CSRD & ESRS explained simply and understandably
From when does the CSRD apply to companies?
The EU directive on reporting on non-financial aspects, the "Non-Financial Reporting Directive" (NFRD), is undergoing a comprehensive update with the "Corporate Sustainability Reporting Directive" (CSRD).
The draft was published on April 21, 2021, and was in consultation until July 14, 2021, during which this legislative process was discussed. A draft report with proposed amendments was published on November 16, 2021, and the European Council's draft amendment appeared on February 24, 2022. On June 21, 2022, the Council and the Parliament reached a preliminary political agreement, the draft of which includes amendments to the Commission's draft. The final version can be found here.
Originally, according to the timetable of the Commission's draft, the provisions were to apply from 01.01.2024 for the 2023 financial year. In their June 2022 version, the European Council and the European Parliament pushed for a delayed introduction and are implementing a phased-in model:
as of January 1, 2024
Starting January 1, 2024 for companies already subject to the NFRD (first reporting in 2025).
as of January 1, 2025
Beginning January 1, 2025 for large companies not currently subject to NFRD (first report in 2026).
as of January 1, 2026
From January 1, 2026 for listed SMEs and small and non-complex credit institutions and captive insurance companies (first report 2027) with an opt-out until 2028.
The draft of the trilogue negotiations was approved by a large majority in the European Parliament on November 10, 2022. On November 28, 2022, the European Council agreed and the directive was thus adopted. It was published in the Official Journal on December 16, 2022, and will enter into force 20 days later. Once adopted at EU level, the directive must be transposed into national law within 18 months.
Who is affected by the CSRD?
The proposal for the directive aims to significantly expand the group of companies required to report. If reporting takes place at group level, the subsidiaries are exempt from their own reporting obligations. The subsidiary must refer to the group report. Large capital market-oriented subsidiaries are an exception to this. Essentially, the following companies are therefore subject to reporting requirements under the CSRD:
Large companies
All large companies with an average number of employees of 250 or more are to report, regardless of their capital market orientation. The thresholds for large companies remain unchanged at a balance sheet total of over 20 million euros and sales of over 40 million euros. Two of these three size criteria must be exceeded.
Capital market-oriented SMEs
All capital market-oriented small and medium-sized enterprises (with the exception of micro-enterprises as of Jan. 1, 2026) must also report. According to Directive 2013/34/EU, companies are considered small as soon as they exceed two of the following three characteristics: 1) 10 employees, 2) 350,000 euros in total assets, and 3) 700,000 euros in net sales.
Non-European companies
From 2028, non-European companies with net sales in the EU of more than €150 million and at least one subsidiary or branch in the EU will also be required to submit a sustainability report.
How is the CSRD to be fulfilled?
The proposed directive provides for the introduction of binding European reporting standards (ESRS), which are currently being developed. These standards will contain sector-independent, sector-specific and organization-specific elements.
An important innovation is the introduction of the concept of dual materiality, which changes the previously prevailing principle of materiality, particularly in Germany. Circumstances are considered material if they are significant either for business success or from an environmental and social perspective. Previously, both criteria had to be met for the non-financial statement, which meant that very few matters were reportable if a strict interpretation was applied.
The first core standards are to be developed by mid-2022 and adopted no later than October 31, 2022.
A slimmed-down version of the standards for SMEs is also being prepared in the form of delegated acts. These standards should be able to be applied in proportion to the organization and its resources, as well as the expectations of relevant stakeholders for sustainability information. The SME standards are to be developed by October 31, 2023.
The sector-specific standards will be developed in packages over the next three years, with the first package to be published in 2023.
Another important component is the development of a digital taxonomy for machine-readable reports, which is to be introduced at the same time as the standards.
What must be disclosed according to the CSRD?
The forthcoming Corporate Sustainability Reporting Directive requires companies to provide a comprehensive statement that includes all information necessary for an understanding of the company's business performance, results, position and the impact of its activities in relation to sustainability concerns. This includes:
Business Model & Strategy
Brief description of the company's business model and strategy, including ...
- resilience to sustainability risks,
- of opportunities related to sustainability concerns,
- of plans to transition to a sustainable economy in line with the Paris Agreement,
- Consideration of stakeholder interests and the company's impact on sustainability concerns in relation to the business model and strategy; and
- Evidence of the implementation of the company's sustainability strategy.
Goals & Progress
Description of the company's sustainability goals and progress toward achieving them.
Role of the corporate bodies
Description of the role of the administrative, management and supervisory bodies in relation to the company's sustainability concerns.
Company policies
Description of corporate policies related to sustainability concerns.
Due Dilligence
Description of due diligence procedures performed with respect to sustainability concerns.
Principal Adverse Impacts
Description of significant actual or potential adverse impacts associated with the company's value chain and actions taken to avoid, mitigate or remedy those impacts.
