What is the CSRD? A Guide to Preparing for the EU Corporate Sustainability Reporting Directive

What is the CSRD?

The European Union’s Corporate Sustainability Reporting Directive (CSRD) has now arrived – sweeping new regulation that significantly expands the scope of sustainability and ESG disclosure requirements for thousands of global companies. The CSRD raises the reporting standard for these disclosures to the same quality and control bar as financial reporting. 

This blog post helps to demystify the CSRD, determine if and when you will need to report, and prepare to meet the disclosure requirements. We’ll cover

• How does the CSRD differ from the NFRD?
• What is the difference between CSRD and ESRS?
• Who needs to prepare a CSRD disclosure?
• What are the CSRD reporting requirements?
• How do I manage double materiality?
• What are the assurance requirements? Do I need an auditor?
• How long will it take to report?
• When will the CSRD come into effect? 
• What happens if you miss the deadline?
• How Gravity can help you meet the CSRD deadline with confidence

If all of this feels daunting and you want more help, please reach out to our team. We can help you determine when you need to report, what data you will need to report, and ensure you can do it before the deadline. Request a meeting here.

How is the CSRD different from the NFRD?

The European Financial Reporting Advisory Group (EFRAG) initially launched the Non-Financial Reporting Directive (NFRD) in 2014 with the aim of helping introduce companies in the European Union (EU) to Environmental, Social and Governance (ESG) reporting.

The CSRD replaces and significantly broadens the scope of the NFRD, quadrupling the number of companies required to report and requiring 50,000 companies to disclose a vast range of data, policies, and plans. This includes an estimated 10,000 non-EU companies with significant operations in Europe. Many of these companies will be required to report for the first time.

In addition to expanding the scope of the NFRD, the CSRD also expands the breadth and depth of the reporting requirements. In addition to carbon reporting, companies will also need to report on ESG categories including pollution, waste, water, and biodiversity, labor practices – all throughout the supply chain (more details to be found below). 

To begin, companies will need to conduct a “double materiality” assessment to determine what data they need to share (more on that below.) These disclosures will need to be included in companies’ annual reports and must meet an audit assurance standard. 

What is the relationship between CSRD and ESRS?

The European Sustainability Reporting Standards (ESRS) is a reporting standard that will be used to meet the requirements of the EU CSRD. Basically, the  EU developed the the ESRS to set out the framework and methodology for reporting and maintaining compliance with the CSRD, which is the regulation. The ESRS standards prescribe the  broad range of ESG disclosure requirements for companies, including climate change, biodiversity, diversity and inclusion, and labor practices. 

While this may seem complicated, the main intention of the ESRS is to help organizations avoid repetitive disclosures by aligning with other major reporting standards like the Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting Initiative (GRI).

Who needs to prepare a CSRD disclosure?

More than 50,000 companies will need to report in line with the CSRD, and many of these companies will be reporting their full carbon emissions for the first time (i.e., full value chain emissions, including Scope 1-3). The new regulations also cover an estimated 10,000 non-EU companies with significant operations in Europe.

The CSRD will apply to the following companies:

• All EU-based public companies (excluding micro-enterprises), regardless of their size.
• Large EU-based private organizations, which are defined as companies that meet two or more of the following criteria:
  • 250 or more employees.
  • Annual revenues of €50 million or more.
  • A balance sheet total of €25 million or more.
• Non-EU parent companies that generate €150 million or more in annual revenues within the EU and have either:
  • A branch in the EU that generates €50 million or more in annual revenues.
  • A subsidiary in the EU that is either listed on an EU-regulated market or meets the large company criteria above.

For non-EU parent companies, their EU subsidiaries will need to report individually unless the parent company opts for voluntary consolidated reporting at the global level.

What do you need to report?

The CSRD requires companies to disclose a broad range of data relating to their environmental, social, and governance practices.

As noted above, the ESRS standards provide detailed guidelines on what to disclose. The standards include both General Disclosures (ESRS 1 and ESRS 2) and Topical Standards covering environmental, social, and governance (ESG) topics. All companies will need to report general disclosures. For the topical standards, however, companies will only need to report on the standards that are material. Companies will need to conduct a  “double materiality” assessment to determine materiality. 

Here’s what your report will need to include:

General Disclosures (ESRS 1 & ESRS 2):

All companies will need to complete the general disclosures, ESRS 1 and ESRS 2. These sections align closely with the typical structure of an annual report.

ESRS 1 outlines the general requirements for sustainability reporting, including:

• Double Materiality Assessment: Companies must report both on how sustainability matters affect their financial performance (financial materiality) and on how their activities impact the environment and society (impact materiality). They will need to include the process by which they determine materiality.
• Sustainability Statements: Disclosures must be integrated into the company’s management report and be subject to a limited audit assurance.

