A Corporate Sustainability Reporting Directive (CSRD) Standards Explainer - Last Updated: November 10, 2022
What is the EU Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive (CSRD) is an EU ESG (environmental social governance) standard released by the European Commission in April, 2021 designed to make corporate sustainability reporting more common, consistent, and standardized like financial accounting and reporting. The CSRD will apply to all companies with:
- Over 250 employees
- More than €40M in annual revenue
- More than €20M in total assets
- Publicly-listed equities and have more than 10 employees or €20M revenue
- International and non-EU companies with more than €150M annual revenue within the EU
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. A first draft of the initial environmental reporting requirements, the EU Sustainability Reporting Standards (ESRS), was released in draft form for public comment on May 3, 2022 by the European Financial Reporting Advisory Group (EFRAG).
The CSRD updates and replaces the existing Non-Financial Reporting Directive (NFRD), and goes into effect throughout the European Union (EU) in 2023. 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 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:
- Prepare and submit a report - A company's first CSRD report will be due in early 2024 based on the company's 2023 fiscal year environmental performance
- Track and disclose the required information - CSRD reports must include management commentary and data on a company's:
- Materiality process to select material ESG themes, topics, risks, and focus areas
- Sustainability and ESG performance targets, goals, and progress
- Sustainability risks (including climate change) affecting the company, as well as the organization's operating impacts on society and environment
- How sustainability and ESG risks could or are impacting operating results and business performance
- Environmental protection policies and actions
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery practices
- Corporate board diversity
- Important social, human, and intellectual capital
- Digital data and tagging - Companies must prepare their financial statements and management statement in XHTML 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)
- 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
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Corporate Sustainability Reporting Directive (CSRD) Timeline
As of today, the CSRD is still a European Commission proposal that has not yet been passed into law. The European Parliament and the European Council still have to integrate EFRAG's recommendations, agree on a final version, and pass the bill. These steps are expected to happen over the course of 2022, although it's possible other pressing EU issues like Russia's invasion of Ukraine may delay or modify this process. Right now, 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. With the adoption of the CSRD by the EU Parliament on November 10th, the proposal moves forward to the Council, who are expected to adopt the proposal before the end of 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 2023 and organizations will need to track their 2023 ESG strategy, risks, and performance to prepare their CSRD reporting
- 2024 - Qualifying businesses will need to disclose a CSRD report according to a first set of sustainability reporting standards for their 2023 financial year
- 2025 - Companies will repeat the same ESG reporting cycle for fiscal year 2024
- 2028 - 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
This means companies need to prepare to plan and implement their CSRD compliance approach by 2023 in order to be ready for the 2024 reporting cycle and 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.
For the latest updates, please refer to our EU Sustainability Reporting Standards (ESRS) guide.
A Few Helpful Recommendations
Your Next Steps With CSRD and ESRS Sustainability Reporting
For organizations in the early stages of their sustainability reporting journey, we have a few general recommendations, additional reading, and suggested next steps:
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, KPIs, and reporting topics should be under 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.