CSRD Directive on Corporate Sustainability Reporting Explained Simply

Many companies are currently under pressure to comply with a variety of different standards and frameworks for sustainability reporting. For this reason, the European Commission established a Corporate Sustainability Reporting Directive (CSRD) on April 21, 2021, with the goal of standardizing and simplifying sustainability/ESG reporting for companies throughout the European Union. This new regulation creates a uniform framework for reporting non-financial data, a first for the European Commission.

The CSRD reporting obligation: A challenge that offers economic opportunities

Creating an ESG report that meets the requirements of EU regulators, investors, and other stakeholders can be challenging, but it can also provide numerous economic opportunities. The EU's aim with the regulation is to redirect financial flows towards more sustainable development to achieve the objectives of the EU Green Deal. Consequently, the requirements from financial institutions for corporate clients are significantly increasing. To continue securing access to capital, a sustainable business orientation is important, leading to more favorable financing options. For the company itself, there is the opportunity to identify financial savings through efficiency measures and to holistically assess the future viability of business models.

Creating sustainable supply chains for transparency and long-term business relationships

An essential requirement is to create transparency on relevant ESG issues throughout the entire value chain and to mitigate negative impacts on society and the environment. The resulting need to transform to more sustainable supply chains also enables the establishment of long-term business relationships with major customers and opens up new market opportunities.

This PDF document provides information on how to best implement the CSRD directive. Discover the opportunity to enhance your long-term competitiveness while also making a positive contribution to sustainability.

CSRD Guide for Companies: A Brief Introduction

The CSRD: New EU Directive on Sustainability Reporting from 2025

• CSRD stands for Corporate Sustainability Reporting Directive 

• Directive on Sustainability Reporting for companies 

• Amendment of the “Directive on Non-Financial Reporting” published in 2014 (English: Non-Financial Reporting Directive, abbreviated NFRD)

• Adoption by the European Commission at the end of 2022

• CSRD comes into effect from 2025

The CSRD: New paths to ESG reporting and sustainability strategy

• Goal: Standardization and simplification of sustainability reporting for companies throughout the European Union.

• Purpose: to create rules for the disclosure of non-financial information from the areas of ecology, social issues, and governance, as well as the ensuring of accountability and the alignment of corporate strategy towards sustainability.

• Problem: Investors have criticized the inadequate information needed to derive comparability between sustainability-related performance and risks of different companies.

Core points of the CSRD: Sustainability reporting and compliance with EU regulations

• CSRD combines a set of common standards for sustainable reporting and further develops these

• Compliance of information submitted by companies with EU regulations

• Scope of reporting: 

1. Disclosure of the environmental impacts and business activities of the company along the value chain

2. Explanation of how boards and supervisory bodies are involved in sustainability issues.

3. Setting short-term sustainability goals 

4. Reviewing the impacts of corporate activities on sustainability issues, assessing sustainability aspects, and reporting on progress made

5. Obtaining confirmation of the reported sustainability information from an auditor

A uniform reporting standard is a goal of the directive on sustainability reporting for companies in the EU and beyond.

Affected companies and timing of the CSRD obligation: What you need to know for your ESG reporting

The new CSRD will come into effect in 2025 and replace the currently applicable NFRD. The applicable binding standards for sustainability reporting were published by the European Commission as the delegated regulation on the first set of European Sustainability Reporting Standards (ESRS) on July 31, 2023. This creates a uniform framework for reporting non-financial data for the first time.

The CSRD applies throughout the EU and to non-EU companies with revenues exceeding €150 million in the EU.

Approximately 50,000 companies in the EU will be subject to reporting obligations. However, the implementation will occur in four phases for different groups of companies (see also the attached table for a detailed definition of the various company groups):

• Reporting in 2025 for the fiscal year 2024 for companies already subject to NFRD, defined by the European Commission as “public interest entities,” i.e., publicly listed companies, banks, and insurance companies (approximately 11,000 existing large companies)

• Reporting in 2026 for fiscal year 2025 for large companies currently not subject to NFRD;

• Reporting in 2027 for fiscal year 2026 for listed SMEs (excluding micro-enterprises), small and non-complex credit institutions, and captive insurance companies;

• Reporting in 2029 for fiscal year 2028 for companies from third countries with net revenues exceeding €150 million in the EU, if they have at least one subsidiary or branch in the EU that exceeds certain thresholds.

The accounting directive defines and differentiates companies into categories, setting three thresholds, of which two must not be exceeded:

ESRS: The key to compliance with CSRD sustainability reporting

The CSRD and the ESRS are closely linked, as they form a uniform framework for sustainable reporting in the EU. While the CSRD establishes the fundamental legal requirements for reporting companies, the ESRS specifies the specific standards and guidelines that companies must follow to comply with the CSRD. 

Understanding the ESRS is not only important for legal reasons but also strategically significant for companies due to regulatory requirements. In this context, it is not just a mere set of rules; it is rather a binding guide that helps companies communicate sustainability information in a consistent and comparable manner.

To succeed in this balancing act, it is crucial to develop a deep understanding of the fundamental ESRS standards. These standards are mandatory for both the strategic and sustainable orientation of companies.

ESRS in detail: European Sustainability Standards and their significance for companies

• ESRS in general: European Sustainability Reporting Standards

• The reporting principle of double materiality must be applied to assess the reporting obligations 

• Only sector-independent standards (ESRS Set 1 have been published; these standards apply to all affected sectors)

• Sector-specific reporting standards (ESRS Set 2 are currently planned for publication in 2024)

• on ESRS SET: There are two cross-sectoral standards ESRS1 and ESRS2 (referring to all sustainability topics and apply regardless of the company's industry, these standards refer to the sector-independent standards)

• ESRS 1 outlines the general requirements for the content of sustainability reporting

• ESRS 2 clarifies the specific reporting requirements and obligations for companies

• 10 topic-specific standards: Environment, Social, Governance (sector-independent)

Environment:

• Climate Change *

• Pollution

• Water and Marine Resources

• Biodiversity and Ecosystems

• Resource Use and Circular Economy

Social:

• Own Workforce *

• Workers in the Value Chain

• Affected Communities

• Consumers and End-users

Governance:

• Corporate Policy

* Important to know: The two categories “Climate Change” and “Own Workforce” are mandatory for sustainable reporting independently of the double materiality analysis.

