What You Need to Know
- The Corporate Sustainability Reporting Directive ("CSRD") significantly expands sustainability reporting requirements for EU companies.
- Companies are subject to its requirements based on their type and whether they meet specific thresholds.
- Companies must undertake a materiality assessment to determine their particular sustainability reporting requirements.
Background
CSRD has significant sustainability reporting requirements for companies operating within the European Union. The CSRD's objective is to update and enhance the regulations regarding the social and environmental data that companies are required to disclose.
CSRD applies to a wide range of EU domiciled companies, including large companies and listed small and medium-sized enterprises ("SMEs"). It is estimated more than 60,000 EU companies will be in scope of CSRD, as opposed to just over 11,000 under its predecessor the Non-Financial Reporting Directive ("NFRD"), which only applied to large public-interest entities.
CSRD came into force on 1 January 2024. It consists of four implementation phases, with companies becoming subject to its requirements based on their type and whether they meet specific thresholds.
Phased Implementation
Phase one of CSRD, for all financial reporting periods commencing after 1 January 2024, only impacted large listed/public interest companies. In general, such large entities were already reporting under the NFRD.
Phase two (commencing 1 January 2025), applies to large undertakings (not subject to NFRD). Such large undertakings are undertakings which on their balance sheet date meet at least two of the three following criteria: (i) balance sheet total: EUR 25 million; (ii) net turnover: EUR 50 million; or (iii) average number of 250 employees during the financial year.
Phase three (commencing 1 January 2026) applies to small and medium-sized undertakings, which are public-interest entities and which are not micro-undertakings1.
Phases 2 and 3 will encompass the majority of EU-domiciled companies that fall under the scope of the CSRD2. These companies should begin preparing for the CSRD, if they have not already done so, during 2025.
Key Requirements of CSRD
CSRD requires companies to report in accordance with the European Sustainability Reporting Standards ("ESRS"). The ESRS specify the information that a company shall disclose about its material impacts, risks and opportunities in relation to environmental, social, and governance sustainability matters.
It will ensure that investors and other stakeholders have access
to the information they need to assess the impact of companies on
people and the environment, and for investors to assess financial
risks and opportunities arising from climate change and other
sustainability issues.
A materiality assessment is the starting point for determining
sustainability reporting under ESRS.
CSRD mandates that materiality be assessed through a "double materiality" lens, considering both impact (inside-out) and financial (outside-in) materiality.
In order to ensure that a reporting process is in place which adequately addresses the requirements of CSRD, it is crucial for Directors to have an understanding of these requirements, including the ESRS and their company's corresponding materiality assessments.
A failure to do so creates a risk of the financial statements published by the Directors not clearly and fairly reflecting the company's sustainability credentials, i.e. greenwashing.
Steps to take now
Here are some practical steps that companies can take to ensure compliance:
Determine Scope – Identify whether your company falls within the scope of CSRD and determine the specific phase applicable to your organisation.
Assess – Evaluate your current sustainability reporting practices and identify gaps in relation to the CSRD requirements.
Develop and Implement – Create a detailed plan to address the new reporting standards, including data collection, assurance processes, and digital reporting.
Director Training – Ensure boards have the requisite understanding of CSRD to oversee a reporting process that will clearly and fairly reflect a company's sustainability credentials.
Footnotes
1. micro-undertakings are undertakings which on their balance sheet dates do not exceed the limits of at least two of the three following criteria: (a) balance sheet total: EUR 450,000; (b) net turnover: EUR 900,000; (c) average number of employees during the financial year: 10.
2. This will include special purpose vehicles incorporated in Ireland and Luxembourg that meet the relevant criteria.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.