Explaining the Difference Between the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) - Last Updated: June 15, 2023

The EU Corporate Sustainability Reporting Directive (CSRD) vs. the European Sustainability Reporting Standards (ESRS)

ESG (environmental social governance) and sustainability are [unfortunately] full of acronyms and abbreviations, and two of the most important ones for companies around the world are the CSRD (Corporate Sustainability Reporting Directive) and ESRS (European Sustainability Reporting Standards). Since they're both different and related, the relationship between the CSRD and ESRS can be confusing. We'll explain the difference here if it's helpful.

What is the Corporate Sustainability Reporting Directive (CSRD)?

The Corporate Sustainability Reporting Directive (CSRD) is an EU ESG 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. The 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. 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. The CSRD was passed by EU lawmakers in November 2022, and will require over 50,000+ European companies (as well as large international companies doing business in Europe) to complete mandatory annual sustainability reporting on their environmental, social, human rights, and governance performance, starting in 2025 and beyond.

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 reporting standards (i.e., the ESRS) are being drafted in collaboration with EFRAG.

What are the EU Sustainability Reporting Standards (ESRS)?

As we've just outlined, the CSRD is a European law that requires eligible companies to issue annual sustainability reports. The ESRS, by comparison, outlines how and what information and ESG metrics companies need to report to European regulators to comply with the CSRD. That's the key difference.

The European Union Sustainability Reporting Standards (ESRS) describe and organize the specific EU compliance and disclosure materials required by the European Commission and the European Financial Reporting Advisory Group (EFRAG) on May 3, 2022. The ESRS are designed to make corporate sustainability and environmental social governance (ESG) reporting within the EU more accurate, common, consistent, comparable, and standardized, just like financial accounting and reporting.

In its current form, the ESRS has two parts:

• ESRS 1: General principles
• ESRS 2: General, strategy, governance, and materiality assessment

Recapping the Difference Between the EU CSRD and ESRS

In effect, the ESRS is a component or disclosure tool within the CSRD. The CSRD is the law that requires companies to issue sustainability reports, and the ESRS describes all the information those reports need to contain. While the CSRD is effectively final and is being passed into European law, the ESRS is still being development, and it is likely to continue to evolve and change based on EFRAG's ongoing work, as well as feedback from companies, regulators, and industry associations.

When Do the CSRD and ESRS 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 using ESRS standards in 2025 on their 2024 financial year
2. Large companies not currently subject to the NFRD must begin reporting using ESRS standards 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

In a more recent June 2023 announcement, in an effort to ease the reporting burden for smaller companies, the EU Commission has proposed allowing companies with fewer than 750 employees to 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.

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. For organizations in the early stages of their sustainability or ESG 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 your sustainability goals, targets, and priorities should be to develop processes to collect and report the information necessary to report under the ESRS and comply with 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.