Blog | CSRD

CSRD

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The CSRD (1) introduces comprehensive and standardized reporting requirements of non-financial data and replaces the Non-Financial Reporting Directive (NFRD). It is designed to enhance the transparency and comparability of non-financial information, ensuring that stakeholders, investors, and regulators have access to consistent and reliable sustainability data.

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In total, it is estimated that CSRD will affect around 50.000 companies across Europe. Depending on their type, affected companies must file an annual report starting between 2024 and 2028.

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The CSRD primarily applies to companies in the EU and the European Economic Area (EEA) countries of Norway, Iceland, and Liechtenstein. Switzerland is subject to certain CSDR provisions via a bilateral agreement and there are separate rules for non-EU countries.

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This CSRD came into force in January this year. The first group of affected companies will have to start reporting in 2025 on the financial year 2024, the remaining ones will follow until 2029 (see table):

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Companies subject to CSRD will be required to disclose a broad set of sustainability-related information explicitly including their upstream and downstream supply chain. The disclosures encompass not only environmental factors but also social and governance aspects i.e., all of ESG. Reporting entities are obligated to provide insights across four reporting areas (adopted from the TCFD framework):

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1) Governance

2) Strategy

3) Impact, risk and opportunity management

4) Metrics and targets

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In order to meet the reporting requirements of the CSRD, the European Sustainability Reporting Standards (ESRS) are being developed. They serve as a framework for reporting in alignment with CSRD (2).

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So far, the sector agnostic ESRS standards have been released. They consist of 12 standards: There are general requirements (ESRS 1), general disclosures (ESRS 2), and five environmental standards (ESRS E1-5), the first and most comprehensive one (ESRS E1) covering the topic of climate change. Furthermore, there are four social standards (ESRS S1-4) and one governmental standard (ESRS G1). Disclosures outlined in ESRS 2 (General disclosures) are always mandatory, all others are subject to materiality assessment.

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Double materiality was adopted as a core principle. It is used to determine whether something must be reported or not. It is based on whether either or both of two components are material based on a materiality assessment performed by the company.

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Financial Materiality describes the positive and negative effect of sustainability impacts on the financial situation of the company. It is therefore an outside-in perspective.
For example, the viability of companies operating in carbon-intensive industries such as oil & gas is under threat by the transition to a low carbon economy due to things such as regulatory pressure, the risk of stranded assets and more difficult access to capital. For a company offering renewable energy systems, the same situation may present a business opportunity.

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Impact materiality describes the positive and negative impacts of operation on people and the environment. It is therefore an inside-out perspective.For example, a chemical company emitting greenhouse gasses and polluting water would need to report this as a negative impact.

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Climate change (ESRS 1) has been changed from a mandatory to an optional topic. However, due to its wide-ranging and systemic impacts across the economy, companies will have to provide a detailed explanation of the conclusions of its materiality assessment if they find climate change to be not material. Accordingly, most companies will need to disclose carbon emission data going forward. In practice, we can expect that reporting of scope 1 + 2 emissions will be mandatory. The majority of companies will also need to disclose scope 3 emissions though not necessarily in its entirety. Requirements are overall less stringent, particularly in the beginning due to transitional provisions to reduce the burden on value chain partners.

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With regards to data quality, ESRS acknowledges that it is not always possible to collect primary data, especially when it comes to value chain information. In such cases, using sector averages and proxy data is permitted. However, companies will still need to meet a number of requirements, including accurately describing assumptions and limitations and maintaining consistency with assumptions used in financial data. With regards to Scope 3 emissions, the percentage calculated using primary data from suppliers must be disclosed.

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On October 17 in its 2024 Commission work programme, the European Commission proposed (3) to postpone the deadline for the adoption of sector-specific ESRS as well as for requirements for large non-EU companies that operate in the EU. The CSRD requires the European Commission to adopt both by June 2024. The plan would see this to be changed to June 2026. Instead, the focus should be on supporting the implementation of the (sector-agnostic) first set of standards (4).

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It is important to note that these delays will have only a limited effect on the overall timeline. The roll-out of the sector-agnostic standards will proceed as planned. Non-EU companies will still be required to report starting in the financial year 2028. The plan would only postpone the deadline for the adoption of these standards giving them less time to prepare.

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