Corporate Sustainability Reporting Directive (CSRD) Explained

Back to top

Summary

The Corporate Sustainability Reporting Directive makes it mandatory for large, small and medium (SMEs), and some non-EU enterprises to disclose sustainability information in their financial reports. Starting from January 2025, large firms will have to report along the environmental, social, and governance dimensions. Currently, very specific and rigid disclosure requirements are being developed. The first official draft is going to be published in October 2022. For SMEs, the regulation is more lenient and will come into force in 2027. All reported information will have to be ‘digital tag’ and audited. Breach of the regulation causes penalties, while compliance brings about significant benefits such as an increase in green investment, monetisation of sustainability efforts, and harmonisation of reporting processes. Read further for details.

What is the aim of the Corporate Sustainability Reporting Directive?

The Corporate Sustainability Reporting Directive creates a common reporting framework that improves the content and quality of sustainability information. Ultimately, the legislation aims to increase the firms’ trustworthiness in the eyes of stakeholders such as investors, banks, customers, and consumers.

In terms of the legislative background, the directive is part of the European Union’s (EU) Sustainable Finance Package, which aims to enhance the flow of money to sustainable activities.2 The package also includes the EU Taxonomy Delegated Act and six amending Delegated Acts. The directive widens the scope of the Non-Financial Reporting Directive (NFRD) adopted in 2014.3 Before being fully implemented, the directive has to undergo a complex policy-making process.

What is the timeline? 

The European Parliament and the Council proposed the Corporate Sustainability Reporting Directive.4 The proposal text was made public on April 21st 2021. By December 1st 2022, member states will integrate the directive into their national legislation. The directive comes into force at the 2025 for large firms already subject to the NFRD and in 2026 for large firms not currently subject to the regulation. In 2027, the CSRD applies for SMEs. The final stage of the policymaking process will be reached when the reporting requirements are fully developed and implemented. Currently, the first set of standards is being drafted. See the image below for the timeline.

Figure 1: Timeline overview of the EU's Corporate Sustainability Reporting Directive


Who is subject to the Corporate Sustainability Reporting Directive? 

According to the proposal text published on April 21st 2021, the Corporate Sustainability Reporting Directive expands the reporting requirements to more entities, including those organised as foundations, trusts, or franchises1.


In particular, the directive applies to

1. All large companies from 2024 which meet at least two of the following3 (applies from 2025 and 2026)  

  • 250 and more employees on average during the financial year5 
  • € 40M or more in net turnover
  • € 20M or more in total assets 

2. Listed SMEs, i.e. those whose financial assets are traded on EU markets (applies from 2027) 

-> Medium enterprises which meet at least two of the following criteria

  • 50 - 249 employees on average during the financial year
  • € 8M - € 40M in net turnover
  • € 4M - € 20M in total assets 

-> Small enterprises which meet at least two of the following criteria

  • 10 - 49 employees on average during the financial year
  • € 700K - € 8M net turnover
  • € 350K - € 4M in total assets
  • Note: When incorporating the directive into the national legislation, member states are allowed to increase the limit for the net turnover and total assets up to € 12M and € 6M respectively

3. EU subsidiaries of non-EU companies operating in the internal EU market 

4. Non-EU companies listed on EU markets possessing financial assets

The directive does not apply to:

1. Listed SMEs with financial assets on growth markets or multilateral trading facilities

2. Non-listed SMEs 

3. Listed micro-enterprises which meet at least two of the following criteria

  • 10 and less employees on average during the financial year 
  • Less than € 700K in net turnover 
  • Less than € 350K in total assets

The excluded firms, however, can use the developed standards voluntarily.

What are the requirements of the Corporate Sustainability Reporting Directive? 