ESRS 2 provides the framework for general disclosures that all companies must include. These are organized into the following key areas:

• Governance: How sustainability is governed within the organization, including roles, responsibilities, and procedures for monitoring ESG risks and opportunities.
• Strategy: How sustainability is integrated into the company’s business model and strategy, including impacts on and from sustainability-related risks and opportunities.
• Impact, Risks, and Opportunities: A description of how the company’s activities affect the environment and society, as well as how external sustainability factors present risks or opportunities to the company.
• Metrics and Targets: Quantitative data on sustainability performance, including targets for improving the company’s ESG footprint over time.

Topical Standards (ESRS E, S, G)

In addition to the general disclosures, companies must report on relevant ESG topics using the 10 Topical Standards under three main categories: Environmental, Social, and Governance. For each of these sections, companies will need to disclose any relevant risks, impacts, and opportunities that are material for the company. Then, companies should disclose the policies, actions and targets in place to mitigate those risks and impacts.

1. Environmental Standards (ESRS E1-E5):
   • ESRS E1 (Climate Change): Disclose how climate-related risks and opportunities affect the company, along with data on greenhouse gas emissions (Scope 1, 2, and 3), energy use, and mitigation strategies. Companies will need to include a credible transition plan that aligns to the Paris Agreement. For most companies, this section will be required.
   • ESRS E2 (Pollution): Report on the company’s emissions of pollutants into air, water, and soil, including information on how these are being reduced.
   • ESRS E3 (Water and Marine Resources): Information on water consumption, conservation, and the impact on marine ecosystems.
   • ESRS E4 (Biodiversity and Ecosystems): Data on how the company’s activities affect biodiversity, including deforestation, habitat destruction, and biodiversity protection efforts.
   • ESRS E5 (Resource Use and Circular Economy): Details on material use, waste production, and how the company is transitioning towards a circular economy (e.g., recycling, sustainable sourcing).
2. Social Standards (ESRS S1-S4):
   • ESRS S1 (Own Workforce): Information on the company’s treatment of employees, including working conditions, diversity and inclusion, wages, and health and safety.
   • ESRS S2 (Workers in the Value Chain): Disclosures on how the company ensures fair labor practices for workers in its supply chain, including human rights due diligence.
   • ESRS S3 (Affected Communities): Information on how the company’s operations impact local communities, including displacement, community relations, and contributions to local economies.
   • ESRS S4 (Consumers and End-users): Data on how the company’s products and services impact end-users, including product safety, privacy, and accessibility.
3. Governance Standards (ESRS G1):
   • ESRS G1 (Governance, Risk Management, and Internal Control): Companies must disclose governance structures, policies, and processes related to managing sustainability risks, including board oversight, executive responsibility, and compliance with legal and ethical standards. This will include both qualitative and quantitative components.

Other Reporting Requirements:

• Sector-Specific Standards: In addition to these topical standards, sector-specific standards may apply, depending on the industry in which the company operates.
• Audit Assurance: All sustainability reports must be subject to a limited audit assurance to ensure the reliability of the disclosed data.

What is double materiality? What is a double materiality assessment?

Double Materiality is a core concept in the CSRD in determining how companies assess and report on sustainability-related information. Double materiality requires companies to look at sustainability from two complementary perspectives: 

• Financial Materiality is a traditional understanding of materiality and requires companies to report how sustainability-related risks and opportunities (such as climate change, social issues, or regulatory changes) could affect their financial position, performance, and business prospects.  
• Impact Materiality is an outward-looking perspective that requires companies to disclose how their activities impact the environment and society, even if these impacts do not directly affect their financial performance.

A double materiality assessment will define how a company’s activities or operations impact the environment or society-at-large, and how sustainability-related matters impact the company. This, in turn, will dictate which areas companies should focus on in their CSRD disclosures.

At a high level, a double materiality assessment will generally consist of asking key stakeholders to evaluate the impacts, risks, and opportunities present across key business activities – including those in the value chain – for the topics covered by the ESRS standards

Companies will need to integrate both qualitative and quantitative input from internal departments as well as external stakeholders—like scientific experts, customers, employees, and investors—as they determine which topics are material to the business and society. The regulation also prescribes that companies determine a materiality threshold to judge the results of the individual analyses and ultimately determine what is material to the company or not.

The outcome of the double materiality assessment is a determination about which ESRS standards a company should prioritize in their reporting, ensuring companies focus on the topics that matter both to the organization and society at large. For those topics deemed not sufficiently material, companies will need to provide justification.

