The Corporate Sustainability Reporting Directive (CSRD)

The primary objective of the CSRD is to establish a standardized framework for reporting non-financial data among companies operating within the EU. This framework is designed to facilitate the reporting of essential non-financial information, thus enabling investors, civil society groups, consumers, policymakers, and various stakeholders to make informed decisions based on a company's non-financial performance. After disclosure of the information, the non-financial corporate report is assessed by independently accredited auditors. The audit can be carried out by the auditor, another auditor, or an independent assurance provider (Member State option). The EU plans to gradually increase the audit standard from 'limited assurance' to 'reasonable assurance', and to develop EU auditing standards for 'reasonable assurance' audits by October 2028. According to the CSRD, in principle subsidiaries are to be exempted from the reporting obligation at the group level. However, this exemption does not apply to capital market-oriented subsidiaries. It should also be noted that if the risks and impacts of the subsidiary and parent company differ significantly, the risks and impacts of the subsidiary must be disclosed in the group management report. 

Compared to the NFRD, the CSRD now makes significantly more companies subject to reporting requirements. For reporting, a chronological sequence of the implementation roadmap is planned depending on the type of company. All companies reporting under the NFRD must report under the CSRD in 2025 for the reporting year 2024. As of 2026, large companies (limited liability companies, credit institutions and insurance companies) that meet two of the following three criteria on the balance sheet date will have to disclose their information in accordance with the CSRD for the 2025 reporting year:

One year later, from 2027 for the reporting year 2026, all small and medium-sized enterprises (SMEs), other listed companies (with 10 to 250 employees) and captive (re)insurance companies will be subject to CSRD reporting, with extensions possible until 2028. Micro-enterprises are excluded. In 2029, (for the reporting year 2028), all European subsidiaries or branches of non-European parent companies that generate more than €150 million in cumulative turnover in the EU and that have at least one EU branch or EU subsidiary which generates at least €40 million in net turnovers in the EU, will then be subject to reporting. The EU subsidiary or EU branch is responsible for publishing the non-EU company's sustainability report. The non-EU company's sustainability reports should be prepared in accordance with separate EU reporting standards (i.e., standards other than those applicable to EU companies). The company may also report according to the standards applicable to EU companies or according to standards deemed equivalent by a Commission decision. More detailed requirements for non-EU companies subject to the CSRD are currently being developed and are expected to be adopted in mid-2024.

The European Sustainability Reporting Standards (ESRS) are the standardized reporting standards that companies obliged to report according to the CSRD must adhere to. The ESRS was adopted on the 31^st of July 2023 and consists of a sector-agnostic part, which applies to all companies regardless of sector, and a sector-specific part, which is currently being developed by the European Financial Reporting Advisory Group (EFRAG) on behalf of the EU Commission. There are twelve sector-agnostic standards:

The ESG-topics standards, (the so-called "topical standards") follow the same structure–for the most part, they are all comprised of indicators for that specific topic, which companies must disclose. Additionally, according to these standards, enterprises are required to report any policies and derived actions to mitigate any negative impacts or risks, as well as to use positive impacts as opportunities for further development in that specific topical field. These standards comprise a total of 84 disclosure requirements, 37 sub-topics and 1,178 data points that companies must report on depending on the outcome of their materiality analysis. (For more information, see the section ‘double materiality assessment’.) If companies determine that any information relevant for the report is not covered by either the sector-agnostic standards, or (in the future) by the sector-specific standards, then they are still obliged to disclose the information in a separate "company-specific disclosure" section of their sustainability report.

The CSRD operates in harmony with other pivotal sustainability regulations within the EU, including the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation. Notably, the EU Taxonomy will be integrated into the mandatory reporting obligations established by the CSRD, further aligning businesses with sustainable finance principles and environmental objectives. Companies obliged to report according to the CSRD must disclose their sustainable financial KPIs in line with Article 8 of the EU Taxonomy. Furthermore, the ESRS E1 Climate change stipulates that companies must draft an environmental transition plan, which must include how the economic activities of the enterprise will be brought into alignment with the EU Taxonomy.

The corporate due diligence process for sustainability matters also plays a central role in the CSRD. According to ESRS, the sustainability due diligence process is an ongoing practice that responds to changes in the company's strategy, business model, activities, business relationships, operations, procurement, and sales context. Furthermore, the process is derived from the international instruments of the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. It includes the following as a core concept: The core aim of the process is to identify and assess any negative impacts caused, or contributed to, by the company–this includes any negative impacts directly related to the company's own operations, products, or services through its business relationships. If the entity cannot address all impacts at once, the due diligence process allows priorities to be set depending on the severity and likelihood of the impacts.

