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The EU’s Corporate Sustainability Reporting Directive (CSRD), effective from January 5, 2023, marks a significant shift in corporate sustainability reporting within the European Union (EU) and globally. Affecting approximately 50,000 EU-based and 10,000 non-EU companies, the CSRD mandates that companies report sustainability information based on its principles and the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). It also requires companies to undertake a “double-materiality” approach to determining their material impacts, risks, and opportunities (IROs).
In this article, we explore the latest developments with the CSRD, the obligations of impacted businesses, how those businesses should prepare, and how CSRD is paving the way for greater accountability globally.
The deadline for the CSRD national transposition by the EU Member States, EEA, and EFTA countries into their national laws was July 6, 2024. Our infographic shows where the current national transposition processes currently stand. Datamaran clients can continue to track these national transpositions using the monitoring functionality within the Datamaran platform.
1. Conduct a Double Materiality Assessment (DMA):
Adopt an objective, data-driven approach to identify material impacts, risks & opportunities (IROs) across the company’s business model and value chain.
2. Identify affected stakeholders: Engage with the stakeholders affected by the identified impacts.
3. Implement Sustainability Governance: Establish clear governance structures, ideally with board and executive-level oversight of sustainability practices.
4. Establish targets related to material matters: Having a clear, justified, data-driven direction of travel is critical - and targets offer a transparent presentation of ambition.
5. Define sustainability strategy, including policies and actions: Ensure the material IROs are considered in core business strategies and define the policies and actions that can drive improved performance towards achieving the company targets.
6. Collect and analyze relevant qualitative and quantitative data: Assess the materiality of information to be collected and disclosed and establish systems to facilitate that process.
7. Publish an annual Sustainability Statement: Companies must report annually according to the European Sustainability Reporting Standards (ESRS) addressing policies, actions, targets, and metrics associated with material sustainability matters. Additional disclosures around sustainability governance, strategy, and overall process to determine the material iIROs are also mandatory for all companies.
8. Maintain transparency and traceability: Ensure transparency throughout the process, including data collection, reporting, and decision-making. Establish systems to track and trace sustainability performance throughout the value chain.
9. Engage a third party for limited assurance: The Sustainability Statement needs to be assured by a third party.
10. Monitor the evolving landscape to proactively adapt strategy and pre-empt emerging IROs: Adopting a data-driven method to monitor developments ensures sustainability is treated strategically and transitions from a reporting and compliance project to a value-adding process.
A CSRD-compliant Double Materiality Assessment (DMA) is a data-driven process that accounts for the actual and potential sustainability impacts, risks & opportunities (IROs) across a company’s value chain. Transparency in data inputs and decision-making coupled with thorough documentation throughout the process are critical to being audit-ready. Implementing robust governance processes - with executive-level oversight - will ensure results are considered strategically from a position of value creation rather than mere compliance. Companies are obligated to report on the policies, actions, targets, and metrics (if applicable) related to their material IROs and a range of process and governance disclosures. And yes, this is to be conducted on an ongoing annual basis.
The CSRD and ESRS require companies to report on their operations and the sustainability practices of their value chain partners, including suppliers, customers, and other entities within their business ecosystem. Recognizing that this can be difficult, the “report or explain" approach allows companies to explain their efforts in obtaining this information, acknowledge any gaps in data, and outline plans to improve future reporting. The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), another recently approved key piece of EU legislation, also promotes responsible value chain reporting by requiring companies to identify and address potential human rights and environmental impacts throughout their operations and value chain.
The CSRD directly applies to companies with operations above a certain size within the EEA, encompassing EU member states. However, other countries are also aligning with the CSRD. For example, Switzerland’s membership in the EFTA doesn't directly mandate its adoption of the CSRD. However, the Swiss federal government has recently initiated a consultation process to align its reporting rules with the CSRD, which will be open until October 17, 2024. Similarly, the UK is no longer an EU member; however, CSRD's extraterritorial impact still influences UK companies. The existing ESG disclosures under the NFRD, implemented in the UK through the Companies Act 2006, were expanded to align with CSRD requirements.
While not mandatory for all businesses, those with significant operations or financial ties to the EU must comply to maintain market access and investor confidence. The CSRD's standardized nature (using ESRS) makes it a de facto international standard, prompting global companies to adopt it for greater transparency. Even companies not directly covered by the CSRD may need to provide ESG information to customers and partners, requiring new data collection and disclosure procedures.
The CSRD's implementation is phased, from 2024, with different reporting requirements based on company size and type. Large EU companies and non-EU entities with significant EU operations are prioritized, with smaller entities given more time to comply.
|
Phase |
Company Size |
Thresholds |
Reporting |
|---|---|---|---|
|
Ph 1: From January 1, 2024 |
Large EU and EU subsidiaries of non-EU entities meeting the NFRD thresholds: |
|
2025 (FY 2024) |
|
Ph 2: From January 1, 2025 |
Other large EU (both listed & unlisted) and EU subsidiaries of non-EU entities that meet at least two of three criteria: |
|
2026 (FY 2025) |
|
Ph 3: From January 1, 2026 (with an optional deferral by two years to January 1, 2028) |
As per the new EU Directive 2013/34/EU of October 17, 2023: Small Undertakings listed on European markets that meet at least two of the following three conditions:
Medium Undertakings listed on European markets that meet at least two of the following three conditions:
Micro-enterprises will not be subject to the CSRD. SMEs meeting the criteria can commence data collection from January 2026, with the option to opt out of reporting for two years. The first reports for eligible SMEs will be due in 2027 and extendable until 2028 under the opt-out provision. |
|
2027 (FY 2026) |
|
Ph 4: From January 1, 2028 |
Non-EU entities with an EU-significant presence (subsidiary or branch EU-based) : Must report on the whole global group´s performance, including non-EU companies. |
|
2029 (FY 2028) |
Potential Sanctions for Non-compliance with CSRD
Non-compliance with the CSRD can result in various sanctions set by EU member states, potentially damaging a company's reputation and limiting its access to public contracts. Each Member State will determine the sanctions, including financial penalties, cease and desist orders, and public statements identifying the responsible individuals or entities and describing the nature of the infringement.
Data from the Datamaran platform below shows the number of European companies citing ‘CSRD’ in their Financial and Sustainability Reports in 2024 and how this has grown over the last three years. However, as we edge closer to 2025, more companies, who are less familiar with the concept of double materiality, will be required to start this journey. Luckily, best practices are already being developed, and these businesses will benefit from having the first wave of CSRD Sustainability Statements as a reference.
For those companies that began this process at the start of the year for mandatory 2024 reporting, the next big hoop is assurance. The CSRD requires that the Sustainability Statements receive limited assurance - but there is as of today, no specific assurance standard for the ESRS. This has created confusion and angst in the market as companies and assurance providers work towards a common understanding and a market norm.
However, CSRD's ambition goes even further. It may even progressively guide companies towards providing "reasonable assurance" on sustainability claims. This signals a future where sustainability reporting holds the same weight as financial statements. While achieving this level of certainty will take time, the CSRD's impact transcends the EU. Companies globally with significant EU ties must comply, making it a de facto international standard and a major step towards a more sustainable global business landscape.
To assist companies in navigating the requirements of CSRD, Datamaran can provide insights and workflows for efficient compliance and strategic integration of ESG factors. These tools are vital for companies aiming to align with the directive while managing costs and resource allocation effectively. Request a discovery call with our team of in-house experts to learn more.
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