CSRD: What Companies in the EU Need to Know about Complying with the Corporate Sustainability Reporting Directive

What is the CSRD?

Key Objectives of the CSRD

Meticulous financial reporting has been a stringent obligation for businesses worldwide for decades, with very clear-cut requirements that companies must abide by to remain compliant. The CSRD aims to bring sustainability reporting to the same level of transparency and standardisation as financial reporting. Key goals to achieve this include:

• Establishing a unified framework across the EU for consistent sustainability reporting. This makes compliance simpler for the reporting companies, and comparisons easier for stakeholders.
• The CSRD mandates detailed and transparent Environmental, Social, and Governance (ESG) disclosures, helping stakeholders accurately assess a company’s sustainability efforts.
• Compared to the NFRD, the CSRD now covers a broader scope. This includes: large corporations, small- and medium-sized enterprises (SMEs), and non-EU companies with significant EU operations. SMEs, however, have reduced reporting requirements to minimise their compliance burden.
• By enforcing standardised reporting, the CSRD encourages companies to integrate ESG considerations into their core strategies, aligning with the EU’s ambitious climate targets. This promotes long-term economic resilience, while also supporting sustainable growth.

Key steps needed to comply with the CSRD

1. Identify which parts of your business and value chain fall within CSRD requirements, and when your company must comply by.
2. Segment your sustainability data to improve reporting clarity, ensuring that specific impacts are represented in a distinct manner.
3. Conduct a Double Materiality Assessment to analyse your company’s sustainability from both a financial and societal impact perspective to determine priority issues.
4. Familiarise yourself with ESRS standards, covering environmental, social, and governance metrics, and ensure your reporting meets these data points.
5. Educate and align internal stakeholders, including relevant finance, sustainability, and operations departments, on CSRD obligations and data requirements.
6. Conduct a gap analysis to identify missing data and ensure complete coverage for ESRS compliance.
7. Consult with auditors to meet assurance requirements and prepare for future assurance upgrades.
8. Implement consistent data collection practices to centralise ESG data across departments.
9. Make use of digital tools that align with CSRD’s digital taxonomy for streamlined, accurate reporting.
10. Stay up to date by monitoring updates to CSRD and ESRS standards to maintain ongoing compliance.

Who does the CSRD apply to?

The CSRD significantly expands the range of companies required to report on sustainability issues, beyond the NFRD’s scope. It applies to:

• Large companies: EU-based and non-EU companies with significant EU operations, meeting at least two of the following:
  • Over 250 employees
  • Net turnover above €40 million
  • Total assets exceeding €20 million.
• Listed SMEs: Small- and medium-sized enterprises listed on EU-regulated markets. While they are required to comply, their obligations are less stringent compared to larger corporations.
• Non-EU companies: Companies with a net turnover of over €150 million in the EU and at least one EU subsidiary or branch.

CSRD Implementation timeline

Double Materiality

The CSRD’s double materiality framework requires companies to assess both Impact Materiality and Financial Materiality when determining their sustainability disclosures.

• Impact Materiality: Companies must identify how their operations affect people and the environment. This assessment captures both positive and negative impacts—such as emissions, resource use, and social effects—throughout the value chain. Stakeholder engagement is crucial to ensure a balanced view, involving internal and external insights.
• Financial Materiality: This involves assessing how sustainability risks, like climate impacts or regulatory changes, could financially affect the company’s performance, cash flow, or reputation. Factors include dependencies on resources, regulatory compliance, and potential financial impacts of environmental or social issues.

The double materiality assessment involves four steps:

1. Identify Activities: Map out business activities, including those in the value chain, with potential sustainability impacts.
2. Identify IROs (Impacts, Risks, and Opportunities): Engage with stakeholders to highlight material IROs, informed by industry standards, peer reports, and regulatory requirements.
3. Determine Materiality of IROs: Score each IRO based on severity, likelihood, and potential financial impact, prioritising significant ones.
4. Document and Conclude: Capture the process and judgments in detailed documentation, providing evidence for future audits and CSRD assurance.

This structured, interdependent approach ensures thorough analysis, meeting CSRD’s requirements for transparent and balanced sustainability reporting.

