policies) and section E1-4 (Targets related to climate change mitigation and adaptation) require organisations to collect data that provides an important basis for calculating their implicit price. The implicit price is a powerful metric and a great starting point for any organisation developing an internal carbon price as it represents the actual cost of carbon that an organisation will face in meeting its targets. For many organisations, this cost of carbon will be far more material than external taxes.

The ESRS guidance also contains a specific section on ICP (E1-8 – Internal Carbon Pricing). The guidance requests that the methodology for determining the internal carbon price is explained and the price stated. This may cause concern as many organisations have been reluctant to share this information. The ESRS does not provide specific guidance on how an internal carbon price should be set or calculated but does suggest an appropriate level of rigour, including that:

The carbon price should be based on an analysis of what is suitable for the application in question (e.g. what area of the business is the price applied to?).
The undertaking should disclose “the extent to which these [prices] have been set using scientific guidance and how their development is related to science-based carbon pricing trajectories”.

The CSRD regulations are notably looking for the application of “double materiality”. Double materiality is the requirement for undertakings to report on both sustainability matters and financial matters or their “impact materiality” and their “financial materiality”. Double materiality requires measurement of the activities that impact the company’s bottom line in a financial sense but also those impacts that the company has on society and the environment with the understanding that these are not immune from impacting the bottom line, i.e. that there are costs associated with them. Internal Carbon Pricing is a key tool for understanding, representing, and communicating these impacts and risks. Anthesis’ approach to ICP aligns with the requirements and intent of the CSRD regulations.

CSRD and SFDR

The CSRD and ESRS have been prepared to take the Sustainable Finance Disclosure Regulation (SFDR) data requirements into account. All the SFDR principal sustainability adverse impacts indicators have been incorporated into the cross-cutting (ESRS 2) general disclosures or in the topical disclosure standards (ESRS E1-E5, S1-S4, G1).

The indicators that have been included are those from the SFDR annexes relating to investments in investee companies, additional climate and other environment-related indicators and additional indicators for social and employee, respect for human rights, anti-corruption and anti-bribery matters.

The ESRS requires that SFDR indicators are disclosed by companies in all circumstances regardless of the outcome of the double materiality assessment. Hence, there are a number of mandatory disclosures and data points that companies have to disclose irrespective of the materiality assessment outcome that will add additional work to companies to comply.

Investment managers and funds that require SFDR information from companies will have access to the information from official sources, although this only applies to the largest 50,000 companies in the EU. Funds investing in start-ups and smaller companies may not be able to access this type of information and will need to continue to request the information ad hoc annually.

CSRD and the EU Taxonomy

The undertakings subject to the scope of the CSRD are obliged to disclose information required by Article 8 of the Regulation (EU) 2020/852 (Taxonomy Regulation). Any undertaking which is subject to an obligation to publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU (the Non-Financial Disclosure Regulation updated for the CSRD) shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of this Regulation.

The information that needs to be disclosed is:

the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; and
the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9. Draft ESRS E1 on climate change requires also disclosing significant monetary amounts in CapEx and OpEx to the relevant financial line item in the financial statements.

Appendix G of ESRS 1 outlines where the Taxonomy disclosure can fit within the sustainability report.

This requires companies to work on preparing for the EU Taxonomy disclosures together with preparing for reporting under CSRD and ESRS. For many companies this will require a major effort to map revenue, OpEx and CapEx against environmentally sustainable activities, which requires an analysis of the technical standards of the EU Taxonomy, the requirements of do no significant harm, and the minimum social safeguards.

CSRD and TCFD

When comparing TCFD with ESRS it must be noted that TCFD deals with climate only and ESRS cover a number of other sustainability matters besides climate. ESRS has Disclosures Requirements applicable across sustainability matters for the reporting areas of governance, strategy, impact, risk and opportunity management, and metrics and targets in ESRS 2 General disclosures. In addition, matters are covered in topical standards. Hence TCFD is covered by ESRS 2 and ESRS E1 on climate change.

