A Corporate Sustainability Reporting Directive (CSRD) Standards Explainer - Last Updated: October 30, 2023

What is the EU Corporate Sustainability Reporting Directive (CSRD)?

The Corporate Sustainability Reporting Directive (CSRD) is an EU ESG (environmental social governance) standard passed by European Union Council on November 28, 2022 designed to make corporate sustainability reporting more common, consistent, and standardized like financial accounting and reporting. Starting January 1, 2024 CSRD will apply to all companies with:

1. Over 250 employees
2. More than 40€ million in annual revenue
3. More than 20€ million in total assets
4. Publicly-listed equities and have more than 10 employees or 20€ million revenue
5. International and non-EU companies with more than 150€ million annual revenue within the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds

Any EU company that meets that criteria is required to file an annual report using the CSRD's forthcoming sustainability taxonomy on how sustainability influences their business, as well as the company's impact on people and the environment. The CSRD's required reporting disclosures are outlined in the EU Sustainability Reporting Standards (ESRS). ESRS was developed by European Financial Reporting Advisory Group (EFRAG), and adpoted and published by the European Commission on July 31, 2023. EFRAG and European regulators have also provided guidance that sector-specific sustainability reporting guidelines will be published later in 2024, however a recent motion has suggested delaying sector-specific standards until 2026 to help companies comply with the first set of CSRD and ESRS reporting requirments.

The CSRD updates and replaces the existing Non-Financial Reporting Directive (NFRD) and Accounting Directive (2013/34/EU), and goes into effect throughout the European Union (EU) starting January 1, 2024. It's estimated 50,000+ companies who do business in Europe will need to report and comply with ESRS. The European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD) on Thursday, November 10 2022 in a 525 to 60 vote (with 28 abstentions).

A big goal of CSRD is to standardize and simplify sustainability reporting for companies. Many companies are currently under pressure to use a wide range of different sustainability reporting standards and frameworks. The EU CSRD aims to consolidate this into one ESG report that meets the needs of EU regulators, investors, and other stakeholders. The first version of CSRD standards are being drafted in collaboration with EFRAG.

Corporate Sustainability Reporting Directive (CSRD) Requirements

To comply with CSRD, organization's will need to take the following annual compliance steps, starting in 2024:

1. Prepare and submit a CSRD report - A large company's first CSRD report will be due in early 2025 based on the company's 2024 fiscal year environmental performance. Small and medium enterprises (SMEs) must begin reporting for 2026 using the CSRD's streamlined SME guidelines
2. Track and disclose the required information - CSRD reports must include management commentary and data (via a dedicated management report section) on a company's:
• Materiality process to assess material ESG themes, topics, risks, impacts, and focus areas. According to the EU Commission: "all standards and all [CSRD] disclosure requirements and data points within each standard will be subject to materiality assessment by the undertaking, with the exception of the disclosure requirements specified in the 'General disclosures' standard"
• Sustainability and ESG performance targets, goals, and progress (the CSRD recommends at least absolute greenhouse gas emission reduction targets for 2030 and 2050)
• The plans of the undertaking, including implementing actions and related financial and investment plans, to ensure its business model and strategy are compatible with the transition to a sustainable economy and limiting global warming to 1.5 °C in line with the UN 2015 Paris Agreement and the objective of achieving EU climate neutrality by 2050 as established in Regulation (EU) 2021/1119 of the European Parliament and of the Council
• Sustainability risks (including climate change) affecting the company, as well as the organization's operating impacts on society and environment
• The resilience of the undertaking’s business model and strategy in relation to risks related to sustainability matters
• How sustainability and ESG risks could or are impacting operating results and business performance
• Where relevant, the exposure of the undertaking to coal-, oil- and gas-related activities
• Environmental protection policies and actions
• Company sustainability policies
• A description of the company's sustainability due diligence
• Social responsibility and treatment of employees
• Respect for human rights
• Anti-corruption and bribery practices
• Corporate ESG governance in relation to sustainability matters, the administrative, management and supervisory bodies' expertise and skills in relation to fulfilling these responsibilities
• Corporate board diversity
• Important social, human, and intellectual capital
• How the undertaking’s business model and strategy take account of the interests of the undertaking’s stakeholders and of the impacts of the undertaking on sustainability matters
3. Digital data and tagging - Companies must prepare their financial statements and management statement in XHTML or electronic format in accordance with the ESEF regulations and the EU sustainability taxonomy, then digitally ‘tag' their reported sustainability information according to a digital categorisation system specified by the CSRD Regulation (or use ESG software like Brightest that can auto-tag and format data)
4. Third party assurance - Organizations reporting under CSRD will also be required to seek "limited" assurance of the sustainability information they disclose from a neutral, trusted, and experienced third party who reviews the data. "Limited" assurance is less strict than a financial audit, but still requires working with an independent sustainability reporting partner organization or auditor

CSRD reporting must be submitted in a compliant electronic reporting format specified in Article 3 of Commission Delegated Regulation (EU) 2019/815 no later than 12 months after a company's balance sheet date.