Double materiality in the CSRD: A comprehensive assessment of sustainability aspects

A crucial component of CSRD sustainability reporting is the concept of double materiality, as defined in ESRS 1. This concept, adopted and standardized from the NFRD directive, requires companies to conduct a two-dimensional assessment of all sustainability aspects. 

All the aforementioned sustainability topics must be analyzed, and a position must be taken on all identified relevant topics, with reports always required on the topics “Climate Change” and “own workforce”.

If the addressed topics are considered material, companies must report on their impacts on business viability as well as on the environment and society. There are two different perspectives: On the one hand, they look at the impacts that are either significantly related to the environment or society (Impact Materiality, “inside-out”). On the other hand, they assess how these topics can financially impact the company in the short, medium, or long term and thus significantly influence the company’s development and performance (financial materiality, “outside-in”). In particular, this should evaluate the future viability of business models in a transforming economy.

The double materiality analysis in practice: A case study from the automotive industry

Let’s take a closer look at the double materiality analysis with an example. Suppose you are an ESG consultant for an automotive company, and you have been tasked with conducting a double materiality analysis for your company.

Environmental impacts in the automotive industry: An inside-out analysis in the context of double materiality

First, let’s examine the inside-out perspective: In investigating the environmental impacts of the production processes, you find that the production of your vehicles has significant impacts on many environmental topics, particularly regarding resource consumption and CO2 emissions.

These environmental impacts are significant as they could influence the company concerning environmental regulations and the company’s image. A good example is an automotive company substantially contributing to climate change by selling combustion engines. On the other hand, manufacturing production components and the associated elaborate production processes involve considerable resource consumption.

Opportunities in the automotive industry: An outside-in analysis in the context of double materiality

On the other hand, from a financial perspective (outside-in perspective), opportunities for future strategic orientation may emerge. If production shifts to environmentally friendly vehicles, this could lead to higher revenues as demand increases. Thus, it is possible to identify early potential for producing and selling low-emission vehicles. This example illustrates how modern technologies can be integrated into corporate strategy to recognize market opportunities and possible future risks. This can lead to adjustments in future business strategies and thereby create a competitive advantage.

External factors such as bans on combustion engines can pose significant financial risks to companies, especially if the transition to electric vehicles is missed. This transition may impact the production process directly and requires significant investments in new technologies and infrastructure. Companies that do not make this transition in time may not only violate legal regulations but also lose market share and competitiveness.

Furthermore, it is important to note that the impacts of climate change may affect supply chain infrastructure. Extreme weather events, rising temperatures, and other climate-related challenges can disrupt supply chains and lead to production downtimes. These disruptions can result in substantial financial losses.

It is, therefore, crucial for companies to carefully analyze these external risk factors and take appropriate measures to minimize financial losses and ensure the long-term stability and resilience of the company.

The importance of accurate CSRD sustainability reporting: Cost analysis and the prospect of economic benefits

However, we should not overlook that the development of environmentally friendly technologies can be associated with higher costs. The financial performance of the company depends heavily on these factors. Therefore, accurate reporting on sustainability issues is essential to ensure a successful orientation of the company in the future. The analysis should also consider that transitioning to lower-emission technologies may entail higher costs. The profitability of such transformation processes should be highlighted within the ESRS standards.

Steps to CSRD sustainability reporting: From identifying material matters to certification

1. Identify relevant ESG issues with the help of double materiality

When considering all reporting-required ESG issues in the context of double materiality, as elaborately explained before, a comprehensive analysis of the sustainability aspects within the company enables the identification of relevant reporting topics. This opens up the possibility of viewing corporate activities from various perspectives over the long term, recognizing innovative business models, and identifying potential risks to the business model at an early stage. Although this process can be time-consuming, it opens up new opportunities for cost savings and contributes to the company's long-term success. Documenting the materiality analysis for all reporting obligations is essential and must be confirmed by an auditor.

2. Prepare and submit a sustainability report

Once the CSRD guidelines and the relevant ESG criteria and information have been identified, it is necessary to collect all relevant data on environmental, social, and governance (ESG) topics within the company and evaluate it using various data points and KPIs. This may include financial data, environmental performance indicators, employee information, and other ESG indicators. 

Based on the information obtained from the double materiality analysis, a transparent and integrated sustainability strategy should be developed, which includes setting reduction targets as well as a roadmap or program to achieve these goals. 

In a text integrated into the annual report, all ESRS guidelines, responsibilities, objectives for the reporting topics, transformation plans, and control metrics must be presented. An independent auditor meticulously reviews this information.

In the CSRD report, management discloses critical details about ecological, social, and governance efforts. With this data, objectives and progress can be transparently tracked and compellingly presented to key stakeholders such as major customers in the supply chain. This builds trust and enables targeted management on your path to sustainable success.

This process can quickly become complex, and many companies face the challenge of effectively developing and implementing the mandatory climate strategy.

3. Assurance by third parties

Reporting must be verified and certified by an accredited independent auditor or certifier. This independent auditor or certifier is responsible for ensuring compliance with reporting regulations and that the sustainability information meets the certification standards recognized by the EU. The auditor reviews the relevant documentation related to double materiality, examines relevant documents, and conducts