Because “double materiality” is so new, this assessment can be one of the most time consuming parts of starting your CSRD reporting. Dell Technologies, for instance, started their double materiality assessment in 2023 to prepare for the 2025 deadline. By starting early, companies can more easily engage internal departments — such as legal, audit, finance, and operations functions — on the requirements of CSRD and the double-materiality assessment and build a shared understanding of what topics to prioritize.

What are the assurance requirements? Do I need an auditor?

The assurance requirements of the CSRD are one of the biggest changes from previous reporting regulations. As part of the effort to standardize ESG reporting and hold it to the same bar as financial reporting, companies will be held accountable for their disclosures through mandatory third-party audits

Companies will need to seek support from independent auditors to certify that reports comply with the CSRD standards. The regulation starts with– a limited assurance threshold in the beginning to give companies time to adapt to the new standards. Over time, however, the assurance threshold ramps up to reasonable assurance, raising the bar for accuracy and traceability in company reports and the data underlying them.

One of the best ways to prepare for this audit is by working with a solution that provides powerful data management and audit tools to ensure your data is traceable.  This will make sure your audit goes as smoothly as possible. 

How long will it take to report?

CSRD represents a significant increase in the breadth and depth of reporting compared to other frameworks. Our Climate Experts estimate that reporting will take a small internal team 6+ months of full time work or 500+ consulting hours. These estimates can change depending on the solutions you have in place and whether you are well equipped to collect the required data, compile and analyze it, conduct an audit, and draft the formal report in the required format. As such, companies subject to the CSRD should start preparing far in advance of their deadline.

When will the CSRD come into effect?

The CSRD became law in January 2023, with reporting requirements starting in early 2025.

Companies will need to include CSRD in their financial reports on the following schedule:

• 2025: Firms currently reporting under the NFRD will need to make their first CSRD disclosures in their 2025 management report, using 2024 data. 
• 2026: Other public companies that are not SMEs or micro-cap and large private companies subject to the regulation will make their first CSRD report in their 2026 management report, using 2025 data. 
• 2027: Listed SMEs will start reporting in the 2027 management report, using their 2026 data.
• 2029: Parent-company level reporting requirements for qualifying non-EU firms will form part of 2029 reporting, using 2028 data. However, some subsidiaries may need to report earlier if they meet any prior requirements.

What happens if we miss the reporting deadline?

While the CSRD has not yet finalized the fine or penalty structure for non-compliance by companies subject to the new reporting requirements, the legislation amends other laws related to annual financial reports and audit. EU member states will be expected to enforce the CSRD.

Failure to comply with the CSRD reporting requirements will likely result in substantial penalties. Companies that fall short of reporting may face monetary fines based on their size, legal implications and regulatory scrutiny, corporate sanctions, and reputational risk.

How Gravity can help you meet the CSRD deadline with confidence

The CSRD represents the latest evolution in reporting regulation, one with far greater requirements than we have seen previously. There are many mechanisms to ensure you meet the deadline, whether that is managing it in house, hiring a consulting firm, or onboarding software.

Gravity offers the best of both worlds: world-class software and personalized support from Climate Experts. We’ll work with you every step of the way: from double materiality assessments to data collection to final reports to ensure you meet your deadline with the highest level of accuracy. 

Here’s how we can support you:

• Double materiality: Double materiality assessments don’t need to be painful. Gravity’s experts and software will guide you efficiently and directly to conduct the necessary assessments of your operations and determine which of the topical standards you need to report on, so that you can get started on the reporting. 
• Data collection: Collecting Scope 1, 2, and 3 data can be one of the most time-consuming processes for reporting. Using Gravity’s bill scanning feature and utility APIs, you can process thousands of documents in seconds – without manual error. The supplier engagement solution and surveys makes it possible to collect data from across your value chain in record time.
• Data assurance: Data assurance should be baked into every step of the process to ensure the highest-grade data and minimal work for your auditors. Gravity’s platform supports viewing data logs, attaches supporting evidence for every data point, and accelerates the audit process by keeping it all in one place/providing you the ability to grant auditors view access to your report. We also can introduce you to trusted auditors to ensure this process runs smoothly.
• Simplified reporting: Our platform will automatically format your data to the European Single Electronic Format (ESEF) for the CSRD. You can also translate the raw data you collected for CSRD to any other disclosure requirements you need to meet.
• World-class assistance: In addition to cutting-edge technology, you’ll also be partnered with an expert Climate Strategist who will be on hand to help you navigate the regulation as it applies to your company, compose answers to qualitative and quantitative questions, and offer final reviews and submission reports. 

You don’t have to be alone as you navigate CSRD. If you’re looking for a partner that can help you understand the requirements and reach your deadlines, please reach out.