According to EFRAG, draft ESRS E1 Climate change and ESRS 2 cover all the disclosures recommended in the TCFD; as such, EU undertakings that comply with ESRS E1 and ESRS 2 are expected also to be able to claim compliance with the TCFD. In addition, the contents of the draft ESRS mirror the TCFD four core contents (governance, strategy, risk management and targets and metrics). This will facilitate understanding from undertakings and users already familiar with the TCFD approach.

If companies have been reporting under TCFD they will have a head start with many of the mandatory disclosure requirements from ESRS 2. However, the scope of ESRS goes significantly further than TCFD and hence companies will need to work on assessing and reporting on a much broader range of disclosure requirements and data points than previously.

CSRD and IFRS Sustainability Reporting Standards

Many companies will need to report in accordance with ESRS in the European Union and under IFRS sustainability standards in other jurisdictions. The content of ESRS 2 and ESRS E1 Climate Change has been developed in order to integrate to the maximum extent possible the content of IFRS S1 and S2. The disclosures prepared under ESRS are expected to correspond to disclosures required by IFRS S1 and S2, however, ESRS has additional data points due to the aims of CSRD and the need to comply with existing EU legislation.

One of the key differences between IFRS sustainability standards and ESRS relates to the concept of materiality; ESRS uses the double materiality approach and IFRS a single materiality approach (financial materiality) unless a sustainability impact matter is relevant to investors.

This difference means that companies will need to consider whether to do one double materiality process across all jurisdictions (to ensure consistency and the ability to report on a consolidated basis if the HQ is in the EU) or to have a two-lane materiality process split between EU and IFRS jurisdictions. Companies will need to understand how they report across jurisdictions and at varying levels of consolidation before they can determine the best way for them to assess materiality.

More specifically, when comparing IFRS Sustainability Disclosure Standards with ESRS it must be noted that IFRS S2, ISSB’s first and (currently) only topical standard, deals with climate and is more widely recognisable as an evolution of the TCFD recommendations. Importantly, the IFRS Foundation has now assumed responsibility for the TCFD, whose recommendations are already used by thousands of organisations across the world for reporting on climate-related risks and opportunities.

According to EFRAG, ESRS E1 Climate Change and ESRS 2 cover all the disclosures recommended by the TCFD and plans to increase interoperability with IFRS S1 and S2. In addition, the contents of both the ESRS and IFRS Standards mirror the TCFD four core contents (governance, strategy, risk management and targets and metrics). This will facilitate understanding from undertakings and users already familiar with the TCFD approach.

If companies have been reporting under TCFD they will have a head start with IFRS S2 and many of the mandatory disclosure requirements from ESRS 2. However, the scope of ESRS goes significantly further than TCFD and hence companies will need to work on assessing and reporting on a much broader range of disclosure requirements and data points than previously.

CSRD and GRI

EFRAG states that the development of the ESRS standards draws heavily on the work of the GRI, although ESRS standards are not fully aligned with the GRI. There are some notable differences:

According to EFRAG, ESRS adopts a double materiality approach whilst GRI has historically focused on impact materiality. The core definitions of impact materiality and the criteria and assessment steps are aligned between GRI and ESRS.
ESRS has a list of data points and disclosure requirements that are always to be disclosed due to EU legislation such as the SFDR, EBA Pillar 3 disclosures and the Benchmark Regulation indicators.
Whilst both frameworks include information on the value chain, ESRS does not permit companies to omit information when information is incomplete or unavailable.

Companies who have reported under GRI should start with a gap analysis between GRI and ESRS as they may find that many topics have been covered within the previous GRI reporting. The key here is to make sure that the ESRS mandatory disclosures are covered going forwards as they may have been omitted if immaterial in the GRI reporting. We would use the GRI reporting and data points as a starting position and see how ESRS builds on what the organisation already has.

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