CSRD Reporting Is Closer Than You Think
The clock is ticking toward implementation of the Corporate Sustainability Reporting Directive (CSRD). Get an overview of the scope and timeline.
An overview
Starting as early as the 2024 fiscal year, certain companies are subject to reporting requirements under the European Union (EU) Corporate Sustainability Reporting Directive (CSRD). Reporting is not merely a check-the-box exercise; the CSRD reporting obligations are extensive and demand meticulous attention to detail. Proactive measures are not just advisable, they are imperative to fend off the risk of noncompliance. Failing to comply with the CSRD could result in financial or other penalties, which vary based on the regulations of each EU member state. Companies must act swiftly and decisively to ensure they are not left scrambling at the eleventh hour to meet the robust CSRD reporting requirements.
The CSRD is a component of the European Green Deal, a set of policy initiatives by the European Commission (EC) with the overarching aim of making Europe climate neutral by 2050. The objective of the CSRD is to improve the quality, consistency, and comparability of sustainability information disclosed by companies in the EU or by non-EU companies that have a significant presence in the EU. The CSRD replaces and expands the previous Non-Financial Reporting Directive (NFRD) and introduces new requirements for reporting standards, assurance, double materiality, and digitalization. These requirements present an opportunity to furnish financial statement users with environmental and sustainability information, thereby providing decision-useful insights.
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Scope and reporting summary and timeline
The CSRD scope is expansive and encompasses non-EU companies (for example, a company domiciled in the United States) that have a significant presence in the EU or have a non-EU parent with debt or equity securities listed on an EU-regulated exchange. The CSRD requires applicable companies to report on their sustainability impacts, risks, and opportunities as well as their performance and position in relation to environmental, social, and governance (ESG) matters.
The first CSRD reporting dates depend on company type and size (see Table 1), but the earliest reporting date is 2025 (covering fiscal year 2024 information) for companies that were already subject to the NFRD.
| Table 1 | |
|---|---|
| Reporting entity | Reporting entity definition |
| Large undertaking | An undertaking that on its balance sheet date exceeds at least two of the three following criteria:
|
| Large group | Parent and subsidiary undertakings to be included in a consolidation that, on a consolidated basis, exceeds the limits of at least two of the three following criteria on the balance sheet date of the parent undertaking:
|
| Small- and medium-sized undertaking (SME) | An undertaking consisting of at least two of the three following criteria on its balance sheet date:
|
| Micro-undertaking | An undertaking consisting of at least two of the three following criteria on its balance sheet date:
|
Source: Original directive: https://eur-lex.europa.eu/eli/dir/2013/34/oj; amendment: https://eur-lex.europa.eu/eli/dir_del/2023/2775/oj
Table 2 summarizes the key parameters for evaluating how a company might be scoped into CSRD reporting requirements and identifies associated reporting dates. Any U.S.-domiciled company with a presence in the EU should consider whether it falls within the scope of the CSRD, and given the complexity of the directive, it is advisable for companies to consult with legal counsel to determine their reporting obligations under the CSRD. The identification of what facts trigger the CSRD reporting requirement is critical, as the scoping criteria drive the reporting date and can have implications for reporting boundaries.
| Table 2 | |
|---|---|
| Reporting entity fact pattern | Mandatory CSRD reporting date |
| Large undertakings or groups that are public interest entities exceeding an average of 500 employees on their balance sheet dates | Reporting for fiscal years beginning in 2024, reporting in 2025 |
| Large undertakings or groups that do not meet the criteria in the previous row | Reporting for fiscal years beginning in 2025, reporting in 2026 |
| Listed small- and medium-sized undertakings, small and noncomplex credit institutions, and captive insurance undertakings, none of which are micro-undertakings | Reporting for fiscal years beginning in 2026, reporting in 2027* |
Third-country nonlisted undertakings with a “significant presence” – a net turnover (revenue) of 150 million euros and either of the following:
|
Reporting for fiscal years beginning in 2028, reporting in 2029 |
* Listed SMEs (excluding micro-undertakings) may choose to defer CSRD sustainability reporting for a period of up to two years, on the condition that they include a brief explanation within their management report clarifying the absence of sustainability information.
