Corporate Sustainability Reporting Directive (CSRD): Who is Subject and What is Required

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Who is Subject to the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is a significant update to the existing Non-Financial Reporting Directive (NFRD), which dramatically broadens its scope. This expansion is set to increase the number of organizations required to comply with sustainability reporting from 11,600 to over 50,000 companies. The CSRD will impact a wide range of entities, including many that will need to report their full carbon emissions for the first time. This article delves into the specifics of who is subject to the CSRD, what disclosures are required, the concept of double materiality, mandatory climate change reporting, assurance requirements, and the connection between the CSRD and the EU Taxonomy.

The Broad Reach of the CSRD

EU-Based Public and Private Companies

The CSRD applies to all EU-based public companies, with the sole exception of micro-enterprises. This means that if a public company is listed on any EU stock exchange, it will be required to comply with the CSRD’s reporting requirements. Additionally, the directive encompasses all EU-based private organizations that meet at least two of the following criteria:

  1. Employ more than 250 people.
  2. Generate annual revenues exceeding €50 million.
  3. Possess a balance sheet total of more than €25 million.

These criteria ensure that large private companies contribute to the EU’s sustainability goals by providing comprehensive environmental, social, and governance (ESG) disclosures.

Non-EU Companies with Significant EU Operations

Approximately 10,000 non-EU companies with substantial operations in Europe will also fall under the CSRD’s purview. For many of these organizations, their EU subsidiaries will need to meet the same reporting standards as their EU counterparts if they satisfy the criteria mentioned above. This requirement mandates detailed sustainability reporting from these subsidiaries, which may lead some parent companies to opt for consolidated reporting at a global level.

Expanding Requirements for Non-EU Companies

Second Wave of Requirements

The CSRD will eventually impose separate reporting requirements on non-EU companies, further expanding the scope of entities required to comply. These regulations will apply if a non-EU parent company has annual EU revenues exceeding €150 million and maintains at least one branch or subsidiary meeting specific criteria. These criteria include:

  1. The branch generating more than €50 million in annual EU revenues.
  2. The subsidiary either being EU-listed or meeting the large company criteria outlined above.

This second wave of requirements ensures that non-EU companies with significant EU activities are also held accountable for their sustainability impacts, promoting greater transparency and alignment with the EU’s sustainability objectives.

What Disclosures Does the CSRD Require?

The CSRD mandates comprehensive sustainability disclosures, governed by the European Sustainability Reporting Standards (ESRS). These standards are divided into 12 draft standards, covering a broad range of topics.

General Requirements and Disclosures

Two cross-cutting standards outline the general requirements and disclosures, addressing overarching ESG topics. These standards provide the foundational elements of sustainability reporting, ensuring consistency and comparability across all reporting entities.

Environmental, Social, and Governance Standards

Beyond the general standards, there are specific topical standards:

  • Environmental: Five standards detailing disclosures on climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy.
  • Social: Four standards focusing on social aspects such as workforce, human rights, and community impacts.
  • Governance: One standard dedicated to governance issues, ensuring robust governance practices and accountability mechanisms.

These detailed standards require companies to report on a wide range of metrics and qualitative information, providing a holistic view of their sustainability performance.

Understanding Double Materiality in the CSRD

Concept of Double Materiality

The CSRD introduces the concept of double materiality, which requires companies to assess and report on both:

  1. How their operations impact people and the environment.
  2. How sustainability-related developments impact the organization.

This dual perspective ensures that companies consider both their external impacts and the internal risks and opportunities related to sustainability.

Materiality Assessments

Companies must conduct comprehensive materiality assessments, engaging a broad range of stakeholders, including scientific experts, customers, employees, and investors. These assessments help identify which sustainability topics are material to the organization, guiding the focus of their reporting.

Mandatory Climate Change Reporting

Regardless of the outcomes of their materiality assessments, companies are required to meet baseline climate reporting standards. These requirements, based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, include:

  1. Measurement and disclosure of full scope 1-3 greenhouse gas emissions.
  2. Assessment of climate-related risks.
  3. Policies related to climate change mitigation and adaptation.

These stringent requirements ensure that all companies provide a comprehensive account of their climate impacts and actions.

Assurance Requirements for CSRD Reporting

To enhance the credibility and reliability of sustainability reporting, the CSRD introduces an audit assurance requirement. Starting in 2026, companies must obtain limited assurance for their sustainability reports, progressing to reasonable assurance by 2028. This requirement aligns sustainability reporting with the rigor of financial reporting, aiming to prevent greenwashing and ensure high levels of data accuracy and completeness.

Connecting the CSRD and EU Taxonomy

The CSRD is closely linked to the EU Taxonomy, a classification system defining environmentally sustainable economic activities. Companies within the scope of the CSRD must also comply with the EU Taxonomy, ensuring that their reported activities align with defined sustainability criteria. This connection ensures coherence between different sustainability reporting requirements, facilitating comprehensive and integrated sustainability disclosures in companies’ annual reports.

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Some sections of this article were crafted using artificial intelligence technology