How the EU’s CSRD regulation will impact European businesses’ sustainability reporting

Companies operating in Europe will need to report on ESG issues in more detail than ever. Become CSRD-ready — or face penalties for non-compliance.

What is the EU’s CSRD regulation?

The new EU CSRD legislation is set to dramatically impact how European businesses need to report on sustainability.
It compels EU businesses — including large companies and SMEs — to disclose ESG impacts through the new ESRS framework.
Large non-European companies with a large EU subsidiary, or a significant EU presence, must also align with CSRD.
The first wave of affected companies will need to report in alignment with CSRD by 2025.
Non-compliant companies will face a range of penalties, including subsidy suspension and financial penalties.

The Corporate Sustainability Reporting Directive (CSRD) is a new EU legislation requiring businesses to publish regular reports disclosing their environmental and social impacts. Aiming to encourage more transparent disclosure on sustainability issues, it is the first time the European Commission has defined a common reporting framework for non-financial data.

The CSRD builds on and updates the Non-Financial Reporting Directive (NFRD), which was introduced in 2014 to improve companies’ accountability on their environmental, social and governance (ESG) performance.

In effect since 5 January 2023, the CSRD will be further phased in over several waves. Many EU companies must apply new rules for the first time in 2024, for reports to be published in 2025, disclosing their ESG impacts through the European Sustainability Reporting Standards (ESRS) framework.

How does ESRS relate to CSRD?

The European Sustainability Reporting Standards (ESRS) are the foundation for CSRD compliance. While CSRD is the name of the legislation, the ESRS are the standards: a structured sustainability reporting framework for companies to communicate their sustainability impacts.

The ESRS framework is divided into two main categories: 1) cross-cutting standards and 2) topical standards.

Cross-cutting standards

Companies preparing for CSRD readiness must consider two mandatory cross-cutting standards, meaning they apply to many topic-specific areas. ESRS 1 and ESRS 2 advise businesses how to structure their disclosures to ensure clarity, relevance, and consistency:

ESRS 1

ESRS 1 outlines the minimum requirements for CSRD compliance, ensuring companies align with essential sustainability reporting standards relating to environmental, social or governance aspects.

It also requires all standards — apart from ESRS 2 — to be subjected to a double materiality assessment. The ESRS defines double materiality as analyzing:

Impact materiality (business’ broader societal and environmental impacts); and
Financial materiality (the effects of ESG factors on the company’s financial performance).

The double materiality exercise is a tool for businesses to narrow their scope, reporting in more depth on issues deemed the most important for the company. Companies will have to provide detailed explanations for any standards they classify as non-material.

ESRS 2

ESRS 2 explains the overarching disclosure requirements which are universally applicable, regardless of company activity or sustainability maturity. It outlines three key reporting areas:

Governance: How sustainability is integrated into a company’s corporate governance framework;
Strategy: What role sustainability plays in the company's long-term planning and decision-making processes;
Impact, risk and opportunity management: How companies manage and respond to all sustainability-related factors, as well as how businesses integrate it into their corporate risk management approach.

Topical standards

The ESRS outlines ten non-mandatory topical standards, which include specific reporting requirements for different ESG matters, as outlined below.

Which companies will be affected by the CSRD?

A range of companies — inside and outside the EU — will be impacted by the CSRD this decade:

Large EU companies (whether listed or not) and large non-European companies which are listed on regulated EU markets, and which fulfill two of the following three criteria:
- a) over 250 employees;
- b) assets worth over €20 million;
- c) a turnover of over €40 million.
All EU and non-EU small and medium-sized enterprises (SMEs) which are listed on European regulated markets. Micro-enterprises are exempt. SMEs who fit two of the following three criteria will be affected:
- a) over 10 employees;
- b) a balance sheet over €350,000;
- c) a turnover over €700,000.
Other large non-European companies with a large EU subsidiary or a significant EU presence i.e. a turnover of over €150 million.

Will non-EU companies be impacted by the CSRD?

The CSRD applies to businesses located in the EU and certain EU subsidiaries of non-EU companies.

Non-EU companies will fall under CSRD’s scope if they are:

Listed on an EU regulated market with securities like bonds or stocks;
In excess of one or both of the following revenue thresholds:
- Annual EU turnover has been above €150 million for the last two consecutive financial years;
- An EU branch has an annual net turnover of over €40 million in the previous financial year.

The impact of the CSRD on the metals, energy and manufacturing sectors

Metals sector

Metals moving through EU borders are increasingly under the spotlight thanks to the EU’s Carbon Border Adjustment Mechanism (CBAM), which mandates importers to account for and pay a price on these emissions. With the CSRD requiring companies to outline the risks that climate change poses to their business model, metals manufacturers will also need to better understand their impact across the value chain, including carbon-related impacts and opportunities.

Energy sector (the case of methane)

Methane is a potent greenhouse gas (GHG) with a warming potential up to 80 times higher than carbon dioxide. Methane release occurs across the energy supply chain, from drilling and production, to processing, as well as in transport and distribution.

What are the penalties for non-compliance with the CSRD?

When companies are found to have omitted key reporting information — or submitted non-compliant disclosures — they could face a range of penalties, including:

Financial penalties;
Subsidies’ suspension;
Publication of non-conforming information.

As an EU directive, the CSRD is implemented at a national level and the magnitude of fines is not defined in the legislation, meaning that the level and frequency of penalties will vary. Regulatory authorities in each member state will be responsible for ensuring CSRD compliance and administering penalties.

What actions should companies impacted by the CSRD take?

CSRD goes beyond a ‘checklist’ approach to communicating ESG issues, as the ESRS framework requires companies to disclose how sustainability is woven throughout their corporate strategy in greater detail than ever.

FAQs

What are the aims of the CSRD?

Part of the European Green Deal — legislation to make Europe carbon neutral by 2050 — the EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose their environmental and social impacts more transparently than ever, using the European Sustainability Reporting Standards (ESRS) framework as a foundation.

Is CSRD the same as TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) was created to establish recommendations on reporting climate-related risks and opportunities. The CSRD and TFCD are both focused on robust, transparent reporting and the CSRD is broadly aligned with the TCFD’s four pillars — governance, strategy, risk management, metrics and targets. However, while the TCFD focuses on climate risks, the CSRD also requests additional disclosures on companies’ sustainability-related risks and opportunities. The CSRD takes a double materiality approach – however, the TCFD is focused on how climate risks will affect companies’ business models and operational capacity, therefore taking a single materiality approach.

Who will the CSRD apply to?

The CSRD will initially impact large EU companies — whether they are listed or not — as well as large companies not based in the EU which are listed on EU regulated markets. Certain EU subsidiaries of non-EU companies will also need to comply with the CSRD.

What is the difference between the CRSD and the CSDDD?

The CSRD and the Corporate Sustainability Due Diligence Directive (CSDDD) are both part of the European Green Deal, a set of policy initiatives which aim to make the EU climate neutral by 2050.

How can companies prepare for CSRD?

To become CSRD-ready, businesses will need to disclose their ESG impacts more transparently than ever before. Companies will need to prioritize climate disclosures — especially carbon accounting — familiarize themselves with CSRD timelines, analyze where their reporting gaps are, embark on a double materiality assessment and ensure a suitable team is in place to assist on data collection and communications.