CSRD: Corporate Sustainability Reporting Directive: A Guide to the EU CSRD Legislation and How It Will Affect You
1st March 2023, 12:19 pm
What is the CSRD?
The ‘Corporate Sustainability Reporting Directive’ 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:
| Mandatory Sustainability Reporting Areas in CSRD | |
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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. |
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Webinar | CSRD: Getting Started with Double Materiality