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?
The CSRD is the Corporate Sustainability Reporting Directive.
First proposed in April 2021, this new EU legislation developed by the European Financial Reporting Advisory Group (EFRAG) will gradually be coming into play over the next few years. It expands upon, and will replace, the Non-Financial Reporting Directive (NFRD), which has been in force since 2018.
Like the NFRD, the CSRD sets out environmental, social and governance (ESG) reporting requirements for companies. Its aim is to significantly expand the scope of the NFRD, both in terms of who needs to report and what needs to be reported.
Who does the CSRD apply to?
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.
Why is it needed?
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.
What will need to be reported on?
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 has now been passed, following a landslide vote in the European Parliament in November 2022.
Once the standards have been adopted by the EU, the next step is to transpose them into national law. Each member state will be able to decide how CSRD regulations are enforced in their country. This stage will be completed by 1st December 2022.
The CSRD will then be phased in:
- 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 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.
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: The CSRD is a substantial step up from previous ESG reporting requirements. To meet these high standards, your company will need full engagement from all stakeholders, particularly C-level executives and the board of directors. More than putting together a report, the CSRD requires a clear vision and goal setting.
Prepare now: Now that we know exactly what the CSRD entails, it's time to make the necessary decisions to ensure that your organisation complies with the mandate.
Remain agile: As the reporting landscape develops, it’s important to assess the processes and tools that underpin daily operations throughout the organisation. Do you have access to all the data your organisation may need to report on? How is it being gathered? Is it secure, verifiable, and connected? Having these building blocks in place (with the help of the right technology and processes) will prepare you for any upcoming reporting requirements.
How Workiva can help
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. By empowering you to trust your data and report in a transparent and verifiable manner, Workiva enables you to go beyond compliance and focus on communicating—and achieving—your company’s goals. To find out more, check out our ESG demo video.