Firms will have to disclose detailed information on human rights, the environment, and governance in their management reports.6 The subject matters will have to be prepared according to a strict set of standards. These standards, however, are yet to be established in a step-by-step process7, in line with the framework set out it the proposed Corporate Sustainability Reporting Directive3. First, by October 31st 2022, the European Commission will adopt the standards for the reporting year 2023. Second, in 2023, the Commission will approve standards for 2024. Finally, the last set will be shared by mid 2024 or later. Since the standards are being developed, many things are still unclear, but it is certain that the upcoming legislation will give a more detailed description of what to disclose and how to structure the information.

1. What information should enterprises disclose in the reports? 
The EU is planning to make the standards consistent with the EU’s legal framework (the European Green Deal, Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation)1 and global initiatives for sustainability reporting and existing sustainability frameworks (e.g., SDGs, ESG criteria). Therefore, the EU sustainability reports will use similar indicators (see Table 1 for the overview of the indicators). The standards will include the information that financial market participants have to share according to the SFDR. The firms will be evaluating whether their activities are sustainable in line with the technical screening criteria set out in the Taxonomy Regulation and its delegated acts. 

Firms will have to include a report on how sustainability issues affect their performance, position, and development (the ‘outside-in’ perspective) and on the impact their activities have on people and the environment (the ‘inside-out’ perspective)1. This will be indicated along the following dimensions.8

Environmental
Climate change

15 disclosure requirements, including 

  • Climate change mitigation and adaptation policies
  • Scope 1, 2, and 3 emissions
  • Energy intensity and consumption
  • Financial effects from related risks and opportunities
Pollution

7 disclosure requirements, including 

  • Policies to control pollution
  • Substances of concern 
  • Financial effects from related risk and opportunities  
Water and marine resources

7 disclosure requirements, including 

  • Policies to manage the resources
  • Water management, intensity performance
  • Financial effects from related risk and opportunities
Biodiversity

10 disclosure requirements, including 

  • Transition plan to reach full recovery by 2050 
  • Pressure, impact, and response metrics
  • Financial effects from related risk and opportunities
Resource use and circular economy

15 disclosure requirements, including 

  • Resource inflows and outflows
  • Resource use optimization
  • Financial effects from related risk and opportunities 
Social
Own workforce

26 disclosure requirements, including

  • Workforce policies
  • Work-life balance
  • Gender pay gap
  • Identified cases of severe human rights issues
Workers in the value chain

6 disclosure requirements, including 

  • Related policies
  • Channels to raise concerns
Affected communities

6 disclosure requirements, including

  • Related policies
  • Taking action on material impacts on affected communities and their effectiveness
Consumers and end-users

6 disclosure requirements, including

  • Related policies 
  • Taking action on material impacts on consumers and end-users and their effectiveness
Governance
Governance, risk management, and internal control

10 disclosure requirements, including

  • Nomination, evaluation, risk management, and internal control processes
  • Composition of administrative, management, and supervisory bodies 
  • Diversity policy
Business conduct

10 disclosure requirements, including 

  • Related policies
  • Corruption and anti-competitive behaviour events
General
General disclosure principles

3 disclosure requirements, including 

  • Policies adopted to manage material sustainability matters
  • Targets, progress and tracking effectiveness
  • Actions, action plans, and resources in relation to policies and targets
General, strategy, governance, and materiality assessment

22 disclosure requirements, including

  • Key features of the firm
  • Statement of compliance
  • Stakeholder views
  • Information of administrative, management, and supervisory bodies about sustainability matters and their roles in such matters
  • Description of the process to identify impacts, risk, and opportunities and the outcomes of the assessment
environment
Climate change

15 disclosure requirements, including 

  • Climate change mitigation and adaptation policies
  • Scope 1, 2, and 3 emissions
  • Energy intensity and consumption
  • Financial effects from related risks and opportunities
Pollution

7 disclosure requirements, including 

  • Policies to control pollution
  • Substances of concern 
  • Financial effects from related risk and opportunities
Water and marine resources

7 disclosure requirements, including 

  • Policies to manage the resources
  • Water management, intensity performance
  • Financial effects from related risk and opportunities
Biodiversity

