The Corporate Sustainability Reporting Directive (CSRD) revises the 2014 Non-Financial Reporting Directive (NFRD), extends the scope of covered companies, and strengthens the reporting requirements for them.
Approximately 50,000 companies will eventually be required to report on sustainability, including larger companies and listed small and medium-sized enterprises (SMEs). Approximately a 1,000 businesses individually meet the reporting criteria and have ultimate parent ownership based in the UK.
A key objective of the CSRD is enabling businesses to increase transparency and accountability of their reporting, and give stakeholders insight and guidance through analysis, benchmarking, and auditing. It's also intended to broaden the scope of sustainability management and reporting to include sustainability risks and opportunities. Ultimately, this should encourage businesses to develop a strategy to improve on sustainability.
The new directive introduces substantial sustainability-related reporting requirements, with small variations for the different companies in scope.
Companies will now need to report:
All relevant disclosures will now extend to the reporter’s value chain, including products and services, business relationships, and supply chain.
Double materiality is fundamental to the new rules. In-scope companies will now have to report on a double materiality basis, identifying sustainability risks and opportunities, and the impact of the company on people and the environment. This means that companies will have to identify both the external impact on society and the environment (impact materiality), as well as the impact on the enterprise value (financial materiality).
Specific details about the business model and strategy, with notable reference to sustainability-related opportunities, resilience and plans to ensure compatibility with the transition to a climate neutral economy and the limiting of global warming to 1.5 °C.
Sustainability targets, including, where appropriate, 2030 and 2050 GHG emission reduction targets and a description of relevant progress.
The role, expertise and skills of the administrative, management and supervisory bodies for sustainability. The existence of sustainability incentives offered to those members.
The business policies for sustainability.
The due diligence process implemented with regard to sustainability matters.
The principal actual or potential adverse impacts connected with the business operations and value chain.
Any actions taken to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts, and their results.
The principal sustainability risks and how those are managed.
This is different to the approach taken by the IFRS Sustainability Standards and the Task Force on Climate-related Financial Disclosures (TCFD), which focus on financial materiality. There's likely to be some divergence for corporates who are in scope of these regulations too.
Disclosures will need to be undertaken in accordance with the European Sustainability Reporting Standards (ESRS) issued by the European Financial Reporting Advisory Group (EFRAG). It's indicated that the ESRS will aim to avoid imposing additional administrative burden on international companies who are caught by multiple global reporting requirements, hence they shall be considering, to the greatest extent possible, the work of global standard-setting initiatives for sustainability reporting.
Introduction of an EU-wide requirement for limited assurance on sustainability information with the aim of moving to reasonable assurance in the long term. More specifically, under the directive, the Commission must adopt legislation to provide for limited assurance standards (1 October 2026), as well as further legislation to provide for reasonable assurance standards (1 October 2028). The assurance certification must come from an accredited independent auditor or certifier, ensuring that the sustainability information complies with the certification standards that have been adopted by the EU. It should be noted that there are currently no mandatory assurance requirements on sustainability reporting in the UK.
Companies already subject to the NFRD. That is, essentially, large EU 'public interest entities' with regulated market listed securities, credit institutions, and insurance companies with more than 500 employees.
Parent companies of a large group. Large groups are groups consisting of parent and subsidiary companies included in a consolidation, fulfilling two of the following criteria:
All 'large' EU companies (including EU subsidiaries of a UK parent) fulfilling two of the following criteria:
Listed small and medium-sized enterprises, with lighter disclosure requirements and the ability to opt-out until 2028.
Other EU and non-EU companies (with the exception of micro undertakings) with securities listed on EU regulated markets. Those include debt securities with denominations of less than EUR 100,000 or equivalent listed on an EU regulated market. It's noted that the directive doesn't apply to securities listed on EU multilateral trading facilities.
Non-EU companies (including EU subsidiaries of a UK parent) that operate in the EU may also fall under the CSRD scope, regardless of whether they're listed or not. They shall be required to provide sustainability disclosure if:
This may start with identifying entities within your group, which are incorporated in the EU or entities with turnover generated in the EU and considering whether the scope criteria set out in the regulations are met.
This will bring focus to your CSRD readiness project and enable you to determine for which topics additional disclosure requirements will arise ahead of your first reporting period. This may include policies, KPIs, and targets. We believe this starting point ensures you don’t spend time aligning components that may not be material in light of CSRD principles, but also will provide valuable input for your strategy.
Comparing the new disclosure requirements to your current state will help you identify gaps you'll need to address to enable your organisation to comply with the regulations.
Having identified the gaps, your roadmap sets out how they will be addressed. Identify who within your organisation will be responsible for this, and, for discussing as a project team, how it will be done.
For more insight and guidance, get in touch with Laura Tibbetts or Rashim Arora (Financial Services).
