The CSRD (Corporate Sustainability Reporting Directive) basics are explained in nine questions in the Q&A below.
What is the purpose of the Corporate Sustainability Reporting Directive (CSRD)?
It is the ambition of the European Union to be climate neutral by 2050. Disclosure and reporting regulations are to accelerate the transition to this sustainable economy. On January 5, 2023 the Corporate Sustainability Reporting Directive (CSRD) entered into force. As many as 49,000 companies must publish information on environmental, social and governance factors in their annual reporting. This sustainability information must be approved by the accountants.
How are CSRD and Non-Financial Reporting Directive (NFRD) related?
The CSRD replaces the Non-Financial Reporting Directive (NFRD) that covered 11,000 companies, and not only expands its scope but also introduces more detailed reporting requirements. It also establishes reporting standards that ensure reporting becomes more accessible and comparable. The current NFRD applies to large companies with a public interest such as listed companies, banks and insurance companies with at least two of the three following criteria: a net turnover of €40 million, a balance sheet total of €20 million and/or with more than 500 employees. EU member states have until 6 July 2024 to transpose the directive into national law. The directive will be phased in from 2024.
To whom does CSRD apply?
The CSRD expands the scope of application of the NFRD. The CSRD applies to:
All large companies incorporated in an EU member state, including EU subsidiaries of non-EU companies. The directive defines a large enterprise as an entity that meets two of the following three criteria:
A net turnover of more than €40 million;
A balance sheet total of more than €20 million and/or
More than 250 employees.
Parent companies with a registered office in an EU Member State, where the group of companies collectively meet the criteria for large companies;
Companies incorporated outside the EU meeting the following criteria:
The company carries out substantial activities in the EU, i.e. net turnover in the EU exceeds €150 million per year in two consecutive financial years; and
The company has at least one:
Branch office of that company in the EU with a net turnover of at least €40 million; or
A subsidiary of that company in the EU that meets at least two of the requirements for large companies;
Companies listed on an EU-regulated market, including small and medium-sized enterprises (SMEs), with the exception of micro-enterprises (micro-enterprises are companies that on the balance sheet date do not exceed the thresholds for at least two of the three following criteria: balance sheet total of €350,000, net turnover of €700,000 and an average workforce during the financial year of 10); and
Captive insurance and reinsurance captives, as well as small and non-complex institutions, provided they also qualify as large companies or SMEs.
When does CSRD apply?
The CSRD will be phased in from 2024, depending on the company:
From 1 January 2024 for companies already subject to the NFRD with reporting in the 2025 annual report for financial year 2024;
From 1 January 2025 for companies not covered by the NFRD with reporting in the 2026 annual report for financial year 2025;
From 1 January 2026 for listed SMEs, small and non-complex credit institutions and insurance captives with reporting in the 2027 annual report for financial year 2026. Listed SMEs may opt out until 2028.
From 1 January 2028 for large non-EU companies reporting in the 2029 annual report for financial year 2028.
What are the obligations from the CSRD?
Under the CSRD, sustainability information must be reported in a special section of the management report and thus not in a separate sustainability report. This will facilitate access to this information and also clarifies the interaction between financial and sustainability information. The sustainability information will at least have to report on the company's impact on sustainability issues and also information needed to understand how sustainability issues affect the company's development, performance and position. This is also known as the 'double materiality' principle.
In the first three years, companies will have the option of using an exception for not being able to find out the necessary data. A 'comply or explain' principle will be used for this. When companies cannot retrieve the information from the value chain, the company will have to explain what efforts have been made and how the company intends to obtain the correct data in the future.
What are the reporting standards?
The European Financial Reporting Advisory Group (EFRAG) has been tasked by the European Commission to develop reporting standards. This set of reporting standards clarifies what companies should start reporting on sustainability and how they should present the information. On 23 November 2022, EFRAG released the drafts of the so-called European Sustainability Reporting Standards (ESRS set 1). Before the European Commission adopts these reporting standards and converts them into delegated acts, which is expected to happen by 30 June 2023, consultations will take place in order to obtain a broad consensus on the content of the standards and consistency with other relevant EU legislation.
How are accountants to audit on CSRD?
From the CSRD comes the obligation to have sustainability information externally audited by an auditor. Initially, a limited assurance must be obtained, which means that an auditor will investigate whether the sustainability report meets the reporting criteria and thus provides a reliable and adequate representation of the sustainability policy. This is in contrast to the audit engagement on financial information, where a reasonable assurance must be obtained ('reasonable' assurance), a much stricter and more demanding level. It is expected that the European Commission will issue auditing standards by 1 October 2026 and that sustainability information will then have to start being tested at the reasonable assurance level.
What are the main exceptions?
A company will be exempted at the individual level from the reporting requirements under the CSRD if the consolidated annual report of the parent company has included the results of the company and its subsidiaries. The exemption will apply at the time the group's consolidated annual report is prepared in a manner equivalent to the CSRD. An EU-based subsidiary that is exempt will have to publish the consolidated management report of its parent company. The company will additionally have to include a reference in its own management report that it has been granted an exemption for reporting sustainability information, and will also have to provide clear instructions on how and where to find the consolidated annual report.
For financial years starting before 1 January 2028, listed SMEs may choose not to report in accordance with the CSRD, provided they include a statement in their annual report making clear why they have chosen not to comply with the reporting requirements.
How is CSRD related to Taxonomy Regulation?
Companies falling within the scope of the CSRD will also have to report on the basis of the Taxonomy Regulation. This means that based on Article 8 of the Taxonomy Regulation, companies will have to report with three Key Performance Indicators (KPIs) what proportion of their turnover, capital expenditure and operational expenditure is environmentally sustainable.
Economic activities shall, in accordance with article 3 Taxonomy Regulation, qualify as environmentally sustainable where that economic activity:
Substantially contributes to one or more of the environmental objectives in the Taxonomy;
Does not significantly harm (DNSH) any of the environmental objectives set out in the Taxonomy Regulation;
Meets the minimum safeguards set out in the Taxonomy Regulation, and
Complies with the technical screening criteria developed by the European Commission in accordance with the Taxonomy Regulation.
The Taxonomy Regulation sets out six environmental objectives in Article 9:
Climate change mitigation;
Climate change adaptation;
The sustainable use and protection of water and marine resources;
The transition to a circular economy;
Pollution prevention and control;
Protecting and restoration of biodiversity and ecosystems.
Should you have questions about the CSRD or how best to prepare? Please do not hesitate to contact us. We will be happy to help you.