An Introduction to the CSRD

What will the reporting requirements entail?

Here are some of the regulation's stand-out features:

1. Double materiality: Organizations will need to disclose the company’s impact on social and environmental issues, known as double materiality, and how these issues will likely affect the business in the future.
2. Looking both ahead and back: Companies will be required to furnish both retrospective and forward-looking analyses. This will mean sharing quantitative information (such as measured impact to date) and qualitative information (such as targets, strategy, and risk assessment).
3. Stricter rules around climate-related disclosures: Most notably, the CSRD will call for disclosure of Scope 3 emissions. These are the indirect CO2 emissions produced by all other companies connected to the organization throughout the entire supply chain.
4. Enforced audits: For the first time, all corporate sustainability reporting information must pass through an audit process to verify accuracy before publication.

How will CSRD reports be presented?

Companies will be expected to provide all CSRD-related information in either their annual or management reports. This is to ensure that financial and ESG information is published at the same time and considered as a whole, rather than two separate entities.

In line with ESEF regulations, all sustainability information will need to be provided in xHTML format for standardization and easier verification.

How does the CSRD fit in with other legislations?

With so many different mandates and legislations, it can be challenging to grasp how they all fit in with one another. As mentioned previously, the CSRD and ESRS will expand upon and replace the Non-Financial Reporting Directive (NFRD).

The mandate will also, however, incorporate existing EU regulations, most notably:

• The Sustainable Finance Disclosure Regulation (SFDR), which sets out ESG disclosure obligations for financial market participants
• The EU Taxonomy, which is a classification system of environmentally sustainable economic activities

The CSRD, the SFDR, and the EU Taxonomy all work together to help promote sustainable investments. By bringing them together in a single bundle, the aim is to align requirements, help reduce complexity, and avoid the risk of duplicating reporting requirements.

What are the challenges of CSRD disclosure?

Because the CSRD requirements are far more detailed than those of the NFRD, companies will need to gather vast amounts of ESG data, which all need to be accurate and verifiable. Scope 3 emissions—which extend beyond a company’s direct CO2 output and look at everything from up and downstream transportation and distribution, to the use of sold products—are particularly difficult to track.

Companies already reporting under the NFRD will therefore have a steep learning curve to tackle, while those needing to produce their first ESG report under the CSRD face an even bigger challenge.

Importantly, the CSRD is being incorporated into national law throughout the EU. Depending on how stringent individual countries choose to be regarding enforcement, non-compliance could lead to penalties or prosecution, potentially posing a serious business risk for organizations.