Risk management
Describe the company's key risks related to sustainability concerns and how they are being managed.
Indicators, Key Figures & Data
Relevant indicators, key figures and data relevant to the disclosure of the aforementioned information.
Furthermore, information on intangible assets such as intellectual, human, social and relational capital must be disclosed. The company must also explain the process for determining the information, taking into account short-, medium- and long-term time horizons. The disclosure should include both forward-looking and retrospective information, as well as qualitative and quantitative information. Where appropriate, information about the company's value chain and its business relationships and supply chain should also be provided. It is possible that certain details that should not be disclosed for competitive reasons do not have to be published, provided that the relevant member country allows this.
According to the CSRD, which topics must be covered in the report?
According to the proposal for the Corporate Sustainability Reporting Directive (CSRD), the planned European Sustainability Reporting Standards (ESRS) are to provide the following information on the various areas. These disclosures on environmental objectives, social aspects and governance are to be defined within the framework of the European Sustainability Reporting Standards (ESRS) in order to enable uniform and comparable reporting.
Environmental goals of the EU
Reporting is to include information on the EU's six environmental goals, which also serve as the structure for the taxonomy.
These goals include climate change mitigation, climate change adaptation, water and marine resources, circular economy, pollution, and biodiversity and ecosystems.
Social aspects
Reporting should include information on social aspects, such as equal opportunities for all (including gender equality and equal pay for equal work), training and skills development, employment, and inclusion of people with disabilities.
Information should also be provided on working conditions, including safe and adaptable workplaces, wages, social dialogue, collective bargaining, worker participation, work-life balance, and a healthy, safe, and well-adapted working environment.
Furthermore, aspects such as respect for human rights, fundamental freedoms, democratic principles, and international standards should be reported.
Governance aspects
Reporting should include information on governance aspects.
This should include the role of the company's administrative, management and supervisory bodies, including their composition and their role in relation to sustainability concerns.
Information should also be provided on corporate ethics and culture, including the fight against corruption and bribery.
Other information should include the company's political engagement, including its lobbying activities, the management and quality of relationships with business partners, including payment practices, and the company's internal control and risk management systems, including the reporting process.
According to the CSRD, in what format should the report be published?
According to the proposal for the Corporate Sustainability Reporting Directive (CSRD), organizations should no longer have a choice as to where they publish the required information. Instead, the information is to be included in the management report of the annual report. The annual report should be published no later than four months after the end of the financial year.
In addition, the information is to be published in a machine-readable format. This means that the sustainability information must be tagged to enable its automatic processing and analysis. The "Single Electronic Reporting Format" is to prescribe this tagging for the sustainability information in the future. This format is to ensure compatibility with the "European Single Access Point", a central register for digitally prepared reports being developed by the EU.
By publishing in a machine-readable format and using the "Single Electronic Reporting Format", the aim is to improve the consistency, comparability and availability of sustainability information and to facilitate access to this information.
What are the audits and penalties under the CSRD?
According to the proposal for the Corporate Sustainability Reporting Directive (CSRD), there is an obligation for external verification of sustainability information. In the initial phase, limited assurance is required. This involves checking the compliance of the information with the reporting standards, the process for determining the reported information and the labeling in accordance with the requirements of the electronic reporting format. Over time, it is considered likely that the audit will be expanded to reasonable assurance.
If a reporting company fails to meet its obligation to disclose the information, the Commission's proposal provides minimum penalties and guidance for the penalty process. These include:
Public statement
The company and the nature of the violation must be publicly identified.
Arrangement
The company will be required to cease the conduct constituting the violation and to cease and desist from future violations.
Fines
Fines may be imposed. The exact amount of the fines is not explicitly specified in the Commission draft, but criteria are defined that are to be taken into account when determining the amount of the fines.
It is important to note that the current draft from the Council and Parliament does not include a section on uniform penalties. This means that the penalties for non-compliance will be determined by the member countries. Each member country can therefore set its own rules and penalties for companies that do not comply with their obligations.
ESRS: The new standard for sustainability reports
The CSRD provides the specifications, while the European Sustainability Standards (ESRS) define the content. The reporting standards take up existing frameworks such as GRI, SASB and TCFD and set new standards for mandatory reporting such as dual materiality. On April 29, 2022, EFRAG published the first official drafts, on which a consultation was held until August 8, 2022. Analysis of the more than 750 responses received will be conducted in August and presented to the EFRAG Sustainability Reporting Board and EFRAG Sustainability Reporting TEG in September. The final drafts were submitted to the European Commission on 23 November.
Environment
Social
Governance
Appendices
Advices packages
Explanatory note
Explanatory note of how draft ESRS take account of the initiatives and legislation listed in Article 1 (8) of the CSRD adding article 20 (b) -5 to the accounting directive
DownloadDue process note
Setting out the process applied and the main differences between the exposure drafts and the draft ESRS
Download
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