The EU Corporate Sustainability Reporting Directive (CSRD) aims to improve the quality and consistency of sustainability reporting throughout the EU. In July, the EU Commission released an initial set of the European Sustainability Reporting Standards (ESRS) as a delegated act, after a public consultation phase on which EcoAct contributed its concerns and recommendations. Ahead of expanding mandatory reporting in 2024, EcoAct experts, Jordan Hairabedian, and Stefan Holzheuser, review important new developments of this directive and guide us through next steps for both EU and non-EU businesses.

What is the CSRD?

The CSRD came into force in January 2023. It represents a significant expansion of mandatory sustainability reporting. The current Non-Financial Reporting Directive (NFRD) applies to approximately 12,000 companies. From 2024 onwards, the new directive will progressively impact 40,000 EU & 10,000 non-EU companies, extend the scope of the EU taxonomy and require disclosure against numerous environmental, social, and governance (ESG) indicators.

Objectives of the CSRD

The CSRD plays a vital role in the EU Sustainable Finance Strategy by directing investment flows towards sustainable enterprises, ensuring the achievement of the goals outlined in the European Green Deal:

• Reaching climate neutrality by 2050 (net-zero GHG emissions)
• Protecting and restoring ecosystems
• Transitioning from a linear economy to a circular one
• Targeting 0 pollution in the EU

The level of sustainable investment required to achieve this can only be realised if asset managers and banks are provided with more information on the sustainability performance of the companies in which they may potentially invest. This is where the CSRD comes in, creating a comprehensive, transparent, and uniform reporting basis at EU level for corporates. This binding framework has been informed by international references, such as the TCFD, CDP and the EU taxonomy, three topics EcoAct has in-depth expertise in.

Source: based on European Commission’s chart (15.06.2022)

Furthermore, non-financial information and indicators have gained significance not only in the financial markets but also among other stakeholders, including customers and civil society. As a result, robust sustainability reporting plays a vital role in establishing trust and strengthening a company’s reputation.

Failure to comply with this directive will result in significant fines.

A focus on ESG indicators

The European Sustainability Reporting Standards (ESRS) are the ESG quantitative and qualitative indicators to report under CSRD. Essentially, the reporting standards can be divided into three blocks:

Key principles of the CSRD

The CSRD guidelines under the delegated act released by the European Commission are as follows:

• Reinforced double materiality: companies should conduct a materiality assessment on all topics (except for “General Disclosures” – ESRS 2), which relate to matters that are either significant for the business (financial materiality) or from ESG concerns (impact materiality).
• Scope: the CSRD covers the entire value chain of companies.
• Time horizon: the CSRD requires increased depth of reported information that is qualitative and quantitative, and covers short, medium, and long periods of time when appropriate.
• Due diligence: procedures must be implemented to identify, prevent, mitigate, and account for the actual and potential negative impacts on the environment and people.
• Verification: non-financial reporting must be verified annually by a statutory auditor, or an audit firm accredited by each Member state.

Which companies are affected?

• Large EU companies (listed or not) & non-European large companies listed on EU regulated markets: with more than 250 employees, with a total balance sheet of more than 20 million euros or with a turnover of more than 40 million euros (2 criteria out of three).
• All EU & non-EU small and medium enterprises that are listed on European regulated market, except micro-enterprises.
• Small and non-complex credit institutions as well as captive insurance companies
• Other large non-European groups with significant activity in the EU (turnover of more than €150 million) and with a large branch or subsidiary based in the EU.

When to report?

CSRD reporting must be annual. The timeline is as follows:

With the new delegated act released in June, the calendar stays the same. However, the phasing of certain obligations is possible:

For all undertakings:

• First reporting year: the company may omit anticipated financial effects disclosure related to non-climate environmental issues (pollution, water, biodiversity, circular economy), as well as certain datapoints related to own workforce (ESRS S1: social protection, people with disability, work-related ill-health, and work-life balance).

For large companies with fewer than 750 employees: 

• First reporting year: the undertaking may omit disclosures on Scope 3 GHG emissions (in ESRS E1) and own workforce standard (ESRS S1).
• First two years: the undertaking may omit disclosures related to biodiversity (ESRS E4), workers in the value chain (ESRS S2), affected communities (ESRS S3), consumers and end users (ESRS S4). However, the undertaking should disclose whether the sustainability topics covered respectively by ESRS E4, ESRS S1, ESRS S2, ESRS S3 and ESRS S4 have been assessed to be material as a result of the undertaking’s materiality assessment and disclose specific elements if the topics are material (ESRS 2 paragraph 17).

Where and how to report

Non-financial information must be published in companies’ annual reports: either in a single consolidated section, in four separate parts (general information, E, S, and G sections) or using incorporation by reference (e.g. ESRS E1-6, paragraph 41).

Companies must also digitally tag information so that it is machine-readable for use in the European Single Access Point (ESAP). Digitizing this information is part of the EU’s digital finance strategy that aims to improve the accessibility and reuse of financial sector data. ESAP will facilitate accessibility, analysis and comparability of annual reports. Consultation on this topic will start in 2024.

Climate change at the core of the reporting

The reporting indicators related to climate change are an important basis of the CSRD. They are subject to materiality analysis as all other topic but if it is identified as not material, detailed explanation of the conclusions should be provided. The related categories of indicators can be classified under TCFD pillars:

Responding to the CDP may enable companies to align more easily on CSRD requirements. Around 140 indicators should be reported in the CSRD standard on climate change of which 85-90% are aligned with the CDP 2023 Climate change questionnaire.

EcoAct and CSRD

At EcoAct, we see CSRD not just as a reporting requirement, but as a strategic tool for preparing your business model to cope with today’s environmental challenges. Our extensive range of services is structured around the implementation of a global strategy to reduce your risks and impacts on the planet:

1. Diagnose: train your teams to prepare CSRD requirements by involving them from the start, and conduct a gap analysis to set a strategic dashboard on ESG
2. Set impacts and risks: conduct a double materiality assessment to identify material topics and set robust roadmaps for your sustainability strategy
3. Perform and report: implement strategies to target a best-in-class CSRD alignment on climate and biodiversity. We have over 17 years’ experience in guiding businesses in climate change & nature consulting, from impacts metrics to risk analysis, decarbonisation, science-based targets, life-cycle assessment, and carbon offsetting. We can also help you chose the most relevant digital tool for data collection, disclosure and monitoring.
4. Transform: transform your business model to operate within planetary boundaries.

If you need support in the preparation and production of a CSRD-compliant sustainability report, please get in touch.