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.
Guide: How to implement the CSRD
Find out how to implement the CSRD within your organisation
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:
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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; |
| 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; |
| 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; |
| 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. |
Webinar | What Does the EU Corporate Sustainability Reporting Directive Mean for Your Organisation?
Watch our experts explain the CSRD and how it will affect you and your organisation.
Topics covered included:
- What is the CSRD?
- Who is affected by this change?
- What information will organisations need to provide?
- What other changes are coming and what happens next?
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
How is Anthesis supporting you?
The introduction of the CSRD arguably marks the most significant change to date in corporate sustainability reporting, and we are here for you to help with the transition. Anthesis offers solutions that give you the information and learning you need, help you to analyse your needs for change, and support you in implementing that change. 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.
As the dust settles on the vote and the ESRS is being developed, we will focus in the short term on providing you with webinars aimed at various groups in your organisation. We invite you to join a session designed to introduce your core ESG/Sustainability team to the CSRD. We will also offer tailored sessions for your Legal, Compliance and Finance teams to bring them up to speed with the requirements of the CSRD. Finally, we provide short form learning sessions for Executive Leadership and Board Members, enabling them to understand the incoming changes and elevate their ESG/Sustainability knowledge.
In cadence with the ESRS development and assurance standards, Anthesis will roll out services to provide you with readiness support through change and process management. And we will keep supporting you with executing your reporting and other engagements per the new EU requirements.
Whitepaper | How Finance Can Help Deliver Mandatory Sustainability Reporting
Mandatory sustainability reporting is now coming to the forefront of the minds of sustainability practitioners and others within the business, including CFOs and their teams. Regulations, such as the Corporate Sustainability Reporting Directive (CSRD), have placed sustainability reporting on the same level as financial reporting.
This whitepaper sets out our model of where we believe a Finance Function can add the most value in relation to mandatory sustainability reporting due to its skills and specific positioning within the organisation.
Other regulatory developments
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 draft ESRS requires that all these indicators are disclosed by companies in all circumstances without taking into account 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 draft ESRS 1, draft ESRS 2 and draft ESRS E1 climate change has been developed in order to integrate to the maximum extent possible the content of the ED IFRS S1 and S2. The disclosures prepared under ESRS are expected to be 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.
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 company already has.
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
Frequently Asked Questions
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. 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 here:
If you have any further questions regarding CSRD, contact our experts using the form below.
