The EU Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023 and is set to require tens of thousands of companies to meet public, standardized ESG reporting requirements for the first time.

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These requirements, set forth in the separately adopted European Sustainability Reporting Standards (ESRS), are extensive and detailed, requiring significant planning, assessment, and data collection before report preparation can begin. 

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This insight provides a CSRD requirements summary featuring key requirements and guidance, along with an overview of important organizations, concepts, and the CSRD's relationship to other EU legislation. 

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For expert support on complying with the CSRD, click here.

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Key Takeaways

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• The CSRD introduces standardized ESG reporting for thousands of EU companies, starting January 2023.
• Compliance centers on "double materiality," requiring disclosures from both financial and impact-significance perspective.
• Companies must follow the ESRS, mandatory standards calling for disclosure of over 1,000 data points across various topics (if material).

What is the CSRD Timeline?

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The timeline on which CSRD requirements come into effect is also important for companies to grasp, with staggered compliance deadlines based on company size and other factors. For very large businesses already subject to the existing Non-Financial Reporting Directive (NFRD), compliance with CSRD requirements is required by 2025 (based on 2024 financial year data). Find out the timeline for the EU CSRD as well as when it may impact your business here. 

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What is the Role of the European Sustainability Reporting Standards (ESRS)?

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The CSRD itself does not contain detailed reporting requirements. Instead, it assigns responsibility to the European Commission to adopt the reporting standards through delegated acts. These standards, known as the European Sustainability Reporting Standards (ESRS), were initially developed by EFRAG. This third-party organization provides technical advice to the European Commission on both sustainability and financial reporting matters. 

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The first set of general ESRS were drafted and finalized in proposed form by EFRAG, and then adopted by the European Commission with limited amendments in July 2023 as Delegated Regulation 2023/2772 (herein referred to simply as the “ESRS”). These ESRS are the definitive standards and requirements against which businesses covered by the CSRD must report. 

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What do the ESRS Contain?

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The ESRS define general reporting requirements, categories of issue-specific topics that businesses may need to report on, specific disclosure requirements and data points under each topic, and application guidance on how companies should interpret and meet each requirement. 

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Do the ESRS Require Reporting on All Topics?

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No. The CSRD and ESRS do not mandate that businesses respond to all potential topics and disclosures by default. Rather, whether or not most information must be disclosed is governed by the concept of materiality — only if a topic, underlying disclosure requirement, or individual data point is “material” is a disclosure required. The concept of materiality has long been the foundation for corporate reporting, ensuring that report users are presented with decision-useful information. 

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The ESRS details how businesses should go about undertaking this materiality assessment — from a unique “double materiality” perspective. 

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What is Double Materiality?

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The CSRD requires a unique, combined form of materiality assessment known as “double” materiality. Businesses must include information that is material from a financial perspective and an impact perspective, thereby serving a diverse group of report users.  

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Businesses are obligated to undertake a materiality assessment under the CSRD as the core “starting point” for sustainability reporting, following a process detailed in ESRS 1, General Requirements. This entails examining whether each topical disclosure, underlying disclosure requirement, and specific data point are material from a dual financial and impact perspective. 

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What is Financial Materiality?

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Information is material from a financial perspective if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions that primary users of general-purpose financial reports make on the basis of the sustainability statement. That’s a mouthful, but generally this means sustainability information that could trigger a material financial effect on the company itself. 

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Financial materiality has long roots in corporate financial reporting, ensuring that only decision-useful information is presented to the typical users of financial reports — prospective investors and shareholders. 

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What is Impact Materiality?

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By contrast, information is material from an impact perspective if it (1) pertains to the business’s actual or potential, positive or negative, impacts on people or the environment over the short, medium or long term, and (2) those impacts are “material” as informed by factors such as the scale, scope, severity and likelihood of the impact. 

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Whereas financial materiality has a clear reference point: the decision-usefulness of the information to report users making investing decisions, impact materiality is more challenging, requiring businesses to set criteria for what impacts are significant enough to be deemed material and which are not.

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Although many businesses may have familiarity with this as a similar approach is followed by some existing frameworks like the GRI, the exercise is not particularly straightforward and is an issue that many other forms of environmental review legislation have long struggled to define (e.g., the US National Environmental Policy Act (NEPA)).

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What Guidance is Available for Conducting Materiality Assessments?

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The ESRS provide requirements on conducting materiality assessments as well as instructions on procedural steps. Appendix E of ESRS 1, for example, provides a step-by-step flowchart for determining which disclosures to make. 

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Additional, EFRAG (a third-party organization that provides technical advice to the European Commission on both sustainability and financial reporting matters) released as set of implementation guidance in May 2024, including an extensive set of guidance on conducting materiality assessments under the ESRS (see EFRAG IG 1 Materiality Assessment). While EFRAG documents are non-binding and non-authoritative, the implementation guidance is highly relevant and useful.