10 disclosure requirements, including 

  • Transition plan to reach full recovery by 2050 
  • Pressure, impact, and response metrics
  • Financial effects from related risk and opportunities 
Resource use and circular economy

15 disclosure requirements, including 

  • Resource inflows and outflows
  • Resource use optimization
  • Financial effects from related risk and opportunities  
Social
Own workforce

On 26 disclosure requirements, including

  • Workforce policies
  • Work-life balance
  • Gender pay gap
  • Identified cases of severe human rights issues
Workers in the value chain

On 6 disclosure requirements, including 

  • Related policies
  • Channels to raise concerns
Affected communities

On 6 disclosure requirements, including

  • Related policies
  • Taking action on material impacts on affected communities and their effectiveness
Consumers and end-users

On 6 disclosure requirements, including

  • Related policies 
  • Taking action on material impacts on consumers and end-users and their effectiveness
Governance
Governance, risk management, and internal control

On 10 disclosure requirements, including

  • Nomination, evaluation, risk management, and internal control processes
  • Composition of administrative, management, and supervisory bodies 
  • Diversity policy
Business conduct

On 10 disclosure requirements, including 

  • Related policies
  • Corruption and anti-competitive behaviour events
General
General disclosure principles

On 3 disclosure requirements, including 

  • Policies adopted to manage material sustainability matters
  • Targets, progress and tracking effectiveness
  • Actions, action plans, and resources in relation to policies and targets
General, strategy, governance, and materiality assessment

On 22 disclosure requirements, including

  • Key features of the firm
  • Statement of compliance
  • Stakeholder views
  • Information of administrative, management, and supervisory bodies about sustainability matters and their roles in such matters
  • Description of the process to identify impacts, risk, and opportunities and the outcomes of the assessment

Table 1: The EU’s Corporate Sustainability Reporting Directive disclosure requirements, as specified in the working paper published in April 2022.

Furthermore, firms will have to disclose information about the intangibles. In particular, how non-physical resources contribute to value creation. Intangibles include such forms of capital as social, human, and intellectual, as well as value captured from research and development. 

Both large firms and SMEs will have to report along the aforementioned indicators.  However, the reporting standards for SMEs will be more lenient4. These standards are being developed together with the standards for large firms.

2. How to to communicate the sustainability information according to the Corporate Sustainability Reporting Directive?

Firms have to include sustainability information in the annual management reports
4. It should be available in an electronic XHTML format and have a digital ‘tag’. The goal of this measure is to make the reports machine-readable and easily feed them into the European Single Access Point. The exact digitalisation standards are to yet be specified in the European Single Electronic Format Regulation and the European Single Access Point Regulation1

The reports will have to be submitted annually within the 12 months after the start of the financial year on January 1st (e.g., submit reports before January 1st 2025 for the financial year starting on January 1st 2024). Large companies that are already subject to the NFRD will use the standards for the first time for the reports submitted on January 1st 2025. All other large firms will use the standards in 2026 for the first time. Standards for SMEs will apply in 20274

Communicated information, including its compliance with the standards, will require assurance. Usual auditors and independent assurance services providers can verify the reports. Both of them should be accredited to evaluate whether the reports comply with requirements1. The option to use the independent firms has been added due to the lack of sustainability audit services and standards. For the same reason, firms will start with a limited assurance requirement. As soon as the Commission adopts sufficient sustainability audit standards, the scope would widen to a more demanding reasonable assurance.

The requirements of the Corporate Sustainability Reporting Directive are rigid and detailed. Adjusting operations to them is a complex process, but the medium- and long-term benefits it will bring are significant.

Why is it important to comply with the Corporate Sustainability Reporting Directive?

Compliance with the regulation is not only important to avoid financial repercussions but also presents a growth opportunity. Not complying can cause administrative penalties and exclusion from investments portfolios. At the same time, compliance can bring more clarity to the reporting process, attract green investments, increase a firm’s public accountability, and bring about innovations.

