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CSRD – Getting to grips with the latest (and greatest?) corporate sustainability reporting

CSRD – Getting to grips with the latest (and greatest?) corporate sustainability reporting


The EU's Directive on Corporate Sustainability Reporting ("CSRD") was published in its final form in mid December 2022, giving organisations in its scope certainty about when the significantly expanded reporting requirements will apply to them.

Shortly before that, the advisory group EFRAG published final drafts of the European Sustainability Reporting Standards to implement the CSRD's requirements ("ESRS"); these drafts are now in the hands of the European Commission for a further consultation and expected publication as delegated acts, by 30 June 2023. While changes are possible, EFRAG has said that it does not expect the final reporting standards to deviate significantly from their own drafts. One of the purposes of the CSRD is to drive businesses in scope to provide the data that the financial community needs for full and accurate reporting under its own disclosure regime, the Sustainable Finance Disclosure Regulation ("SFDR"), though some will be caught by both. In this briefing, we outline some key aspects of the new regime and look at the wealth of ESG information that organisations will need to prepare to report.

CSRD - to recap

The final text of the CSRD is largely unaltered from the political agreement reached between the EU's legislative institutions in summer 2022, summarised in our briefing. CSRD amends the Non-financial Reporting Directive (2013/34/EU) ("NRFD") and although CSRD widens considerably the number of entities caught by NFRD, the NFRD concept of "undertaking" is key in determining whether an entity is caught.

"Undertaking" is defined by reference to a list of types of, largely, limited liability companies (for example, Irish private companies limited by shares or by guarantee, or Luxembourg SRLs); also in scope are undertakings such as partnerships or limited partnerships whose members are all limited liability companies. Though there is an explicit exemption for alternative investment funds and UCITS, as defined in SFDR, asset managers should assess the rules carefully to see whether they (or any of the vehicles they manage) would be in scope.

Other financial undertakings who meet the criteria, including as to legal form, would also be in scope. Comments during the EFRAG consultation called for the exclusion of the asset management/owner community, citing the overlap with the Sustainable Finance Disclosure Regulation requirements in particular, but such a change would require an amendment to the primary legislation which we would consider unlikely.

As a reminder, undertakings in the scope of the new reporting obligation are:

  • EU companies which are:
    • "large" companies, i.e. those meeting two of the three criteria: balance sheet of EUR 20m, turnover of EUR 40m or 250 average number of employees, OR
    • parents of a "large" group (according to the thresholds for "large" above, and where the parent also qualifies as an "undertaking"), OR
    • any EU listed company excluding micro-enterprises, OR
    • large or listed insurance undertakings or credit institutions.
  • Non-EU companies which have:
    • turnover of EUR 150 million or more in the EU for each of the last two consecutive financial years, AND
    • an EU branch with turnover of EUR 40 million or more in the EU OR an EU subsidiary.

Member States have 18 months from the entry into force of the Directive to enact national legislation implementing the Directive. The reporting requirements apply on a staged basis, with entities already in the scope of NFRD (mostly large listed entities) being the first to report in 2025, for financial years starting on or after 1 January 2024. That does mean that the first entities in scope of the expanded requirements will be blind to some of the specifics of national legislation under which CSRD will actually be implemented, most notably what kind of penalties they may face for poor or no reporting.

European Sustainability Reporting Standards (ESRS)

As noted above, companies in the scope of CSRD are required to report in accordance with a detailed set of standards, the ESRS. EFRAG initially proposed 13 separate standards covering environmental, social and governance matters, and cross-cutting disclosure standards, under which well in excess of 100 separate data points would need to be reported on a mandatory basis. Following their consultation, EFRAG adopted a somewhat softer approach – although the final package which went to the Commission for the next round of consultation comprised 12 standards with more than 80 disclosure requirements, some of which will be phased in and others only required where material.

Note also that this is only the first set of draft standards. EFRAG is also expected to publish further standards, including sector-specific standards (covering sectors such as textiles, mining, road transport, food & beverages, and energy & utilities sectors) – drafts have not yet been made available, but should be adopted by the Commission by June 2024, according to CSRD. Similarly, separate "proportionate" standards suitable for SME reporting should be adopted by June 2024. Finally, EFRAG is developing voluntary sustainability reporting standards ("VSRS") for reporting by non-listed SMEs, an early draft of which is already available.

Some points to note on the content of the first published set of ESRS are set out below.

Cross-cutting standards

ESRS 1 General Requirements

This standard does not contain any independent disclosure requirements, but in common with ESRS 2, complements and facilitates reporting under the E, S and G standards. It contains important definitions (though note Appendix VI to the suite of standards is a full glossary and list of acronyms). 

ESRS 2 General Disclosures – 13 disclosure requirements

This cross-cutting standard functions slightly differently from the "topical" standards (E, S and G, as below). The disclosures relate to matters such as the undertaking's strategy and business planning, its policies, methodologies and materiality assessment in preparing the sustainability statements. Topical standards highlight where and how cross-cutting requirements (e.g. to disclose strategy) must be reported by reference to a specific matter dealt with in the E, S or G standard.


