CSRD: The New Standard for ESG Reporting

The Corporate Sustainability Reporting Directive (CSRD) transforms environmental, social, and governance (ESG) reporting in the EU from a voluntary marketing exercise into a mandatory compliance process matching the rigor of financial reporting.

Scope and Timeline

The CSRD expands the scope of the prior Non-Financial Reporting Directive (NFRD) to cover nearly 50,000 companies. It applies to:

• All large EU companies meeting two of three criteria: >250 employees, >€50m turnover, >€25m balance sheet total.
• All EU listed companies (except micro-enterprises).
• Non-EU companies generating >€150m in the EU and having at least one large or listed EU subsidiary or branch.

Reporting rolls out in phases between 2024 (for companies already subject to NFRD) and 2028 (for non-EU companies).

The Principle of Double Materiality

The cornerstone of CSRD is "double materiality." Companies must report on:

1. Impact Materiality (Inside-Out): How the company's operations impact the environment and society (e.g., carbon emissions, labor rights).
2. Financial Materiality (Outside-In): How sustainability matters trigger financial risks and opportunities for the company (e.g., physical climate risks damaging assets, transition risks from new carbon taxes).

A topic must be reported if it is material from either perspective.

European Sustainability Reporting Standards (ESRS)

Companies must report according to the ESRS, drafted by EFRAG. The standards cover 12 areas:

• Cross-cutting: General Requirements (ESRS 1) and General Disclosures (ESRS 2).
• Environmental: Climate change, pollution, water and marine resources, biodiversity, resource use and circular economy.
• Social: Own workforce, workers in the value chain, affected communities, consumers and end-users.
• Governance: Business conduct (e.g., anti-corruption, lobbying).

Mandatory Assurance

Unlike previous ESG frameworks, CSRD requires independent third-party assurance of the sustainability report. Initially, this is set at "limited assurance," but is expected to transition to "reasonable assurance" (the standard for financial audits) by 2028.