CSRD: A Guide to the Corporate Sustainability Reporting Directive

One of the most influential new sustainability disclosure laws on the world stage is the European Union’s Corporate Sustainability Reporting Directive (CSRD), which requires thousands of companies to disclose details about their sustainability impacts, risks, and opportunities. One of the focal topics is climate, and carbon footprints are a crucial part of the puzzle. 

Though it's a European law, the CSRD is expected to have broad repercussions for global markets — and businesses everywhere need to pay attention. The policy kicked into effect on January 1, 2024, with mandates for 12,000 of the EU’s largest publicly listed companies. Over the next four years, the CSRD will gradually fold in more and more businesses, ultimately impacting an estimated 50,000 companies — including thousands based outside European borders. That means many non-EU organizations will face disclosure obligations, and even those who are not legally required to report under the law will feel its impact. 

In this article, we do a deep dive into the CSRD — who it affects, what it requires, and the steps you can take to prepare for compliance. 

Why was the CSRD introduced?

The policy aims to give stakeholders better data about companies’ sustainability practices.

To make sense of how the CSRD might affect your business, it’s first helpful to understand the law’s objectives. The European Commission proposed the CSRD in April of 2021 as part of the European Green Deal, which seeks to make Europe the world’s first climate-neutral continent by 2050. The goal of the CSRD is to arm investors, customers, and other stakeholders with reliable sustainability data so they can make informed decisions — ultimately spurring businesses to decarbonize, and moving Europe closer to climate neutrality.

The CSRD evolved from an earlier rule called the Non-financial Reporting Directive (NFRD), which expected companies to report on sustainability matters but did not specify how. This was problematic: Research by the European Parliament found that stakeholders struggled to understand and compare sustainability reports due to their lack of consistency. Companies used different standards and reported varying levels of detail. The NFRD also only applied to the largest public companies, leaving gaps in the marketplace of information. European leaders rallied behind the European Green Deal and committed to policy actions to make that vision a reality. The CSRD is a key part of that vision.

The Directive aims to: 

• Standardize and improve the quality of sustainability data and disclosures
• Provide investors and other stakeholders with more comprehensive, comparable, and accessible information
• Improve accountability and transparency among businesses for sustainability-related activities
• Support the transition to a more sustainable economy

Companies reporting under the law will need to follow the European Sustainability Reporting Standards (ESRSs), which provide a roadmap for disclosure. The ESRSs for large companies were finalized and published in the EU’s Official Journal at the end of last year.  

By requiring comprehensive, regulated sustainability reporting by a broad range of public and private companies, the CSRD promises to inform market decision-making — not only for investors, but also for consumers, employees, and civil society. 

Who needs to comply with the CSRD — and when?

An estimated 10,000 non-EU companies will need to report.

In addition to creating more thorough reporting standards, the CSRD applies to a much broader swath of companies than previous policies. The policy mandates that private and public European companies — as well as non-European companies with a substantial presence in the EU — provide detailed information on sustainability-related issues. The European Commission has estimated that 50,000 companies will be affected by the CSRD. Independent analysis found more than 10,000 non-EU companies that meet the criteria for mandatory CSRD reporting — over 3,000 of which are American.

Large Undertakings

The policy applies to both listed and non-listed companies in Europe that qualify as “large undertakings,” meeting two of the following criteria: 

1. Annual net turnover greater than €50M EUR;
2. Total employees greater than 250; 
3. Balance sheet assets greater than €25M EUR 

There are two waves of deadlines. Companies that were covered by the NFRD will be reporting in 2025, covering FY 2024. The rest of the companies meeting these criteria will need to prepare their first CSRD report for FY 2025 and file it in FY 2026. Notably, this provision also applies to non-listed, large subsidiaries or groups of non-EU companies. If you have a subsidiary or group of subsidiaries incorporated in the EU that meet two of these three criteria, those entities will need to comply. These companies have some options for how to comply — ranging from each subsidiary reporting, to an “artificial consolidation” of the EU-based subsidiaries, to parent-level reporting. There are many factors to consider when making that choice. 

Small and Medium Enterprises

Listed small and medium-sized EU enterprises (SMEs) must also comply with the CSRD. These listed SMEs are companies whose securities are traded on a regulated market in the EU but do not qualify as “large” companies according to the definition above. All listed SMEs are captured by the CSRD, except those categorized as micro-enterprises, which are companies that do not exceed the limits of at least two of the three following criteria:

1. Balance sheet total of €350,000 EUR;
2. Net turnover of €700, 000 EUR;
3. Ten employees

These small and medium enterprises will have to file reports covering FY 2026 starting in FY 2027. The CSRD has a provision for these companies to delay reporting, but that option sunsets in FY 2028.  

