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The Corporate Sustainability Reporting Directive (CSRD)

Author

Shel

Introduction

The origin of the CSRD traces back to the Non-Financial Reporting Directive (NFRD).

The NFRD was proposed in 2014 and enacted in 2016. This law required countries within scope to publish a non-financial report on their ESG performance together with their annual management report. The goal was to help stakeholders e.g. investors and customers assess the non-financial performance of large companies and hold them accountable on various ESG issues.

Under the NFRD, large listed companies, banks and insurance companies (‘public interest entities’) with more than 500 employees were required to publish reports on the policies they implemented in relation to social responsibility and treatment of employees; respect for human rights; anti-corruption and bribery; and diversity on company boards (in terms of age, gender, educational and professional background).

However, the NFRD allowed too much flexibility in its implementation. It did not require the use of any non-financial reporting standard or framework and did not impose detailed disclosure requirements (such as a list of indicators). This allowed companies to disclose information based on what they thought was ‘material’. The lack of a standardised format of reporting led to reports that were not comparable. There was therefore need for a new regulation to curb these challenges.

The CSRD regulation was then proposed. On the 21st of April 2021, the EU commission announced its adoption and it officially replaced NFRD on November 28, 2022. The goal of the CSRD was to amend the NFRD and substantially increase reporting requirements on the companies falling within its scope in its efforts to expand the sustainability information for users. The directive was set to apply from 1 January 2024 for financial years starting on or after 1 January 2024.

The European Commission adopted the European Sustainability Reporting Standards (ESRS) when putting together the CSRD. ESRS were developed by the European Financial Reporting Advisory Group (EFRAG). They cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest.

The ESRS are a set of 12 standards, 2 cross-cutting disclosures and 10 topical disclosures. The cross-cutting disclosures are ESRS 1 (General requirements) and ESRS 2 (General disclosures). The topical disclosures are categorised into three groups: Environmental standards (ESRS E1 - ESRS E5), Social standards (ESRS S1 - ESRS S4) and one Governance standard (ESRS G1). More information about the ESRS can be found here.

Scope

The CSRD mandates sustainability reporting for all large companies and all companies listed on EU regulated markets, excluding micro-enterprises. More specifically:

  1. Companies that were already subject to the NFRD.

  2. All large EU companies.

  3. All listed small and medium enterprises (SMEs) with the exception of micro-enterprises.

  4. Certain non-EU companies operating within EU regulated markets.

Companies that were already subject to the NFRD are mandated to comply with the CSRD if they:

  1. are publicly listed

  2. have more than 500 employees

  3. have a balance sheet over €25 million or a net turnover over €50 million

The first reports for these companies are due in 2025, covering FY 2024.

All large EU companies are obligated to report if they meet at least two of the following conditions:

  1. Have an employee count exceeding 250

  2. Have a balance sheet over €25 million

  3. Have a net turnover above €50 million

These companies will commence reporting in 2026, based on data for FY 2025.

All listed small and medium enterprises (SMEs) with the exception of micro-enterprises fall under the CSRD if they meet at least two of the following conditions;

  1. They employ more than 50 employees

  2. Have a net turnover above €10 million

  3. Have a balance sheet above €5 million

All listed SMEs are required to begin reporting starting 2027, based on FY 2026 data.

Certain non-EU companies operating within EU regulated markets. This includes non-EU entities with securities listed on an EU regulated market, or those classified as either large companies or SMEs under the EU regulation. These companies fall under the CSRD provided that they have a branch or subsidiary in the EU, excluding micro enterprises. Non-EU companies falling under the CSRD will need to begin their reporting somewhere between 2025 and 2029, based on specific criteria.

A subsidiary company with a parent based outside the EU may be required to report under the CSRD. In this case, the non-EU parent company will also be required to report, either alongside its subsidiary or separately. If reporting separately, the subsidiary or branch would report alongside the group of European companies of its size. Subsidiaries are responsible for publishing the sustainability report of the parent company.

Subsidiaries are exempt from submitting CSRD reports if the parent companies submit a single, combined report for the entire group. This applies to non-EU companies and subsidiaries that are public interest, unless they reach the large company thresholds. The exempt subsidiaries should include the following details in their annual reports:

  1. The name and registered office of the parent company that is reporting the sustainability information at group level.

  2. Web links to the consolidated annual reports.

  3. A reference to this exemption on their own annual report.

If there are significant differences between the impacts and risks of the group and those of the subsidiary, the parent company should provide adequate understanding of the impacts and risks of their subsidiaries, including information on the due diligence process where appropriate.

Further recognizing the differences in resources available to each type of organisation, some additional flexibility and provisions for compliance have been introduced.

  • All entities may omit anticipated financial effects from all climate and other environmental related impacts, risks and opportunities in the first year of reporting.

  • Small entities (those with not more than 750 employees) may omit data on GHG emissions, biodiversity, resource use and various social disclosures in the first two years.

  • For the first 3 years, qualitative disclosures on anticipated financial effects are permitted if quantitative disclosures are impractical.


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