European Sustainability Reporting Standards (ESRS)

The European Sustainability Reporting Standards (ESRS) provide the backbone of CSRD compliance. The standards include more than 1,200 distinct data points that need to be disclosed, ensuring thorough and comparable sustainability reporting across various categories within the ESG spectrum. Sector-specific ESRS standards will be introduced by 2026, further refining reporting obligations based on industry needs.

ESRS E1 through to E5 have become increasingly more important for sustainability managers to focus on, since these requirements cover the reporting requirements for environmental activities, with ESRS E1 covering activities relating to buying carbon credits.

ESRS E1: Climate Change

This standard covers strategies implemented to limit global warming to 1.5°C, including reporting on greenhouse gas emissions, energy production, and consumption. It aligns with EU Climate Law and requires companies to outline climate impacts, risks, and mitigation efforts, integrating climate-related objectives with the EU’s sustainability goals.

ESRS E2: Pollution

This standard focuses on pollution impacts in air, water, soil, and food resources, covering substances of concern such as microplastics. Companies report on pollution control measures, associated risks, and their compliance with EU’s “Zero Pollution” ambition for air, water, and soil.

ESRS E3: Water and Marine Resources

ESRS E3 covers water use and marine resource management, requiring companies to report on activities relating to their water consumption, discharges, and any impacts to marine ecosystem. It supports EU Green Deal targets for clean water and biodiversity and promotes alignment with global environmental limits.

ESRS E4: Biodiversity and Ecosystems

Companies are encouraged to address biodiversity loss, ecosystem degradation, and related dependencies. Disclosures include impacts on species, ecosystems, and natural services, guided by frameworks like the Kunming-Montreal Global Biodiversity Framework and the EU Biodiversity Strategy for 2030.

ESRS E5: Circular Economy

ESRS E5 covers resource inflows, waste management, and sustainable sourcing, with a  focus on resource efficiency and the prevention of waste. This standard aligns with the EU Circular Economy Action Plan and supports a shift to a circular economy by fostering efficient, sustainable use of resources throughout a product’s lifecycle.

Gap Analysis

Conducting a Gap Analysis is a key step to align your company's existing data practices with CSRD’s rigorous requirements. This analysis is carried out to spot any missing requirements between the sustainability data a company already collects and what is needed under CSRD standards.

To carry out a Gap Analysis, a company should follow these steps:

1. Review current ESG data collection and reporting methods to understand the initial state.
2. Assess the quality, availability, and accuracy of the data to verify that it meets CSRD standards.
3. Engage stakeholders and assign responsibility across departments to improve data consistency.
4. Translate findings into an actionable roadmap to bridge any gaps that were identified.

Optimising data collection

Data collection for CSRD compliance is complex and requires cross-departmental collaboration and precise documentation. Key tips to keep in mind with this critical step of CSRD compliance include:

• Standardise Definitions: Implement standard definitions for each data point across departments to ensure uniformity in reporting.
• Establish Clear Processes: Define and document data collection processes for each department. This includes protocols for data accuracy, handling sensitive information, and regular updates.
• Centralised Data Storage: Use a centralised platform to consolidate ESG data, making it accessible and verifiable by internal teams and auditors. This also aids in digital taxonomy compliance, where data is tagged for machine readability.
• Collaboration with External Partners: Coordinate with suppliers and partners to obtain necessary data on supply chain impacts, especially for Scope 3 emissions, biodiversity, and water usage.

Key Takeaways

• The CSRD broadens sustainability reporting requirements in the EU, replacing NFRD to ensure consistent, transparent sustainability disclosures.
• Sustainability managers must assess both financial and societal impacts, addressing both risks and opportunities.
• Understanding ESRS E1 is essential for companies looking to report on their carbon credit strategy.
• Identify and address missing data in ESG metrics to meet ESRS standards.
• Standardise, centralise, and validate data for accuracy; coordinate with auditors for assurance.
• Use digital taxonomy for machine-readable data and maintain compliance with evolving standards.
• Begin with phased deadlines from 2024 to 2028, ensuring robust internal controls and independent audits.