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What are the CSRD Reporting Requirements and Topics? 

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The CSRD’s reporting requirements included topics are as follows. The ESRS include 10 topical standards, split across environmental, social, and governance, along with two additional cross-cutting general standards, as set forth in the table below. Each topical standard includes independent requirements geared towards the specific topic area. Combined, these 12 standards require businesses to collect and report on upwards of 1,000 unique data points. 

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What are the Key CSRD Reporting Requirements of the Cross-Cutting General ESRS?

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ESRS 1 (General requirements) and ESRS 2 (General disclosures) provide general reporting instructions and baseline disclosure requirements that are applicable to all businesses subject to the CSRD. These two cross-cutting standards are the core of the full set of ESRS, from which the topical standards frequently refer back to. 

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Importantly, under ESRS 2, there are several “minimum disclosure requirements” that must be fulfilled in all cases, regardless of materiality. 

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Additionally, ESRS 1 establishes an important reporting principle and obligation known as “entity-specific disclosures.” Under ESRS 1, businesses are obligated to provide additional entity-specific disclosures any time they conclude that an impact, risk, or opportunity is not sufficiently covered by an ESRS but is material in the context of the specific business.

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This means that businesses cannot rely on the narrow language of a specific topical ESRS to limit reporting when it would mean omitting or obscuring material information that is not technically required under a given ESRS. 

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What are the Reporting Areas of the Topical ESRS?

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Each of the topical ESRS are structured roughly the same, requiring disclosures within some or all of the following reporting areas:

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• Governance
• Strategy
• Impact, Risk and Opportunity Management
• Metrics and Targets

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Not all topical standards require topic-specific Governance and Strategy disclosures (e.g. ESRS E2 — Pollution, which omits both Governance and Strategy). However topical standards include disclosures on Impact, Risk and Opportunity Management and Metrics and Targets.

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What is an ESRS “Disclosure Requirement” (DR)?

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Within each topical reporting area (e.g., Strategy or Metrics and Targets) are one or more “Disclosure Requirements” (DR). These are brief, clear statements of information to be disclosed within each reporting area. For example, topical standard “ESRS E1 — Climate Change” has 9 distinct Disclosure Requirements. Each Disclosure Requirement is followed by a series of instructions, clarifications, and in many cases specific data points to be disclosed in connection with that Disclosure Requirement. 

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What Types of Disclosure Requirements are in the ESRS?

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Like many other ESG disclosure frameworks (e.g., ISSB, CDP), the EFRS include some Disclosure Requirements that are more narrative and qualitative in nature (such as disclosures of policies, discussions of material impacts, risks, and opportunities) and others that are more technical and quantitative in nature (such as metrics like the corporate carbon footprint). Both types of disclosure are important for report users, enabling analysis of data over time and across peers, as well as understanding the views and actions of management in response to that data.  

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What is Unique About ESRS E1 Climate Change?

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Amongst the topical standards, ESRS E1 — Climate Change is the longest and most complex, spanning nearly 40 Official Journal pages alone (compare ESRS E5 — Resource Use and Circular Economy, spanning 12 pages). ESRS E1 is accorded special importance by the European Commission, which added heightened materiality requirements to this standard.

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Specifically, if a business concludes that climate change is not material with respect to its business, it must support that conclusion with a detailed explanation — implying that climate change is expected to be material for all organizations absent compelling and unique circumstances. 

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What are the CSRD’s Climate Change Requirements?

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Businesses reporting under ESRS E1 are expected to disclose a significant amount of information, from information about their transition plans and climate targets (if adopted) to their own internal climate policies and risk management procedures, to narrative analysis and discussion of impacts, risks and opportunities, to information on carbon removals and mitigation, to detailed breakdowns of energy usage across business operations (among many others). Yet the most complex and foundational element of ESRS E1 is the disclosure of the business’s corporate carbon footprint across Scopes 1, 2 and 3, a calculation which most businesses are not equipped to compute themselves.

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Why is Accounting for Scope 1, 2 and 3 GHG Emissions Important?

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ESRS E1-6 requires businesses to disclose their corporate carbon footprint across all of scopes 1, 2 and 3. This is a complex calculation that must take inventory of a defined set of activities within the business’s operational control (Scope 1), the electricity it purchases from external sources to power those operations (Scope 2), and activities across 15 distinct value chain categories such as purchased goods and services, and product use phase (Scope 3). These calculations must be informed by the GHG Protocol Corporate Standard, the GHG Protocol Scope 2 Guidance, and the GHG Protocol Scope 3 Standard, all of which are explicitly referenced within the ESRS.

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Additionally, the corporate carbon footprint is critical beyond ESRS E1-6. Reliable footprint data are also essential in order to fulfill other requirements under ESRS E1, such as identifying transition risks, setting climate targets, assessing other risks and opportunities, and implementing transition plans.