Source: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX%3A32022L2464
Crowe observation: It’s critical to recognize that the first year of reporting under the CSRD will require limited assurance. Starting in 2028, the CSRD’s assurance requirements begin to phase into reasonable assurance. The SEC’s final climate disclosures rule differs significantly from the CSRD in terms of disclosures and assurance requirements.
Scope exception
After an institution determines its scoping category, it should perform an evaluation of the reporting boundaries. The CSRD reporting requirements describe reporting alternatives, offering certain non-EU companies different approaches regarding which entities are included in the reporting boundaries. Refer to Article 48i, “Transitional provisions.”
Under the various reporting boundaries, an entity might also be eligible for an exemption. Exempted subsidiaries are required to disclose the following information within their management statement:
- The name and registered office of the parent company responsible for reporting sustainability information at the group level
- The web links to the consolidated management report
- An acknowledgment of this exemption in their own management report
These disclosures ensure transparency and accessibility to sustainability information at the group level while streamlining reporting obligations for subsidiaries.
CSRD reporting standards and content
CSRD standards require the use of the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). The ESRS are designed to address the needs of various stakeholders, including investors, customers, employees, and regulators.
Broadly speaking, the ESRS require companies to report on their business model, strategy, governance, policies, targets, indicators, due diligence processes, and principal and adverse impacts on sustainability matters. The ESRS framework requires consideration of double materiality (see “Materiality” section of this article) and includes 12 standards under which entities must disclose all material impacts, risks, and opportunities related to ESG matters. ESRS do not require disclosure of any information within these categories when the topic is not material.
The 12 standards of ESRS sustainability reporting
- General standards
- ESRS 1: General requirements
- ESRS 2: General disclosures
- Standards on environment
- ESRS E1: Climate change
- ESRS E2: Pollution
- ESRS E3: Water and marine resources
- ESRS E4: Biodiversity and ecosystems
- ESRS E5: Resource use and circular economy
- Social standards
- ESRS S1: Own workforce
- ESRS S2: Workers in the value chain
- ESRS S3: Affected communities
- ESRS S4: Consumers and end users
- Governance standards
- ESRS G1: Business conduct
Source: “Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 Supplementing Directive 2013/34/EU of the European Parliament and of the Council as Regards Sustainability Reporting Standards,” accessed Aug. 29, 2024, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202302772
ESRS reporting requirements vary based on the scoping category. Non-EU companies should note that specific standards tailored for them are still in early working versions under development and have yet to be finalized. Considering this, it is imperative for companies to proactively assess the ESRS requirements and disclosures. Engaging with legal counsel for guidance is advisable. See EFRAG’s draft reporting standards for non-EU groups.
Certain institutions may be eligible to adopt simplified ESRS (for example, listed SMEs, credit institutions, captive insurers). These reporting standards are called the Sustainability Reporting for Listed Small and Medium Enterprises (LSME) and the Voluntary Sustainability Reporting Standards for Non-Listed SMEs (VSME). Exposure drafts for these standards were released in January 2024 to solicit public feedback, and comments were due May 21, 2024.
ESRS 1 and 2: General standards
ESRS 1 is recognized as the general requirements, and ESRS 2 is termed the general disclosures. ESRS 1 and ESRS 2 are categorized as cross-cutting standards. They are considered overarching standards that are relevant to sustainability topics covered by thematic and industry-specific standards. ESRS 1 delineates core concepts such as double materiality, due diligence activities, value chain consideration, and the assessment of various time horizons. ESRS 2 elaborates on the process for creating disclosures and sets out requirements for disclosures related to strategy, impacts, risks, and opportunity management. Both ESRS 1 and 2 serve as foundational points for adherence to sustainability reporting protocols. For additional details, please see pages 3 and 40 of the Commission Delegated Regulation.