Non-EU Companies

The CSRD will impact the European market, and the EU has included an additional provision to cover non-EU companies that are active players in that market. To ensure a level playing field,   businesses based outside of the EU will also be subject to CSRD requirements if they generate a net turnover of €150M EUR in the EU and fulfill either of the following criteria:

1. At least one large or listed subsidiary in the EU; or
2. At least one branch in the EU with more than €40M EUR in net turnover

The extraterritorial provision kicks in starting in FY 2028: If you have a branch or subsidiary in Europe with €40M EUR in annual revenue, and you earn €150M EUR in annual revenue from your total operations in Europe, your subsidiary will have to file a report covering its global parent. This provision may capture additional companies, and companies that begin reporting for “large” subsidiaries in Europe in 2025 should plan for global parent reporting in the future. The EU will issue reporting standards for these companies by July 2026; they will probably look a lot like the ESRSs in place for large companies today.

In addition to the entities that fall into the categories listed above, many businesses operating upstream or downstream of these companies will be asked to share emissions data and other sustainability information as their partners and customers report on value chain impacts. 

Reporting Deadlines and Criteria

‍

‍

➜ Access our on-demand webinar to learn essential strategies for navigating CSRD reporting requirements and maximizing business value through sustainability disclosures.

CSRD Requirements: What will companies need to disclose? 

Companies will need to apply a double materiality lens and secure third-party assurance.

The European Sustainability Reporting Standards (ESRSs) detail how companies must report on sustainability risks and impacts to comply with the CSRD. The first set of standards for “large” companies (as described above) is now final and covers ten different environmental, social, and governance (ESG) topics, with a special focus on climate change. SMEs will report against a tailored set of ESRSs, currently out for consultation. 

Across all ten topics, companies need to consider and report on how their sustainability impacts, risks, and opportunities arise across their value chain.  

Double Materiality

The CSRD is designed to inform many different stakeholders, so it calls for the application of a “double materiality” lens. This means businesses will not only need to disclose their exposure to risks associated with ESG issues (financial materiality), but they will also have to report on their company’s material impacts on the environment and society more broadly (impact materiality). Companies will need to look to the ESRSs for guidance on how to conduct a double materiality assessment, including: 

1. Determining material impacts, risks, and opportunities; 
2. Preparing mandatory general disclosures on governance, risk management, and strategy;  
3. Identifying the necessary disclosures across the ten topics

Assurance Requirements

All disclosures must be included in the company’s annual report, and all, including the materiality assessment, must receive third-party assurance. In the initial years, the policy allows for limited assurance, but by 2028, the EU plans to move to a reasonable assurance requirement.

A Focus on Climate 

Among the ten ESRSs topics, the climate change standard (ESRS E1) warrants special attention. After a company conducts its materiality assessment, if it determines that climate change is not material and does not provide the information called for in ESRS E1, it must support that decision by disclosing a detailed explanation of the conclusions of its materiality assessment. The European Commission emphasized  that this provision was “included in recognition of the widespread and systemic effects of climate change on the economy as a whole.”

The climate change standard requires a company to disclose details about its policies and actions, transition plans and targets, energy use and mix, its own GHG removal projects, and other reductions or removals it finances through carbon credits, internal carbon pricing, and the anticipated effects of climate-related risks and opportunities. And it requires companies to disclose their scope 1, scope 2, and scope 3 carbon emissions.  

Carbon Data is a Cornerstone

The CSRD makes clear that a reliable picture of a company’s carbon emissions is important to understanding the transition risks it faces. That includes scope 3 emissions from up and down value chains. The EU has recognized that some businesses will need extra time to prepare scope 3 disclosures and has provided a one-year grace period on scope 3 reporting for companies with fewer than 750 employees. 

Carbon emissions are also foundational to many of the other disclosures a company needs to make. In addition to requiring disclosure of scope 3 emissions, the CSRD asks for details about transition plans, reduction targets, and decarbonization strategies to meet those targets — including specific levers and their anticipated impacts. A comprehensive and reliable carbon footprint is the starting line. 

The CSRD’s expectations for emissions disclosure will also shape market expectations. Because companies with CSRD obligations will need to acquire external assurance, they will expect their business partners to provide reliable and traceable information. And, as investors, consumers, employees, and civil society become accustomed to receiving this information, expectations and demands will continue to rise. That means an organization may be asked to share emissions information if it is part of the value chain of one of the thousands of companies regulated by the CSRD — even if the organization itself is not directly regulated. 

The CSRD not only demands a broader range of information than previous regulations, but it also raises the bar for data quality. The law asks for assurance for all disclosures and compels companies to address climate in their management commentary. 

In this context, it becomes imperative to ensure that carbon data is transparent, traceable, and reliable. Emissions reporting requires more than data collection and management; it also requires the transformation of activity data. Carbon accounting software can facilitate this process and help businesses meet the rigorous standards of the CSRD.