Corporate Sustainability Reporting Directive (CSRD) Timeline

The CSRD has been approved by the European Commission an is now being implemented into law. The timeline for the CSRD coming into effect is:

• May 2022 - EFRAG opened the first draft ESRS standards for public comment
• June 21, 2022 - Members of the European Parliament (MEPs) and EU governments confirmed a provisional agreement on CSRD terms and implementation
• September 2022 - The European Financial Reporting Advisory Group (EFRAG) sends the first complete version of the ESRS reporting standards to the EU Commission
• November 2022 - The EU Commission formally approves and adopts a first set of sustainability reporting and disclosure standards. The CSRD was approved by the EU Parliament on November 10th, and approved by the EU Council on November 28th, 2022
• December 2022 - EU Member States adopt the EU Directive into law and publication in the EU Official Journal. It will enter into force 20 days after publication and its provisions will have to integrated into member states’ national laws after 18 months
• 2023 - The Corporate Sustainability Reporting Directive (CSRD) takes effect for eligible entities in corporate fiscal year 2024 and organizations will need to start implementing ESG reporting capabilities and infrastructure in 2023 to prepare their CSRD reporting for the follow year. The CSRD enters into force on the twentieth day following its publication in the Official Journal of the European Union
• 2024 - Qualifying large businesses will need to disclose a CSRD report according to a first set of sustainability reporting standards for their 2024 financial year. All EU Member States needs to comply with the CSRD by July 6, 2024. CSRD Article 4 of the Directive shall apply from 1 January 2024 for financial years starting on or after 1 January 2024. By June 2024, the CSRD requires the European Commission to adopt sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies, however indications are this second phase of the ESRS be delayed until 2026
• 2025 - Companies will repeat the same ESG reporting cycle for fiscal year 2025
• 2026 - EU small and medium enterprises (SMEs) will need to start their own CSRD reporting using the follow-on, streamlined reporting system designed for small businesses. Sector-specific ESRS reporting standards are expected to take effect by this point, if not sooner
• 2028 - International companies with more than 150€ million annual revenue within the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds will be required to start reporting under the ESRS (CSRD) at a consolidated group level (including non-EU activity)

This means companies need to prepare to plan and implement their CSRD compliance approach by early 2024 in order to be ready for the first CSRD reporting cycle to stay compliant. It's not yet know exactly how the EU Commission or specific member states might penalize businesses who fail to comply with the CSRD, but according to the Commissions’ requirements within the Directive, non-compliant eligible organizations will be forced to pay a meaningful fine.

In a more recent June 2023 announcement, in an effort to ease the reporting burden for smaller companies, the EU Commission approved allowing companies with fewer than 750 employees to phase-in and omit (a) Scope 3 GHG emissions data and (b) ESRS S1 “Own Workforce” disclosures in their first reporting year, and skip disclosures in the (a) ESRS E4 Biodiversity, (b) ESRS S2 "Workers in the value Chain", (c) ESRS S3 "Affected Communities", and (d) ESRS S4 "Consumers and End-users" for the their first two years' CSRD reports. All undertakings may also omit their anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use); and certain data points related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance) in the first year they apply and report under CSRD's ESRS standards.

For the latest updates, please refer to our EU Sustainability Reporting Standards (ESRS) guide.

When Does the CSRD Take Effect for Different Types of Companies?

The EU CSRD regulation takes effect in four phases:

1. Companies already subject to the NFRD must begin reporting in 2025 on their 2024 financial year
2. Large companies not currently subject to the NFRD must begin reporting in 2026 on their 2025 financial year
3. Listed SMEs (except micro undertakings), small and non-complex credit institutions, and captive insurance undertakings must begin reporting in 2027 on their 2026 financial year
4. International companies with net turnover above 150€ million in the EU who meet other CSRD requirements must begin reporting in 2029 on their 2028 financial year

A Few Helpful Recommendations

Your Next Steps With CSRD and ESRS Sustainability Reporting

As you're likely already aware, the EU is implementing several new, major sustainability rules, laws, and disclosure requirements in 2023 and beyond, including the CSRD. For organizations in the early stages of their sustainability reporting journey, we have a few general recommendations, additional reading, and suggested next steps:

Sustainability leadership attention and structure - Ultimately, the board and senior management have a responsibility to oversee sustainability issues, and to assess the potential sustainability and climate risks to a company’s overall strategy. Clarify the board and senior management's role(s), structure, and processes around sustainability, including which committee(s) will review and decide on sustainability matters, resources, and disclosure. Your company will likely also want to set up one or more sustainability working groups or committees (as well as formal departments), comprising management and staff, to implement action plans, collect data, track sustainability KPIs, and report to the board and senior management.

Materiality assessment - Before collecting data or thinking about preparing your first report, you need to conduct a “Materiality Assessment” to help determine what your sustainability goals, targets, and priorities should be in order to stay compliant with and get ready for the CSRD. A materiality assessment is a project which determines and ranks the most material themes for your business based on market data, stakeholder interviews, and surveys. For example, a healthcare company might focus on healthcare access, affordability, innovation, and its supply chain. A technology company could focus on data privacy, security, and STEM education access. A bank might designate financial inclusion as its most material theme. Pick and rank the right sustainability themes depending on your organization’s mission, sector, model, and ESG maturity.

Sustainability data systems and process - While this might go without saying, in order to report your organization's sustainability performance, you need to know what it is - with a high degree of accuracy. Your materiality process can help guide you toward the main sustainability themes you may need to focus on and collect data around. Is employee travel a big source of your organization's carbon footprint? Facilities? Manufacturing sites? Where does that data exist today, and how will you access or collect it? Many organizations start their sustainability reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organization with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay ESG compliant. Ongoing report archiving, version control, and governance are also important to think about, since you'll be reporting every year.

Further reading - Our free guides to sustainability measurement and ESG reporting provide additional, detailed guidance and insights on how to measure and report your sustainability performance.