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What are the CSRD’s Assurance Requirements?

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CSRD reporting is subject to mandatory third-party assurance. This includes assuring (i) that the reporting is compliant with the ESRS, (ii) the process for identifying information reported (e.g., encompassing due diligence, materiality assessments, and data quality control), and (iii) compliance with requirements to mark up the reporting in accordance with electronic reporting rules and the EU Taxonomy Regulation. 

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CSRD assurance requirements are initially required at a “limited assurance” level, a less-intensive form of review that produces a “negative” conclusion stating that no matter has been identified to lead the auditor to conclude that a matter is materially misstated. By contrast, “reasonable assurance” requires a much more intensive examination and results in a “positive” conclusion regarding the compliance of the reported information against the applicable requirements.

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What CSRD Assurance Requirements and Standards Must Be Followed?

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Formal EU-wide limited assurance standards must be adopted by the Commission by 1 October 2026 to ensure uniform stringency and process across the EU. Until that time, limited assurance will be conducted following the standards and requirements applied in the applicable Member States. 

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By 1 October 2028, the Commission is required to adopt similar standards for “reasonable assurance” engagements — but only if the Commission first determines that reasonable assurance is feasible for companies and auditors. The Commission must specify when reporting will shift from “limited” to “reasonable” assurance when (or if) it adopts such standards. 

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How do CSRD Requirements Interact with Other EU Sustainability Legislation?

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The CSRD did not fall out of a coconut tree. Rather, it exists and interacts with the legislation that came before (EU SFDR, EU Taxonomy) and after (EU Corporate Sustainability Due Diligence Directive).

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How does the CSRD Interact with the SFDR?

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The EU Sustainable Finance Disclosure Regulation (SFDR) applies to financial advisers and investors and requires them to make disclosures about the sustainability attributes of their portfolios and classify the investment products they offer based on this data, which they must obtain from their investee companies. CSRD explicitly aligns with the SFDR by requiring CSRD-regulated businesses to calculate and report certain data in alignment with what financial entities must collect and disclose under the SFDR. 

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For example, required financial entity portfolio disclosures on the energy use profile of investee companies under the SFDR are explicitly covered by several questions under the CSRD’s ESRS E1, Disclosure Requirement E1-5 — Energy Consumption and Mix. 

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How does the CSRD Interact with the EU Taxonomy? 

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The EU Taxonomy Regulation is a separate reporting obligation that has already been in effect for several years. It requires covered businesses to report on what aspects of their operations are aligned with specified sustainable activities. Applicability of the Taxonomy is largely aligned with the CSRD, with covered businesses required to provide their Taxonomy disclosures in their existing non-financial statements (so-called “Article 8” disclosures). 

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After the adoption of the Taxonomy, the CSRD significantly expanded the amount of information that must be provided in the same statements, creating the potential for overlap and confusion for report users between data that may be responsive to both mandates. To avoid this, the CSRD’s ESRS require that Taxonomy disclosures be separately identifiable and presented together in a “clearly identifiable” part of the environmental section of the sustainability statement.

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How does the CSRD Interact with the CSDDD?

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The EU Corporate Sustainability Due Diligence Directive (CSDDD) entered into force in July 2024 and covers a comparatively smaller number of (very large) companies as compared to the CSRD (roughly 6,000 versus 50,000). It mandates companies engage in due diligence along their supply chains, requiring them to identify and assess actual or potential adverse impacts on human rights and the environment, as well as to prevent, mitigate, or end those impacts over time.

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There is notable overlap between the CSRD and the CSDDD. For instance, the CSRD already establishes due diligence requirements to enable companies to conduct their materiality assessments and to collect required information in order to make such disclosures. The CSDDD goes further, mandating more specific actions regarding management of the process and mitigation of impacts. 

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The CSDDD also requires companies to adopt a transition plan for climate change mitigation. This differs from the CSRD, which simply requires companies to disclose information about their climate transition plan if one is in place. Importantly, this does not apply to all companies subject to the CSRD, but merely those also subject to the CSDDD as well.

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Finally, the CSRD already requires companies to publicly report on their due diligence process. The CSDDD acknowledges this, and provides that a company’s CSRD disclosures with respect to due diligence are sufficient to meet its new public reporting obligations under the CSDDD.

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For businesses navigating the complexities of the CSRD and its expansive reporting requirements, timely preparation and thorough understanding are essential.

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Disclaimer: This Insight is provided for informational purposes and is not intended to be relied upon or used as specific legal advice.

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If your company needs assistance in understanding disclosure requirements, calculating metrics, and managing disclosures, consider reaching out Vaayu’s sustainability experts who can provide the necessary guidance and support. Find out more about Vaayu’s CSRD compliance software or feel free to get in touch with us today to ensure your compliance strategy is robust and tailored to your organization’s needs.