The constant recording and assessment of the company's impacts through the due diligence process is an essential input for the materiality assessment of internal processes of ESG issues. As ESG issues are broad and their relevance varies from company to company, an assessment is needed to determine which issues are particularly relevant in the context of sustainability management and which ESG aspects the public should be informed about in the sustainability report. Compared to the NFRD, the CSRD prescribes the definition of material sustainability topics according to the principle of double materiality (DM), and thus significantly expands the scope of relevant topics. The double materiality analysis examines two dimensions: environmental materiality and financial materiality. To prevent misunderstandings or misinterpretations of the double materiality analysis, EFRAG was tasked with firmly anchoring the principle in the ESRS as part of the development of the CSRD.

According to the ESRS, the starting point of any materiality assessment is the identification of environmental materiality (inside-out). This materiality dimension assesses the impact of a company's business activities on the environment and society. In identifying and assessing impacts, risks and opportunities within the value chain, entities should focus on areas where material impacts are most likely to occur due to the nature of the activities, business relationships, geography, or other risk factors.

For actual adverse impacts, materiality is based on the severity of the impact, while potential adverse impacts is based on the severity and likelihood of the impact. The severity is determined on the basis of

and is calculated additively. In the case of a potential negative impact on human rights, the severity of the impact takes precedence over the probability of occurrence. In contrast, the calculation of positive significant impacts differs depending on the type of impact. In the case of:

Financial materiality completes the double-materiality assessment. Here, the impact of the environment and society on the company's business activities is assessed. In this step, companies should derive risks and opportunities from past or future events that have an impact on the following:

Furthermore, financial materiality is not limited to matters that are under the direct control of the company concerned, but can also relate to the material risks and opportunities arising from business relationships with other companies/stakeholders. As for financial effects arising from a company's dependence on natural and social resources, a distinction is made between two types of effects. On the one hand are, those effects that influence the company's ability to obtain and use resources it needs for its business processes, and to influence the quality and pricing of these resources. And on the other hand, those effects that affect the company's ability to access business relationships (with other companies and with stakeholders) that it needs for its business processes under economically acceptable conditions. 
To calculate financial materiality, it is necessary to consider:

In order for complete implementation of the materiality assessment to occur, companies need to consider several factors in their double materiality analysis. Conducting a status quo analysis of the company, which identifies its business model, business strategy, features of the value chain, target market, and stakeholders, is an important supporting step in executing the materiality analysis. Similarly, a list of sustainability topics based on the ESRS–including the actual and potential positive and negative impacts formulated for the company, as well as the aspects of stakeholder involvement, is crucial for the success of the materiality assessment. Since all disclosure requirements of the ESRS, apart from ESRS 2, are to be assessed by the double materiality approach, the circle of topics to be disclosed varies from company to company. 

The life cycle perspective is also gaining importance in the regulations for sustainability reporting according to the ESRS. To that end, Life cycle assessment (LCA) and the concept of accounting for greenhouse gas (GHG) emissions according to the Greenhouse Gas Protocol (GHG Protocol)–subdivided into Scopes 1, 2, and 3–play an important role. Scope 1 emissions are defined as direct emissions from owned or controlled sources, whereas Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are defined as all indirect emissions that do not fall under Scope 2, but are identified when reporting a company's value chain–including upstream and downstream emissions. While LCA assesses various environmental impacts of products or services, GHG accounting according to the GHG Protocol refers to the organizational or company level. Despite the different objects of investigation (product vs. company), a life cycle and Scope 3 emissions assessment according to the GHG Protocol, record environmental or climate impacts that go far beyond the pure effects within the company. This is because both LCA and Scope 3 emissions accounting consider the entire life cycle of the product or company. In particular, the accounting of GHG emissions occupies a central place in the CSRD, in (ESRS E1 Climate Change) with the obligation of all companies to disclose their GHG balance in accordance with the GHG Protocol (see ESRS E1).

Viridad recognizes the significance of the CSRD in promoting corporate transparency and sustainability. We are committed to assisting our clients in adhering to these important standards, thereby contributing to a more sustainable and responsible business landscape in the EU and beyond. At Viridad, we're committed to simplifying the CSRD reporting process and helping you harness the power of sustainability reporting to drive your business towards a more sustainable and responsible future. Explore our services to see how we can assist you on this transformative journey.