Approximately 50,000 companies in the European Union and beyond will have to comply with the Corporate Sustainability Reporting Directive. Here’s what you need to know to prepare your business and ensure compliance.
The Corporate Sustainability Reporting Directive (CSRD) is the European law establishing mandatory environmental, social, and governance (ESG) reporting to be used alongside financial reporting. Its goal is to ensure that investors and other key stakeholders have pertinent information regarding the company's impacts, risks, and opportunities associated with ESG-related issues, including climate change.
Approximately 50,000 companies in the European Union (EU) and beyond will have to comply with CSRD in the coming years. It’s a sweeping, mandatory requirement and is being phased in from 2024 to 2029. Beginning in January 2024, it applies to EU-based companies and subsidiaries in scope. Then, over the next four years, the law will extend to more organizations in the EU, plus companies that do business in the EU — even if they are based elsewhere.
Companies initially in scope for CSRD must start collecting data in 2024 to be prepared to report in 2025. And data collection will take time, particularly for companies currently not tracking or reporting on any ESG metrics. By 2029, all organizations impacted by CSRD will need to be in compliance.
CSRD will impact EU-based companies in 2024 and then expand to those that do business in the EU from 2025 onward. Non-EU-based companies with subsidiaries registered in EU countries will be impacted in Phases 1–3, depending on the characteristics of that subsidiary, as outlined to the left.
Although each EU member state determines the penalties for noncompliance, companies can anticipate one or a combination of the following consequences:
Existing laws for failing to comply with nonfinancial reporting rules are already stiff, and they might get more stringent with CSRD. Fines range from €5,000 in Ireland to €10 million or 5% of the total annual turnover (or revenues) or twice the total profits made/losses avoided in Germany.
CSRD is a broad-based disclosure requirement that covers a full range of topics across ESG factors. The European Sustainability Reporting Standards (ESRS) are the technical requirements within CSRD. Organizations must use the ESRS to comply with CSRD.
The ESRS are organized across the following categories:
The cross-cutting disclosures and principles are required for all businesses impacted by CSRD. The issue-specific environmental, social, and governance disclosures are required only when the topic is deemed material for the company.
All businesses will be required to report against E1, the Climate Change standard. This standard is the only one not subject to double materiality, so even companies that say it isn’t material will have to explain how and why they came to that conclusion. E1 encompasses greenhouse gas (GHG) emissions — including scope 3. Under this standard, companies will also need to provide an evaluation of climate risks and any plans to mitigate and adapt to climate change.
The ESRS requires a double materiality assessment be conducted by organizations to comply with CSRD. Double materiality refers to the impact of ESG topics on people and the environment, as well as on a business’ financial success in terms of risks and opportunities presented to the business.
In a double materiality assessment, organizations have to determine which ESG topics are most material to their business’ success and impact on society. They must understand and report on how their business is affected by sustainability issues (inward-facing impact) and how their business activities affect society and the environment (outward-facing impact).
To comply with CSRD, companies will also be required to have a third party assure their sustainability information and data.
Companies will first be mandated to secure limited assurance from a third-party auditor. CSRD then outlines a timeline for companies to move to reasonable assurance, in which a third party will carry out a comprehensive assessment of a company’s sustainability disclosures and related operations.
CSRD is an expansion of the EU’s previous ESG reporting requirements under the NFRD. Enacted in 2018, the NFRD focused on financial reporting requirements and provided companies with guidelines to disclose their approach to managing environmental and social challenges in their annual reports, along with financial metrics. As CSRD rolls out, it will supersede NFRD.
The EU’s CSRD and CSDDD serve unique but interconnected purposes. While CSRD sets the standard for transparent ESG reporting and disclosures, the CSDDD is a legislative framework that requires companies to set up due diligence processes to proactively identify, prevent, and mitigate human rights issues and environmental impacts stemming from their value chain.
In short, think of the CSDDD as a mechanism for companies to create systems that improve the sustainability performance of their organization. CSRD then covers the reporting requirements for companies impacted by the CSDDD and beyond.
The SEC’s climate disclosure rule, unveiled in March 2024, is much more narrow in scope than CSRD. Unlike CSRD, the SEC’s climate disclosure rule extends only to publicly listed companies in the U.S. and is focused on GHG inventory reporting and climate risk disclosures. Notably, the SEC mandates reporting for only scope 1 and scope 2 (and not scope 3). Companies that fall in scope of both CSRD and the SEC’s climate disclosure rule will be required to comply with both.
The European Commission created CSRD to ensure high-quality and reliable public reporting by companies to help create a culture of greater public accountability. For decades, ESG reporting has been voluntary, and voluntary frameworks have emerged to help companies report on their ESG metrics. But without laws to ensure all organizations reported or a single framework on which to base their reporting, stakeholders have a difficult time making a fair evaluation between the information disclosed by multiple companies or even the same company across multiple reporting periods. This has complicated decision-making for investors, customers, consumers, partners, and suppliers. Given CSRD’s broad reach — both within Europe and beyond — customers, investors, and other stakeholders might ask you for information in alignment with CSRD, even if the law doesn't apply to you directly.
Companies impacted by CSRD are faced with challenges like increased costs, a lack of trusted data, and difficulty keeping up with evolving regulatory requirements.
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