Understanding the CSRD: Requirements, scope, timeline

In recent years, the increasing awareness of environmental risks and their impact on people, businesses, and the planet has driven the adoption of legislation aimed at accelerating the shift towards a more sustainable economy. A significant milestone in this journey was the European Union’s (EU) introduction of the European Green Deal in 2019. This transformative growth strategy is guiding the EU toward a sustainable economic model, with the ambitious goal of achieving net-zero emissions by 2050. 

To support this green transition, various legislative measures have been introduced, each targeting key objectives such as reducing emissions, enhancing the circular economy, preserving biodiversity, and providing financial support during the energy transition. One such critical piece of legislation is the Corporate Sustainability Reporting Directive (CSRD). This directive will expand the scope of companies required to report on their environmental, social, and governance (ESG) performance, affecting around 50,000 companies- nearly four times more than its predecessor, the Non-Financial Reporting Directive (NFRD). 

Why has the CSRD been introduced? 

The CSRD was introduced in response to the growing recognition that more robust sustainability reporting requirements were necessary to meet the ambitious goals set by the European Green Deal. While the Non-Financial Reporting Directive (NFRD), introduced in 2016, was a step in the right direction by requiring companies to publish a non-financial report on their ESG performance, its scope was limited. The NFRD helped stakeholders, regulators, and investors assess the non-financial performance of companies. However, due to the Directive’s narrow scope, doubts were raised about its ability to realistically improve the social and environmental impacts of EU companies.  Additionally, while the NFRD did require reporting on key areas such as environmental protection, social responsibility and board diversity, its reporting obligations did not demand the details of specific environment and climate related risks, nor were companies mandated to provide assurance on any information disclosed. 

Recognising these limitations, the CSRD was enacted to enhance transparency, accountability, and comparability in sustainability reporting. It introduces more detailed requirements and additional obligations, ensuring the reliability of this information. By setting a higher standard for non-financial reporting, the CSRD aims to prevent greenwashing practices that can mislead consumers and investors. The enforcement of this legislation, starting for some companies in 2025, will require a real commitment at all levels of an organisation, paving the way for transformative business practices that increase resilience and create long-term value. 

What companies are in scope of the CSRD? 

Under the scope of the CSRD, companies that fall under the following categories are required to disclose sustainability information: 

• Large EU companies that meet at least two of the following criteria: a) more than 250 employees, b) more than 50 million EUR of turnover, c) total assets on the balance sheet of 25 million. 

• All companies with securities listed on an EU regulated market (with an EU parent or not), including small and medium-sized enterprises (SMEs) with the exception of microenterprises. 

• Non-EU Companies with more than 150 million in net turnover generated in the EU, and a subsidiary or branch in the EU. In the last case, the branch is required to generate in the EU a turnover of more than 40 million EUR in the preceding financial year. 

Roadmap to CSRD implementation: What’s coming next? 

There is a phased-in period of implementation starting from 2024, which depends on the characteristics of the company:  

• Phase 1: Reporting in 2025 (for the financial year 2024) – Entities already reporting under NFDR 
• Phase 2: Reporting in 2026 (for the financial year 2025) – Large undertakings (see first set of criteria on the left) out of scope of NFRD 
• Phase 3: Reporting in 2027 (for the financial year 2026) – Listed SMEs (except micro-enterprises) 
• Phase 4: Reporting in 2028 (for the financial year 2027) – Third-country undertakings with net turnover over 150 million EUR in the EU 

How will the CSRD impact UK-based companies or other non-EU companies? 

The CSRD has expanded the scope to include two groups of companies: all listed companies in EU member states, including SMEs, and large non-EU parent companies (non-listed) that meet certain criteria. For non-EU companies to fall within scope, they must have generated more than 150 million EUR in net turnover within the EU for each of the last two financial years. Additionally, they must have a subsidiary or branch in the EU with significant operations, generating over 40 million EUR in net turnover in the preceding financial year. 

Key requirements of the CSRD 

The CSRD will require companies within its scope to report on their ESG-related risks and impacts in accordance with the European Sustainability Reporting Standards (ESRS). Unlike some other frameworks, the ESRS include both quantitative and qualitative disclosures across a broad range of sustainability topics, addressing governance, strategy, risk management, and performance metrics. These enhanced requirements aim to impose more stringent obligations on in-scope companies. 

