The Corporate Sustainability Reporting Directive (CSRD)

A distinguishing characteristic of the CSRD is that it requires disclosures related to a broad spectrum of ESG issues. Companies subject to the CSRD need to prepare disclosures related to climate risks and opportunities, including climate transition plans, and all three scopes of greenhouse gases (GHGs), which is one of the most common areas addressed by ESG disclosure frameworks. But additionally, companies need to disclose details about environmental management (specifically related to pollution, marine life, and biodiversity), labor and safety management, workers in the value chain, and resource use and the circular economy.

Companies subject to the CSRD must prepare their disclosures according to the ESRSs developed by EFRAG. EFRAG voted to finalize its first ESRSs in late 2022, and the European Commission adopted the ESRSs on July 31, 2023. Some companies covered by the CSRD would need to start collecting data as early as the 2024 financial year for disclosure in 2025 reports, while others will have phased-in reporting requirements over the next several years.

The CSRD uses a double materiality lens, combining the commonly used financial materiality basis (focused on the effects of ESG issues on the company’s profitability and business performance) with a focus on impact materiality (the consequences of a company’s operations beyond its own walls, including effects on the environment and communities). An ESG issue is considered material under a double materiality lens if it is material from either an impact materiality or financial materiality perspective, or both.

The CSRD’s double materiality lens demonstrates that it’s focused on the connection between ESG and business performance. That connection is the reason why the CSRD requires covered businesses to provide their required ESG disclosures within a section of their regular financial statements. The message is clear: Businesses need to prioritize understanding and managing the ESG aspects of their business in the same way they manage and track other key metrics of business performance.

You’ll need high quality data to be able to meet your CSRD disclosure requirements. Your data must be accurate and secure, and all companies in the CSRD’s scope are required to obtain limited assurance from a third-party verifier in their first reporting year. The European Commission is evaluating the need to obtain reasonable assurance for feasibility and may adopt that provision at a future date. For now, the takeaway is that companies required to follow the CSRD (and those who plan to follow it as a best practice) will need to ensure they have efficient and accurate ways of collecting and calculating data, and safe and secure methods to store and access their data.