The Corporate Sustainability Reporting Directive (CSRD)

What is the purpose of the CSRD and what is it aiming to achieve?

The CSRD is an EU law with the purpose of enhancing the quality and breadth of corporate ESG disclosures. The directive aims to direct capital flows towards sustainable investments and eliminate greenwashing, which is the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology, or company practice. 

Through this directive, the EU hopes to upgrade corporate transparency, providing stakeholders with more reliable and comparable information about a company's ESG intentions and performance. 

This is a part of the EU's broader initiatives under its Action Plan on Financing Sustainable Growth and the EU Green Deal, aiming to transform the EU into a modern, resource-efficient, and competitive economy with no net emissions of greenhouse gases by 2050. The CSRD is designed to support these broader goals by ensuring that corporations are transparent about their sustainability practices and impacts.

How does the CSRD differ from the SFDR?

The CSRD and SFDR, both EU regulations, differ in scope, focus, reporting requirements, and purpose. The CSRD applies to a broader range of large companies and industries, focusing on non-financial sustainability disclosures. It introduces detailed and standardised reporting requirements, aiming to increase corporate transparency about ESG performance. 

Conversely, the SFDR applies solely to financial market participants and advisors, focusing on the integration of sustainability risks in investment decisions. It requires entities to disclose how their policies and investment decisions impact sustainability, aiming to provide clear information about investment products' sustainability risks and impacts.

How does the CSRD differ from the NFRD?

The CSRD replaces the NFRD, significantly expanding its scope and reporting requirements. While the NFRD applied to large public-interest entities with over 500 employees, the CSRD applies to a wider range of large companies and those with securities on regulated EU markets. 

The CSRD introduces more detailed and standardized reporting, requiring companies to adhere to mandatory sustainability reporting standards. Unlike the NFRD, the CSRD mandates external assurance of non-financial information by an independent provider. Overall, the CSRD addresses the limitations of the NFRD, enhancing detail, standardisation, and scope of non-financial reporting​​.

Why was the CSRD created and what was the process?

The CSRD was initiated due to dissatisfaction with unclear and ineffective legislation around non-financial disclosure by large companies. Its creation aimed to increase transparency and performance in environmental, social, and employee-related matters. The process began with the adoption of environmental and social disclosure guidelines in 2017, then climate-related information disclosure in 2019. The significant breakthrough occurred with the final report from the European Financial Reporting Advisory Group (EFRAG) in 2021. The CSRD proposal was agreed upon in 2022, and the first drafts of 12 Sustainability Reporting Standards were delivered by EFRAG later that year. The final standards are set to be finalised and adopted in June 2023.

What is the purpose of the European Sustainability Reporting Standards (ESRS)?

The European Sustainability Reporting Standards (ESRS) are a critical component of the CSRD. They will aim to standardise how companies disclose their environmental, social, and governance (ESG) impacts.

In November 2022 the first set of 12 draft ESRS were delivered to the Commission. These include 2 general ESRS, 5 environmental ESRS, 4 social ESRS, and 1 on governance. The Commission will finalise the ESRS on the 30th June 2023.

The ESRS will aim to ensure that reported information is of high quality, comprehensible, verifiable, comparable, and faithfully represented. They also introduce the ‘double materiality’ principle, requiring companies to disclose both their impacts on sustainability and the effects of sustainability on them. The ultimate objective is to increase transparency, and accountability, and foster more sustainable corporate behaviour.