ESRS E1: Standards of Climate
Of the 12 standards within the CSRD, ESRS E1 is specifically dedicated to climate change considerations and requires some disclosure regardless of the entity’s conclusions on materiality. According to the directive, “If the undertaking concludes that climate change is not material and therefore omits all disclosure requirements in ESRS E1, ‘Climate change,’ it shall disclose a detailed explanation of the conclusions of its materiality assessment with regard to climate change.” The disclosure requirements under the ESRS E1 are comprehensive, and adherence is likely to demand substantial effort. Sections of the requirement are as follows:
| Table 3 | |
|---|---|
| Disclosure requirement | Description |
| E1-1 | Transition plan for climate change mitigation |
| E1-2 | Policies related to climate change mitigation and adaptation |
| E1-3 | Actions and resources in relation to climate change policies |
| E1-4 | Targets related to climate change mitigation and adaptation |
| E1-5 | Energy consumption and mix |
| E1-6 | Gross scopes 1, 2, 3 and total GHG (greenhouse gas) emissions |
| E1-7 | GHG removals and GHG mitigation projects financed through carbon credits |
| E1-8 | Internal carbon pricing |
| E1-9 | Anticipated financial effects from material physical and transition risks and potential climate-related opportunities |
Some disclosure requirements of CSRD might be phased in. Institutions need to be thoroughly prepared to navigate the intricacies of ESRS E1. For additional details, refer to the “Objective” section on pages 73-85 of the Commission Delegated Regulation.
Materiality
The concept of double materiality has two dimensions: 1) impact materiality and 2) financial materiality. A sustainability matter meets the criteria of double materiality whether it is material from an impact perspective, from a financial perspective, or both. CSRD requires companies to use the concept of double materiality as the basis for all sustainability disclosures.
Impact materiality relates to the real or possible effects of an undertaking’s actions that might be beneficial or detrimental to individuals or ecosystems. These impacts can unfold across the short, medium, or long term. Adopting a broad approach enhances the likelihood of capturing all significant consequences of the undertaking’s operations in its sustainability reporting and evaluations. These assessments may be informed by stakeholders and conducting thorough due diligence.
From a financial viewpoint, sustainability issues are considered material if they have or might have significant monetary impact on a company’s cash flows, financial position, or performance over any term. These are issues that create or could create significant risks or opportunities influencing future financial performance.
For more information on materiality considerations, please reference Section 3.2 of the Commission Delegated Regulation.
Assurance and digitalization of the CSRD
The CSRD requires independent third-party assurance for sustainability reporting. It will begin with limited assurance and progress to reasonable assurance. The limited assurance requirement begins in the first year a company must report under the CSRD, making it crucial to engage with assurance providers early on. The CSRD also empowers the EC to adopt assurance standards, following an assessment of the feasibility and availability of assurance providers. The directive permits member states to designate the assurance providers, which can be statutory auditors or independent assurance services providers, if they fulfill certain supervision and educational requirements, meet professional standards, and maintain quality management system processes.
Companies within the scope of the CSRD are subject to the single electronic reporting format requirements of Article 29d, which is intended to facilitate the accessibility, usability, and comparability of sustainability information.
Wrapping it up
The CSRD represents a significant shift in the landscape of corporate reporting within the EU as it replaces and expands upon the previous NFRD and introduces stringent requirements for reporting standards, assurance, materiality, and digitalization. The urgency to understand and prepare for compliance with the CSRD cannot be overstated, as it is essential for ensuring readiness for and adherence to the forthcoming standards. The directive underscores the increasing recognition of the significance of ESG issues to corporate performance and risk management, marking a transition from voluntary to mandatory assurance of sustainability disclosures. Companies operating within the EU, as well as those outside the EU with significant presence within it, should act swiftly to align with these regulations to avoid being caught unprepared, effectively manage reporting risks, and avoid potential financial penalties by EU member states.
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