Avoid sanctions and exclusion from investment portfolios

If a company is found to be non-compliant with the Corporate Sustainability Reporting Directive, the firms will face administrative sanctions. There are three possible penalties: 

  1. First, a public statement about the breach. 
  2. Second, an order on the name of the entity requiring to change the conduct. 
  3. Third, financial sanctions. 


It is up to member states to choose the penalty. They also have to define the extent of the sanctions when they transpose the directive to local law. For example, according to the German version of the current NFRD, firms are fined up to either € 10M, 5% of the annual turnover, or twice the amount of the profits gained / losses avoided because of the breach.9  

Another consequence of insufficient reporting is the loss of investments for the reasons of investor protection and upcoming legislation1. There is a growing awareness that sustainability-related issues can affect the firms’ performance which pushes away potential investors7.  This risk will grow as sustainability information becomes ever more important throughout the financial system due to upcoming legislation targeted at enhancing green investments. For example, the SFDR forces investors to share how they account for the effects of their investments on people and the environment.10 The Taxonomy Regulation is another legislation that increases the demand for sustainability information by requiring firms under the scope of the sustainability reporting directive to disclose the extent to which their activities are environmentally sustainable according to the taxonomy. 

Utilise harmonised reporting standards

Harmonisation of the reporting standards will simplify reporting2, as enterprises would no longer have to deal with overlapping standards and inconsistent requests from stakeholders. The common framework will act as a single reporting solution, eliminating complexity and harnessing cooperation. Having a single comprehensive reporting framework will make it easier for firms to get the information they need for ensuring responsible business conduct from their partners (suppliers, clients, and investee companies), without constantly requesting additional information. According to the European parliament, the decrease in such requests will save € 24 200 - 41 700 per company annually4

Monetise sustainability efforts

Being early adopters of non-financial reporting, firms can capture the growing demand for sustainability. Reporting can improve the image of a firm in the eyes of important stakeholders1.  Financial market participants such as investors and banks increasingly need information from businesses on their impacts on the environment and people to comply with disclosure requirements under the SFDR. Reliable reporting enhances investors’ engagement by enabling them to account for sustainability-related risks. Additionally, the importance of making quantifiable and transparent sustainability claims is gaining popularity among consumers as they become more aware of greenwashing. A recent study indicated that two-thirds of consumers are willing to pay extra for sustainable products.11 Taking responsibility for their impacts helps firms harness public trust and acquire new consumers1

Besides being important for various stakeholders, understanding the performance on the non-financial indicators can bring about new insights and innovation to the production processes. For example, decreasing costs by reducing energy consumption or monetising waste.

To circumvent the sanctions and utilise the benefits of the regulation, it is necessary to comply. However, it is often not clear where to start.

How to set up a reporting process in accordance with the Corporate Sustainability Reporting Directive? 

The Corporate Sustainability Reporting Directive makes it mandatory to report on sustainability indicators, but adjusting to the new requirements is not easy, and firms have to start preparing now. 

  • Begin with harnessing cooperation along your supply chains to get the information you need for reporting purposes from your business partners (suppliers, clients, and investee companies). This might be done through contractual agreements that ensure data sharing across your supply chain for the purpose of the reporting. 
  • Find auditing agencies to substantiate the collected sustainability information.
  • Choose a reliable and scalable medium where the collected information can be stored in an XHTML format and from which it can be fed into the European Single Access Point with a digital ‘tag’. Currently, the majority of companies are accustomed to emailing pdf, and excel documents upon customer requests. However, this data sharing process is not scalable nor secure.
  • Keep an eye on the legislative procedure. Pay extra attention to the standard-setting by the European Financial Reporting Advisory Group, EU Taxonomy Delegated Acts, European Single Electronic Format Regulation, European Single Access Point Regulation, and the transposition of the directive in EU member states.
  • Until the final reporting framework is made available in mid 2024 for large firms and in 2026 for SMEs, ensuring traceability of supply chains is useful. The full visibility, though not being directly required by the regulation, has two key benefits. First, being aware of what is happening will help you evaluate the business practices along a wide range of indicators, including the social, environmental, and governance criteria. Hence, you would be ready to any standards. Second, the visibility can be used to substantiate the sustainability claims, consequently making your reports credible in the eyes of the information’s user (be it governments, investors, or consumers). Further, you can find information about how to achieve supply chain traceability.

