What to Know About the CSRD

5 min readOct 6, 2021

Overview

The Corporate Sustainability Reporting Directive (CSRD) is a measure, launched on April 21st, 2021, that introduced more sustainability reporting requirements for companies in the EU area. While many large firms and public interest companies (such as listed firms, banks, and insurance companies) are already regulated by the Non-Financial Reporting Directive (NFRD), this directive provides more rigid standards for reporting the sustainability of their business. This will help provide more ESG data for investors to help flow more money to sustainable projects, ensure higher levels of accountability for firms on environmental and social issues, and continue to shape international reporting frameworks.

The CSRD is a major expansion of the NFRD — increasing the number of companies included, widening the scope of reporting requirements, mandating an external audit, and digitalizing the reporting process. The NFRD was a significant development in the creation of international sustainability reporting frameworks, but the European Commission believes that it does not go far enough. With existing regulations, there is critical social and environmental data that is being omitted, and it doesn’t provide enough targets, governance context, or other forward-looking information to help investors with their ESG valuations.

Existing Regulations

The NFRD was originally constructed to provide public accountability on social and environmental issues and provide investors with more information to drive investment to sustainable businesses. It focused on five main pillars: environmental, social and employee aspects, human rights, anti-corruption, and diversity on board of directors. It legally required more corporate disclosures on each of these whereas previous frameworks were voluntary, so it was a monumental advancement in international sustainability reporting. But issues still remain. Taking into account the level of corporate capabilities during its announcement in 2014, the NFRD gave plenty of wiggle room for companies to self-disclose the data that is materially relevant. Critics say that companies have used that flexibility to avoid pertinent disclosures. Many investors also feel that the data mandated in the NFRD is not actionable for future valuation. The data required is mostly backward-looking and has fewer regulations around governance disclosures or target-setting. And the scope of companies included was rather limited. The CSRD will expand to many more small- to midsize companies and will be building out future recommendations to take into account the more limited capacity for companies with smaller headcounts.

Notable Changes

More Companies Included

Currently, there are only about 11,000 companies that are subject to the NFRD regulations. It’s limited to firms with over 500 employees that are public interest companies, i.e. publicly traded companies, banks, and insurance companies. The CSRD will increase that scope to about 50,000 companies. CSRD reporting will be mandatory for companies that have two of these three attributes:

250 employees
€40M in annual turnover
€20M in total assets

The CSRD will also be working with the European Financial Reporting Advisory Group (EFRAG) to build out separate reporting requirements for SME’s. These should account for the fact that these companies have less data gathering capacity than large multinationals, and they will develop questionnaires and software to help guide companies on disclosures.

Widening the Scope of Disclosures

Currently, the NFRD has a basic set of disclosures that cover topics including environmental, social/employee, human rights, anti-corruption, and diversity on board of directors. Some of the big initiatives in the CSRD is to add the concept of double-materiality to reporting requirements, provide more forward-looking data, and encourage more qualitative information, especially around omissions and governance. Double materiality refers to providing information on how external risks (such as flooding or extreme heat caused by climate change) affects your business as well as your firm’s impact on those factors (e.g. your GHG emissions). They also expect to see target setting and progress on historical targets. And similar to the TCFD [Note: link to TCFD article], they still give leeway for omissions but will expect a higher level of explanation around why data is being left out. More descriptive information around a firm’s ESG governance is also expected to be a big element of the new regulations.

The EU commission will be working with the EFRAG and holding conferences with outside organizations to ensure that the EU reporting requirements will be in line with the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulation, and existing international frameworks such as GRI, TCFD, VRF, and CDP. While exact reporting regulations won’t be released until 2022 at the earliest, the new guidelines should break too far away from the existing groundwork and should reduce duplicate reporting requirements. The goal is to harmonize EU Regulations around current best practices in international sustainability reporting.

Audits Will Be Required

Many investors say that disclosures with the NFRD reporting requirements are not tremendously useful investment decisions. There are large omissions, the datasets provided are inconsistently labeled and use separate methodologies, and the data is not often contextualized with targets in governance and strategy. This proposal introduces a EU-wide audit regulation, similar to IFRS requirements with annual financial reports. The commission is recommending a “limited” assurance requirement, which would mean the audits are less rigorous and trustworthy, but this will account for the availability and technical capacity of current auditing organizations. It should also reduce the financial stress on companies conducting audits while the industry matures. The goal will be to increase the level of assurance over the coming years.

Reports Must Be Available Digitally

The CSRD also is mandating a technical upgrade to sustainability reporting, aiming to eventually provide a single access point for sustainability disclosure data. Companies will be required to submit their reports in an XHTML format, which should follow the European Single Electronic Format (ESEF). Companies will also be required to put XBRL tags on all of their data, so it will be accessible to machines, making it easier for investors to use in making informed investment decisions.

Moving Forward

While these regulations are not finalized and will be rolled out step by step until 2023, it’s clear that the EU is creating stronger regulatory pressure to report on ESG issues, holding companies accountable and providing higher quality information for investors looking at sustainable businesses. These regulations will make it more difficult to “greenwash”, incentivizing companies to become more sustainable and providing information to assess which firms don’t have sustainability built into their core business model. This will have a big impact on sustainability reporting in Europe and shows that the international ESG community is moving towards more standardized practices.

Need Help?

Eunoic is a technology platform that helps companies become more valuable by improving their environmental, social and governance (ESG) performance and external perception via its AI-infused cloud applications and advisory services. We can provide guidance around corporate sustainability disclosures and help analyze how your firm is seen by its outside stakeholders, such as investors, rating agencies, etc.