Steps to Prepare for CSRD Reporting

The CSRD will result in a significant shift in data management and reporting. As a result, many companies may face substantial upfront investment needs — leaving teams feeling overwhelmed if they don’t have sufficient support. 

You can ease that burden and prepare for CSRD compliance by taking these key steps: 

1. Get familiar with the regulations. The first step is to determine whether or not you fall under the scope of the CSRD and what your reporting obligations will be. Your legal team is in the best position to assess the specific impacts of the law on your company, including materiality assessments. The materiality assessment is at the heart of the CSRD and must be thoroughly understood. You will also need to stay on top of requirement changes and reporting deadlines, especially if your company is an SME or non-EU organization, since reporting guidance for these entities is still developing. ‍
2. Educate your team. It’s important to cultivate understanding and buy-in, especially among team members who will be responsible for data collection. The better your employees grasp the law, the more reliable and efficient your reporting will be. Teams should be able to articulate CSRD’s impact on the business, the aspects of compliance they are responsible for, and the many reasons why it is important to collect accurate data.‍
3. Understand the different types of data you will need. Under the CSRD, there are a lot of disclosures, and many of those disclosures require data. Some of this data you might have, but are not yet gathering, and with some, you may have to start from the beginning. You will need processes for developing your narrative disclosures, and systems to help you with data collection, management, and analysis to support your narratives. ‍
4. Establish reliable systems and use the right tool for the right needs. To make sure you’re assurance-ready, you need reliable systems, controls, and procedures. First, you have to identify your emissions-generating activities or related spend. Then you have to gather and control that data, before transforming it into a carbon dioxide equivalent. You will need to show your work, for example disclosing the percentage of scope 3 data that you obtained directly from your suppliers or value chain partners. If you are reporting for just a subsidiary or group of subsidiaries, you will need to be able to organize your corporate-level emissions data in a way that allows you to break out the emissions attributed to the reporting entity. The specificity of these requirements requires a specialized tool. Climate management and accounting software can save time and resources by reducing the need for manual data collection, input, and analysis. 

Conclusion

Europe’s CSRD is reshaping global markets, and many businesses — including those beyond the European Union — will need to respond. One of the biggest challenges they will face in complying with the law is the complexity of managing emissions data. 

The CSRD requires assurance over all sustainability information and sets a new high bar for data quality. In this context, organizations need the right systems in place to ensure their emissions data is transparent, traceable, and reliable. Carbon accounting software is an essential tool that can build confidence in your data and save time in preparing your CSRD sustainability report. 

Find out how Persefoni can help you prepare for CSRD disclosure. 

CSRD FAQs

Is CSRD reporting mandatory?

CSRD reporting is mandatory for companies that meet the criteria described above. If information is found to be material, it must be disclosed, and materiality assessments are subject to third-party assurance requirements. Penalties for non-compliance are determined at a national level and could be substantial. 

What is the status of CSRD?

The CSRD took effect on January 1, 2024, and will be phased in over the next four years according to the size of your company. The ESRSs provide more specific guidance on what companies must do to comply with the law, when, and how.

How will CSRD reports be presented? 

Sustainability reporting under the CSRD will be presented as part of a company’s annual report or management report. This is a key feature of the CSRD: It incorporates environmental disclosure into financial reporting. The policy mandates that sustainability information must be reported digitally in alignment with the European Single Electronic Format (ESEF). Companies must digitally tag their sustainability information making it machine-readable. The Xbrl-based tags companies will need to use are coming soon.

How does the CSRD fit in with other legislation? 

The CSRD is part of a wave of regulations requiring the disclosure of climate information — most notably, the SEC’s climate rule and California’s new climate disclosure laws, SB 253 and SB 261. While the SEC and California laws focus on climate and carbon emissions, the CSRD requires disclosure on a much broader range of ESG topics, such as human rights and biodiversity. The foundations of CSRD reporting — and specifically the general disclosures and the climate change standard —  are the same foundations for the ISSB standards, which are being adopted around the globe as a common framework for sustainability disclosure that is focused on investors and financially material information. Because of this, companies reporting under the CSRD should be able to use much of the same data to disclose under other regulations and voluntary standards. 

What is the difference between CSRD and ESRSs?

The CSRD and ESRSs are connected but distinct. The CSRD is the overarching mandate — it provides the legal framework for disclosure obligations. In contrast, the ESRSs serve as a roadmap for reporting under the CSRD; they offer details about what companies must disclose under the law, and how. 

What are the challenges of CSRD disclosure? 

One of the biggest challenges organizations will face in meeting CSRD reporting obligations is the sheer volume and complexity of climate data. The law not only requires businesses to report on scope 3 emissions but also requires assurance over all sustainability information. To comply, you must ensure the climate data you use is reliable, traceable, and transparent. Carbon accounting software can help you manage this complex data efficiently and effectively.