How Circularise can help with complying with the Corporate Sustainability Reporting Directive? 

To ensure you know what is happening across the supply chain, continually tracking the impact and chain of custody of all material that passes through a manufacturing company is required. However, this is a significant undertaking and presents a web of challenges from resourcing, to data integrity, and protecting company intellectual property. This is why Circuarise has developed a tried and tested, blockchain-powered software platform, which provides supply chain traceability that can not only be trusted but also integrated with existing operational processes.

See how we achieved visibility into the Porsche supply chain.

Conclusion  

The CSRD aims to make reliable and structured sustainability information available for various stakeholders. It does so by forcing firms to disclose information on non-financial indicators. Enterprises will have to include a report on how sustainability issues affect their performance, position and development, and on the impact their activities have on people and the environment. 

The directive applies to large companies, SMEs listed on official EU markets, SMEs carrying out high-risk activities, and non-EU companies operating in the EU internal market. The standards are going to be less rigid for SMEs.

The exact reporting standards are yet to be defined, but the first draft will be published in October 2022. The sustainability information will have to be communicated through annual management reports, available in an electronic format and have a digital tag. The reports will also require audit and assurance. To effectively respond to new legislative measures, firms have to start preparing now.

Contact us for more information on CSRD preparation

About Circularise

Circularise provides cutting edge end-to-end traceability & transparency solution for complex industrial supply chains.

We help companies to verify the origins, certificates, CO2 footprint and other material and product data on blockchain to improve their ESG performance, demonstrate responsible sourcing, and enable a circular economy at scale.

Resources
  1. "Corporate Sustainability Reporting Directive proposal." 21 Apr. 2021, https://ec.europa.eu/info/news/questions-and-answers-corporate-sustainability-reporting-directive-proposal-2021-apr-21_en. Accessed 14 Jul. 2022.
  2. "Sustainable Finance and EU Taxonomy - European Commission." 21 Apr. 2021, https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804. Accessed 19 Jul. 2022.
  3. "Proposal for a directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting - EUR-Lex." https://www.europarl.europa.eu/RegData/docs_autres_institutions/commission_europeenne/com/2021/0189/COM_COM(2021)0189_EN.pdf. Accessed 15 Jul. 2022.
  4. "2021/0104(COD) | Legislative Observatory | European Parliament." https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2021/0104(COD)&l=en. Accessed 28 Jul. 2022.
  5. "32013L0034 - EN - EUR-Lex - European Union." https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32013L0034. Accessed 22 Jul. 2022.
  6. "Corporate sustainability reporting | European Commission." https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en. Accessed 12 Jul. 2022.
  7. "Final report - Proposals for a relevant and dynamic EU sustainability reporting standard-setting" 5 Feb. 2021,https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2FEFRAG%2520PTF-NFRS_MAIN_REPORT.pdf. Accessed 13 Jul. 2022.
  8. "EFRAG Public consultation on draft ESRS Appendix I." https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2FED_ESRS_AP1.pdf. Accessed 28 Jul. 2022.
  9. "The Corporate Sustainability Reporting Directive (CSRD) - planA.earth." 2 Jun. 2022, https://plana.earth/academy/csrd-corporate-sustainability-reporting-directive/. Accessed 19 Jul. 2022.
  10. "Sustainability-related disclosure in the financial services sector." https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/sustainability-related-disclosure-financial-services-sector_en. Accessed 22 Jul. 2022.
  11. "The Sustainability Imperative - Nielsen." https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/Global20Sustainability20Report_October202015.pdf. Accessed 19 Jul. 2022.