ESRS E1 Climate change – 9 disclosure requirements

Covers climate change adaptation and mitigation, and energy. Critically, this standard implements new Article 19a(2)(a)(iii) (in the renumbered NFRD) on climate transition plans. That article requires an undertaking to provide a description of its plans to ensure its business model and strategy are compatible with a transition to a sustainable economy and the limiting of global warming to 1.5 degrees in line with the Paris Agreement, as well as the EU's objective of being climate neutral by 2050. Recitals to CSRD clarify that this does not create a substantive obligation to produce a transition plan, but to disclose "any plans they may have" to align their business model and strategy with these key climate goals. Clearly, however, disclosing that the business does not have a transition plan may have implications for shareholder and investor relations.

ESRS E1 requires, simply, that "the undertaking shall disclose its transition plan for climate change mitigation". Detailed provisions add colour to that disclosure requirement; transition plans should include, for example, narrative around how the undertaking's plan is compatible with the 1.5 degree target, key actions planned, investments and funding supporting the implementation of the transition plan, and where applicable, current or future plans to make its economic activities "environmentally sustainable" under the Taxonomy Regulation. It is worth noting that ESRS 1 overlaps significantly with TCFD reporting requirements (see our briefing). A full breakdown of the TCFD disclosure requirements as against the ESRS has been included as a separate Appendix IV. This appendix notes that both reporting requirements are generally aligned on the subject of climate-related matters, but with further requirements under ESRS including more general reporting, for example, covering Taxonomy-alignment and more technical or detailed reporting requirements, such as requiring more detailed emissions targets and disallowing the use of carbon credits/offsets to achieve GHG emission reduction targets. The fact that ESRS disclosures must use a "double materiality" standard as explained under section 3 below will also mean that more thought will need to go into ESRS reporting, even for entities also reporting under TCFD.

ESRS E1 also requires disclosure of scope 1, 2 and 3 emissions. The explanatory text on this requirement notes that scope 3 emissions should reflect the reporting boundary (meaning that a group report must include all subsidiaries' emissions) but also the value chain. This would include associates, joint ventures, unconsolidated subsidiaries (for investment entities) and jointly controlled operations and assets. In respect of control investments, there should be no pro-rating of emissions to reflect the actual percentage shareholding (a 51% shareholder needs still to report 100% of the investment's emissions within its own scope 1 and 2 emissions). In respect of non-control investments, the undertaking should consider whether the investment is part of its value chain and if so, should also report its emissions as scope 3. Value chain reporting in respect of most disclosures is subject to a transitional period of three years during which the reporting entity, where it does not have access to full value chain information, may explain its efforts to obtain information and how it plans to obtain information in the future. It must however use in-house information to begin to report value chain impacts, risks and opportunities.

ESRS E2 Pollution – 6 disclosure requirements

Covers pollution of air, water, soil and living organisms and food resources, thus overlapping to a degree with ESRS S4 on biodiversity. This standard also covers substances of concern and substances of very high concern. Many entities will have limited information to disclose under this standard, as well as E3 (water) and E4 (biodiversity) though will still need to consider where in their value chain these impacts may occur, which may be upstream as procured services, or may stem from the activities of portfolio companies or other investments (with particular scrutiny at the moment being given to biodiversity impacts).

ESRS E3 Water and marine resources – 5 disclosure requirements

Covers water extraction, consumption, use and discharge. It also covers marine habitat degradation.

ESRS E4 Biodiversity and ecosystems – 6 disclosure requirements

Covers direct drivers of biodiversity loss such as climate change, land use changes and invasive species and impacts on species.

ESRS E5 Resource use and circular economy – 6 disclosure requirements

Covers both inputs in terms of virgin resources, and outputs including waste. Generally, though not at the top of corporate agendas, most businesses could optimise their own internal systems to minimise waste. Certain disclosure requirements in this standard are particularly targeted at producers of products and materials, whereas others are more generally applicable to any business operations.


ESRS S1 Own workforce – 17 disclosure requirements

Covers work related matters within the reporting entity's own organisation (or group), including working conditions, equal treatment including diversity and inclusion, child and forced labour and privacy. The undertaking must report the extent to which its policies applicable to its own workers are aligned with international standards including the UN Guiding Principles on Business and Human Rights ("UNGP")

ESRS S2 Workers in the value chain – 5 disclosure requirements

Covers largely the same topics as ESRS S1, but in relation to "all workers in the undertaking's upstream and downstream value chain who are or can be materially impacted by the undertaking", and who are not covered by ESRS S1. There is a strong correlation between the requirements of S2 and the related draft directive on Corporate Sustainability Due Diligence ("CS3D"); both require the undertaking to identify if and where material impacts are occurring within its value chain, though S2 is potentially even broader than CS3D given that reporting covers the entire range of sustainability related impacts, risks and opportunities compared to the focus under CS3D on adverse human rights and environmental impacts. One key disclosure under S2 is that the undertaking must describe its human rights policy commitments relevant to value chain workers, including processes and mechanisms to monitor compliance with the UN Global Compact and the OECD Guidelines for Multinational Enterprises (similar commitments exist in respect of the undertaking's own workforce in S1). S2 also requires disclosure as to how far the undertaking's policies with regard to workers in the value chain are aligned with internationally recognised standards including the UN Guiding Principles – see our recent briefing on these principles and wider drivers relating to entities' human rights policy commitments.

