The Corporate Sustainability Reporting Directive (CSRD) is the EU’s new big step toward making ESG reporting as rigorous as financial reporting. Politics aside, it’s a big added load for finance teams with companies who have EU activity.
The CSRD is a replacement (and expansion) of the earlier Non-Financial Reporting Directive (NFRD), standardizing and tightening ESG-related reportinghofor companies. The NFRD applied to about 11000 companies, the CSRD is broader in scope and will cover around 50000 companies. That includes non-EU companies with significant EU business or EU subsidiaries. The reports will follow the European Sustainability Reporting Standards (ESRS).
Timeline & Roll Out Process
The EU decided to roll out the CSRD in stages, to ease the burden on companies. Here’s the plan they put together. It’s worth mentioning that these timelines are subject to change, and previous timelines they’ve announced were already modified in later EU proposals.
Phase 1: FY 2024 Reporting (Due in 2025)
This initial reporting requirement is for large public-interest companies already subject to NFRD. It’s typically large companies with 500+ employees, public listing, or financial institutions.
Phase 2: FY 2025 Reporting (Due in 2026)
This stage applies to large companies meeting at least two of three criteria: >250 employees, >€40–50M turnover, or >€20–25M in assets. In the original plan, this was due in 2026, but the EU recently passed a “stop-the-clock” proposal that delays this stage by two years.
Phase 3: FY 2026 Reporting (Due in 2027)
This stage is for listed SMEs, small credit institutions, captive insurers, and other small and medium sized enterprises with securities listed on EU markets. SMEs have an opt-out until 2028, and the rest of the stage reporting deadline was also postponed until FY 2028 (reports in 2029). Note: unlisted SMEs are not mandated by CSRD, though voluntary standards are being developed for them. Just in case your finance team had some extra time on their hands.
Phase 4: FY 2028 (due in 2029)
This phase is for non-EU parent companies with significant EU turnaround (€150M+) or EU subsidiaries or branches.
Reporting Scope: Bird’s Eye View
The EU loves their acrynonyms. The ESRS standards underlying the CSRD covers topics across ESG: environmental, scope 1-3 emissions, social topics like workforce development, demographics, and governance topics.
The first set of ESRS has 12 standards, 82 requirements, around 500 KPIs, and over 10,000 data points that companies need to track and report. This places a big burden on finance teams at large companies and makes the need for better reporting software even greater.
Another challenge is the required value chain reporting. This means companies need to report on ESG standards held by their supply chain and other external partners. A large factory, for example, has to pull reports from their raw goods suppliers. That means finance teams are also responsible for getting accurate, timely information from their partners.
The new report will be included alongside financial reports of the company. It will be audited by a third party and you need to obtain an assurance statement from an independent auditor as well — although the EU confirmed that assurance standards will become more rigorous over time.
The challenges facing finance teams are heavy. Lots of smaller firms don’t have dedicated sustainability teams, so the workload is added to the teams responsible for all other reporting. Most mid market companies can estimate it will take an additional 3-5 full time hires to meet compliance requirements. And there is a steep learning with all of the new standards and added scope — which is challenging especially for teams that aren’t familiar with frameworks like TCFD.
Double Materiality
Th EU’s Big Idea behind the CSRD is to match the rigor of performance reporting to reporting on ESG goals. This is sometimes called Double Materiality. The intent is to gain clarity on a company’s progress on ESG goals and be able to compare companies against each other using certain benchmarks.
While performance (or financial) reporting tells a story of how a company’s operations impacts the internal financial picture, double materiality flips that on its head. It’s an answer to the question, How does a firm’s performance & operations impact the planet and people? The ESRS standards are a guide to creating a company sustainability strategy, to track progress on targets, and prove how sustainability is baked into your business model.
It’s hard to say what this new level of ESG reporting will mean for companies in 5 or 10 years after the CSRD roll out — but you can be sure the EU will continue to come up with new regulations and added pressure to companies to maintain ESG metrics they report.
Digital Tagging and ESRS Standards
CSRD not only dictates what companeis must report, but also how they present and transmit this information. A key technical requirement is that sustainability disclosures be prepared in a digitally tagged format, similar to how financial reports are tagged in XBRL for e-filing.
Companies will need to publish their sustainability information in an electronic, machine readable format (XHTML) with tags that map to a sustainability taxonomy. This makes the reports more comparable and searchable.
Conclusion
CSRD compliance is no joke. Especially for mid-market firms with limited resources.
But on the bright side, with planning and the right tools, finance leaders can navigate CSRD waters well and even turn the challenge into an opportunity for more transparency, building trust with stakeholders, and building sustainability goals into their business strategy!