The adoption of the ESRS marks a shift in reporting standards, with the goal of increasing transparency, accountability, and comparability in sustainability reporting. The key requirements of this Directive are as follow: 

Double materiality assessment 

One of the key features introduced by CSRD is double materiality assessment (DMA), which requires a company to assess both the impacts of the company’s operations on people and the environment (impact materiality), as well as the risks and opportunities that derive from these impacts concerning their financial performance (financial materiality).  

According to the European Financial Reporting Advisory Group (EFRAG) guidelines, this process involves four key steps, from understanding the operational boundaries of the company and its context, to the identification and assessment of sustainability issues, ending with reporting. In this process, effective stakeholder engagement is a key mechanism to access new information that is useful to identify environmental, social, and governance-related areas that are relevant for the company. Moreover, involving relevant groups to the business through different channels such as interviews or surveys helps to deliver effective planning and robust strategies that reduce negative impacts and business exposure to environment-related events. 

On top of that, the CSRD requires companies to map their relationships with their upstream business partners, which includes suppliers of raw materials and manufacturers, as well as downstream business partners including distributors and other actors that deliver services and products to end consumers.  This preliminary task is part of their obligation to report about their impacts, risks, and opportunities (hereinafter, IROs) throughout their value chains. CSRD therefore has established an additional burden for companies by requiring them to report about sustainability issues arising beyond their own operations. 

Sustainability in corporate strategy and governance 

There are three key points related to corporate strategy and governance that arise from CSRD. First, it requires companies to disclose their business model and strategies related to sustainability matters, which means that companies will have to disclose how they will face environmental, social, and governance-related issues. Moreover, they are required to explain how these two address their impacts, risks and opportunities (IROs) and to disclose their climate transition plans to align with the 1.5 C of global warming target set by the Paris Agreement. Finally, there is an obligation to define responsibilities by explaining the role of the administrative, management and supervisory bodies in charge of sustainability matters. 

Risk management and compliance functions 

The CSRD significantly affects an organisation’s risk management and compliance functions. One key requirement is mandatory assurance of the sustainability information disclosed in reports. Companies must also report on the targets they set to address their most salient sustainability issues and track their performance over time. Moreover, a strong focus is placed on environmental factors, which must be measured in line with scientific targets. Additionally, companies are required to disclose the due diligence procedures they have in place to address sustainability issues, which involves providing information on internal documents, such as policies and action plans, that outline how a company identifies, prevents, mitigates or remedies adverse social and environmental impacts.  

How will CSRD requirements be enforced and what are the penalties for non-compliance? 

The CSRD does not set specific penalties for non-compliance. Instead, each member state is required to incorporate the directive into their national laws, giving them the authority to create their own enforcement regimes. These regimes must be “effective, proportionate, and dissuasive” (Article 51). As a result, penalties are likely to align with existing national penalties for similar reporting laws. This means monetary fines, sanctions, and supervisory bodies may vary from country to country, so companies subject to the directive must consult their national laws for specific guidance. 

Conclusion 

The CSRD reporting requirements affect various aspects of a business, from top management to day-to-day operations, fostering a new approach to accountability. Companies are now expected to be more aware of how their internal activities, operations, and relationships with suppliers and stakeholders impact both people and the planet. 

These regulations require companies to rethink their business models, strategies, and governance systems by embedding sustainability into core decision-making processes. This not only helps set clear targets and track progress but also reduces risks, seizes opportunities, and contributes to broader environmental and societal goals. 

Ultimately, the CSRD paves the way for companies to embark on a transformative ESG journey that enhances brand value and drives long-term growth. Additionally, the more recently adopted Corporate Sustainability Due Diligence Directive (CSDDD) being put into effect reinforces and extends the need for corporates to take sustainability and ESG very seriously. GoodCorporation supports businesses on this journey, helping companies comply with both the CSRD and CSDDD by analysing their material ESG risks and aligning their management and operational processes and procedures with regulatory requirements.

Our services enable businesses to identify what needs to be done to meet both Directives’ standards, including measuring ESG performance and integrating sustainability goals into practice. Through bespoke methodologies, our experts can assess an organisation’s operations to ensure compliance with regulations and demonstrate a responsible approach to environmental, social, and governance management, turning sustainability goals into practice.