ESRS S3 Affected communities – 5 disclosure requirements

Covers a broad range of rights of communities affected by the undertaking's activities, including basic rights such as housing, food, water and sanitation, as well as civil and political rights and particular rights of indigenous communities. Many entities may look at the requirements under S3 and consider them not relevant to their operations, however a response of "N/A" is unlikely to satisfy regulators or investors. Having to disclose whether the undertaking has a policy to address its material impacts on communities in its value chain (remembering that these may well be overseas and in some instances not well known to the undertaking) will at the very least necessitate an exercise of considering whether such a policy is in fact needed. (Note that companies may need to take advice on the extent to which creation and publication of a group-wide policy might give rise to potential additional liability under the emerging doctrine of "parental company liability"; see our briefing.)

ESRS S4 Consumers and end-users – 5 disclosure requirements

Covers information-related requirements including privacy/data protection and freedom of expression, but also physical safety and non-discrimination. Given this standard also covers responsible marketing practices (which will include greenwashing), even non-consumer-facing undertakings will have relevant information to disclose under this standard. 


ESRS G1 Business conduct – 6 disclosure requirements

Covers corporate culture and business ethics, political engagement and lobbying, management of supplier relationships, as well as anti-bribery and corruption ("ABC"). The undertaking must disclose whether it has policies on matters including ABC, whistleblowing, animal welfare, and late payments.


There are a further 6 appendices, including helpful correlation charts between the reporting requirements of the ESRS and those already required to be disclosed (i) as principal adverse impacts ("PAIs") under SFDR, (ii) under TCFD (as described above), (iii) under the exposure drafts of the sustainability (S1) and climate (S2) disclosure standards being developed by the IFRS body, ISSB.

Double materiality under the ESRS

Use of the ESRS is mandatory, but a materiality assessment must be performed to determine whether certain of the data points are relevant for disclosure by the undertaking or not. Regardless of the outcome of the materiality assessment, all undertakings must disclose in accordance with cross-cutting, climate change and other standards, and larger entities must provide certain social disclosures relating to their own workforce, at a minimum. 

It is critical to remember that the ESRS requires disclosure according to the "double materiality" principle. In ESRS 1, this is explained as "impact materiality" and "financial materiality". Impact materiality relates to the undertaking's material actual or potential impacts on people or the environment, whereas financial materiality relates to material actual or potential financial effects on the undertaking. While this has been a concept under NFRD for some time (including in the UK implementation of NFRD in the Companies Act), it does not commonly feature in UK law. Similarly, the ISSB's new standards on climate and sustainability disclosures determine materiality by reference to matters that could affect enterprise value (although they take an expansive view on matters that could affect value). TCFD is also more focused on impacts of climate related risks and opportunities on the entity's financial performance.

Timetable for reporting and how to prepare

As CSRD is now final, businesses can now see with certainty the timeline for implementation of CSRD depending on the nature and location of their undertaking or group. The first reports will be by public interest entities already in the scope of NFRD, and these must be prepared for financial years beginning on or after 1 January 2024, to be reported in 2025. Non-EU entities which, of course, includes UK entities, will need to report for financial years beginning on or after 1 January 2028, with reports due in 2029.

Though the requirements may be somewhat distant for many organisations, there are several ways that businesses coming into scope for the first time can begin to prepare. The most important is to know whether, and if so when, they come into scope of CSRD, as this will drive further preparation. Unlike CS3D which looks likely to pull in many categories of regulated financial undertakings including investment firms, AIFMs and UCITS management companies, as noted above, CSRD is more focused on entities with a more corporate structure which could put such financial undertakings out of its scope in some cases. For those in scope, or with a group entity in scope, it will be important to look at the grouping and consolidated reporting rules, as these are complex but there may be transitional benefits in understanding and applying them.

Entities who are in scope could already start thinking about whether they have systems designed to capture this data up into their supply chain and down into their customer or client base, and whether these systems are extensive and robust enough to meet the standards required for public disclosure in reports which must, additionally, be audited in a similar manner to financial reports. The exercise of assessing materiality, to determine the extent of reporting required, can also be started, and this may well prompt some businesses to think about what more they can or should do to improve their ESG performance.

Remember, also, CSRD reports must be freely available. In combination with the ever decreasing regulatory tolerance for greenwashing (see our briefing on the EU's mission against greenwashing or listen to our podcast), reporting entities can expect to be held to account by regulators, investors and a wide range of other stakeholders with unprecedented access to information on entities' sustainability performance.

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