What is the Corporate Sustainability Reporting Directive (CSRD)?
Since the beginning of 2023, the EU has had a new directive on sustainability reporting, the Corporate Sustainability Reporting Directive (CSRD). It is a further development of the previous Non-Financial Reporting Directive (NFRD). The new CSRD expands the scope and scope of previous sustainability reporting and introduces common, mandatory reporting standards at EU level. With it, the number of companies in the EU that have to publish such reports will increase significantly from 11,600 to up to 49,000.
The fundamental aim of this reporting is to disclose information about the risks and opportunities arising from social and ecological issues, as well as about the effects of corporate activities on people and the environment. The disclosure is intended to encourage companies to take sustainability issues into greater consideration in their processes and business models. The future competitiveness of companies should be ensured. For example, a company can demonstrably present itself as a sustainable supplier and a responsible, attractive employer. At the same time, the CSRD ensures that stakeholders can obtain better information about sustainability aspects and invest in proven sustainable companies. The directive's name change emphasizes the importance the EU places on sustainability. The EU also wants to equate sustainability reporting with financial reporting (see SFDR below). Financial reporting involves the publication of financial information to inform stakeholders such as investors, creditors and regulators about a company's economic condition and performance.
The CSRD came into force on January 5, 2023 and must be implemented by the respective EU member states within 18 months. In Germany, implementation is expected to take place in summer 2024 and will replace the previous CSR Directive Implementation Act (CSR-RUG), which is based on the NFRD. The current draft bill for the implementation of the directive in Germany envisages implementing the European requirements in accordance with CSRD 1:1.
Links to the EU Disclosure Regulation and EU Taxonomy Regulation
The EU Disclosure Regulation, or Sustainable Finance Disclosure Regulation (SFDR), obliges credit institutions to disclose sustainability information about their activities and products (Fin.Connect.Basics zur SFDR). To meet these requirements, credit institutions need additional data from the companies to which they lend. Until now, this data was only available very rarely. Since more companies have to publish sustainability reports with the CSRD, this information is easier for credit institutions to obtain. Companies that are obliged to report on sustainability (see Chapter 2) must also observe the EU Taxonomy Regulation (Fin.Connect.Basics on the EU Taxonomy) and accordingly disclose the extent to which their corporate activities are linked to ecologically sustainable business (see Illustration 1).
Here are the most important changes of the CSRD:
- Advanced, unified reporting standards: Companies should report according to more comprehensive and consistent standards. There should be greater quantification of the content for better measurability and comparability. The exact content of sustainability reporting and the cross-EU standards were defined by the European Financial Reporting Advisory Group (EFRAG) in the European Sustainability Reporting Standards (ESRS). There are different standards for the different types of companies required to report, some of which still have to be developed by EFRAG.
- Part of the management report: The reporting must take place in a separate section of the management report and thus the usual annual presentation of business developments in a financial year. Within the framework of the NFRD, reporting in addition to the management report is also permitted in a separate sustainability report. This shows the equal status of the sustainability report alongside the financial report.
- External audit obligation: Like financial reporting, sustainability reporting must also be audited. The testing standard is to be gradually expanded from a test with limited assurance to a test with sufficient assurance (“reasonable assurance”). The latter should be developed by 2028.
- New definition of materiality: The CSRD obliges companies to report both on the significant impact of their own business activities on the environment and on the impact of sustainability aspects on the company. This concept is called double materiality.
- Reporting at group level: Subsidiaries do not have to prepare their own reports. Exceptions, however, are capital market-oriented subsidiaries. In addition, companies must list the risks and effects of subsidiaries in the management report if they differ significantly from those of the parent company.
Which companies does the CSRD affect and from when?
The future sustainability reporting obligation under the new guidelines affects different groups of companies. This initially includes companies that are already required to report in accordance with the current CSR Directive Implementation Act (CSR-RUG). This includes large and capital market-oriented companies with more than 500 employees (Group I). Large companies as well as large banks and insurance companies (Group II) are now included in the new guidelines in the accounting sense . For a company to be considered large, it must meet at least two of the following criteria: a balance sheet total of at least €25 million, net sales of at least €50 million or an average number of at least 250 employees during the financial year. This applies to both of the first mentioned groups.
Listed small and medium-sized enterprises (SMEs), small and non-complex credit institutions and captive (re)insurance companies also fall under the new reporting requirements (Group III). However, micro-enterprises with at least two of the following three characteristics are exempt from this obligation: a balance sheet total of a maximum of 450,000 euros, a net sales revenue of a maximum of 900,000 euros or an average number of a maximum of 10 employees. Nevertheless, those SMEs that do not actually have to submit a report should also concern themselves with sustainability reporting. Small businesses are indirectly affected by the new guidelines through the “trickle-down effect” when larger, reporting business partners require sustainability information from their smaller suppliers.
In addition, non-EU companies with a net turnover of more than €150 million within the EU are included if their subsidiaries meet the relevant size criteria or their branches have a turnover of more than €40 million (Group IV).
The introduction of sustainability reporting according to the CSRD is taking place gradually for the various corporate groups. Affected companies must report on the previous year from January of the following year (see Figure 2). From 2025, companies that were already required to report under the old guidelines will have to submit corresponding reports for 2024. From January 1, 2026, this will also affect all other large companies in terms of accounting law. Listed small and medium-sized companies as well as all other companies that fall into Group III will follow from January 1, 2027. However, there is the possibility of a voluntary opt-out until 2028. Companies from third countries that fall into Group IV must finally fulfill this obligation from January 1, 2029 for the year 2028.
Where can I find binding and helpful information?
The CSRD policy text can be found on the EUR-Lex website. The German Sustainability Code page offers a helpful overview of the CSRD as well as further links, an explanatory video and a fact sheet . The different reporting standards for each type of company are also listed here. An overview from the Federal Financial Supervisory Authority is also helpful .
The adopted European Sustainability Reporting Standards (ESRS) are described on the EU Commission's website , as well as a Q&A on the topic. The EFRAG website provides further comprehensive information and drafts of the ESRS .
