An Introduction to the CSRD
To many, the CSRD will be a game changer in ESG reporting. But what is it, who will it affect, and when does it come into force? This introduction breaks it all down.
What is the CSRD?
What are the new requirements?
- Integration of ESG in the Management Report (Annual Report)
- Mandatory standards for sustainability reporting
- Financial Reporting team is responsible
- Audit (assurance) mandated
- Digital tagging of information
What is the scope of the CSRD?
When is the CSRD mandated by?
Officially entered into force on 5 January 2023.
Gradual rollout with first companies due to file in Q1 2025 (applies to FY 2024).
Frequently Asked Questions
The CSRD will have a considerably larger reach than the NFRD, taking the number of companies affected from 11,000 to around 50,000.
As well as organisations currently in scope of the NFRD, the CSRD will affect all EU-based companies who have:
- A net turnover of €40 million or more
- At least €20 million in assets
- 250+ employees
- All listed companies (with the exception of micro-enterprises) will also be affected.
Additionally, non-EU companies who have with EU-based subsidiaries, or who have securities on EU-regulated markets, are also required to comply with the CSRD. This means, for example, that a UK or US-based multi-entity corporation with a single subsidiary in the EU will need to report in line with CSRD regulations, even if all their other subsidiaries are outside of the EU.
The European Sustainability Reporting Standards (ESRS) are the new standards being brought in by the CSRD. These provide the specific requirements that companies will need to follow in their reporting practices.
In November 2022, EFRAG published the first set of draft ESRS, covering 12 standards. These cover:
- General: 1- General requirements, 2- General disclosures
- Environmental: E1 - Climate Change, E2 - Pollution, E3 - Water and Marine Resources, E4 - Biodiversity and Ecosystems, E5 - Resource Use and Circular Economy
- Social: S1 - Own Workforce, S2- Workers in the value chain, S3 - Affected communities, S4 - Consumers and end users
- Governance: G1 - Business Conduct
While reporting in line with E2 - General disclosures and E1 - Climate change is required for all companies in scope of the CSRD, not all of these are mandatory for every company. EFRAG and the ESRS provide detailed information on who needs to follow which specific standards.
The EU has long believed that investors and consumers are entitled to understand the ESG impact of businesses in a clear, easily comparable manner. Though existing regulations (such as the NFRD) provided a step in this direction, the consensus was that they weren’t sufficient.
Investors found that many ESG reports omitted important or useful information, used differing metrics, and had different areas of focus, making it difficult to trust the data or benchmark companies against one another. As the EU found, this can have a knock-on effect on sustainable investment, one of its key areas of focus.
The CSRD aims to establish a shared framework for reporting non-financial data. The idea is that by enforcing thorough, robust, standardised reports, everyone— from policymakers and investors to clients and consumers—can make informed decisions on a company’s ESG performance.
One of the major aims of the CSRD is to bring together the ‘E’, ‘S’, and ‘G’ of ESG reporting in a more cohesive and coherent manner. Companies will need to disclose information concerning:
- The environment
- Treatment of staff and approach to social matters
- Human rights
- Anti-bribery and corruption
- Board diversity
When will the CSRD come into force?
The text of the CSRD was passed following a landslide vote in the European Parliament in November 2022.
The CSRD officially entered into force in the EU in early January 2023. From this date, member states have 18 months to transpose the new standards into national law.
Each member state has its own history with ESG reporting regulations, and is likely to implement the new requirements in its own way.
The CSRD will then be phased in from:
- FY’24: For all organisations that are already within the existing scope of the NFRD (currently around 11,700 organisations)
- FY’25: All “large” organisations—firms with a net turnover of €40 million or more, at least €20 million in assets and 250+ employees
- Later: All listed companies, including listed small and medium-sized enterprises (SMEs) but with the exception of micro enterprises
What will the reporting requirements entail?
Here are some of the regulation's stand-out features:
Double materiality: Organisations will need to disclose both the company’s impact on social and environmental issues, and how these issues are likely to affect the business going forward.
Looking both ahead and back: Companies will be required to furnish both retrospective and forward-looking analysis. This will mean sharing quantitative information (such as measured impact to date) and qualitative information (such as targets, strategy, and risk assessment).
Stricter rules around climate-related disclosures: Most notably, the CSRD will call for disclosure of Scope 3 emissions. These are the indirect CO2 emissions produced by all other companies connected to the organisation throughout the entire supply chain.
Enforced audits: For the first time, all sustainability information within a report will be obliged to pass through an audit process to verify for accuracy before publication.
How will CSRD reports be presented?
Companies will be expected to provide all CSRD related information in either their annual or management reports. This is to ensure that financial and ESG information is published at the same time and considered as a whole, rather than two separate entities.
In line with ESEF regulations, all sustainability information will need to be provided in xHTML format for standardisation and easier verification.
How does the CSRD fit in with other legislations?
With so many different mandates and legislations, it can be challenging to grasp how they all fit in with one another.
As mentioned above, the CSRD and ESRS will expand upon and replace the Non-Financial Reporting Directive (NFRD).
The mandate will also, however, incorporate existing EU regulations, most notably:
- The Sustainable Finance Disclosure Regulation (SFDR), which sets out ESG disclosure obligations for financial markets participants
- The EU Taxonomy, which is a classification system of environmentally sustainable economic activities
The CSRD, the SFDR and the EU Taxonomy all work together to help promote sustainable investments. By bringing them together in a single bundle, the aim is to align requirements, help reduce complexity and avoid the risk of duplicating reporting requirements.
What are the challenges of CSRD disclosure?
Because the CSRD requirements are far more detailed than those of the NFRD, companies will need to gather vast amounts of data, which all needs to be accurate and verifiable. Scope 3 emissions—which extend beyond a company’s direct CO2 output and look at everything from up- and downstream transportation and distribution, to the use of sold products—are particularly difficult to track.
Companies already reporting under the NFRD will therefore have a steep learning curve to tackle, while those needing to produce their first ESG report under the CSRD face an even bigger challenge.
Importantly, the CSRD is being incorporated into national law throughout the EU. Depending on how stringent individual countries choose to be regarding enforcement, non-compliance could lead to penalties or prosecution, potentially posing a serious business risk for organisations.
Executive Summary: A Snapshot of the CSRD
This guide distills key information about the mandate and how it will impact your organisation.
What else should I know?
The CSRD will be granting individual Member States the opportunity to open the market to ‘independent assurance services providers’. Countries that choose to take this option would allow assurance firms as well as auditors to verify the sustainability information within reports.
In the future, smaller organisations will also need to report in accordance with the CSRD. Modified regulations tailored for SMEs will be published, and those listed on a regulated market will need to start reporting from 2028.
All hands on deck
Our ESG solution has all CSRD reporting requirements built into the platform, which we continually optimise to enable its seamless integration within the reporting process. To help you stay ahead of evolving legislations, our platform connects data across your entire organisation and existing systems, all while maintaining control and mitigating risk.
The CSRD: Breaking Down the Walls Between ESG and Finance
ESG Reporting 101: What You Need To Know
CSRD Debrief: Who’s Impacted and How to Prepare
Learn how Workiva can help you on your sustainability journey
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Our ESG solution has all CSRD reporting requirements built into the platform, which we continually optimise to enable its seamless integration within the reporting process.
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