Corporate Sustainability Reporting Directive: what companies need to know

About the CSRD

• The Corporate Sustainability Reporting Directive (CSRD) came into law on 5 January 2023 and will come into force for companies in 2024. Companies will be required to disclose for the first time against the CSRD in 2025 on negative material impacts, both potential and actual. For actual negative impacts materiality is based on the severity of the impact, while for potential negative impacts (risks), it is based on the severity and likelihood of the impact.
• The CSRD will repeal the Non-Financial Reporting Directive (NFRD). The NFRD will remain in force until companies start reporting under the CSRD.
• The CSRD will require companies to disclose both cross-cutting and sector-specific indicators. These will be set out in European Sustainability Reporting Standards (ESRS), adopted through Delegated Acts. The European Financial Reporting Advisory Group (EFRAG) has been tasked with developing the draft ESRS.
• EFRAG published the first set of 12 cross-cutting draft ESRS on 23 November 2022. This first set of standards covers general disclosures for all sectors, alongside risk-specific disclosures, such as those related to workers in the supply chain, pollution, and water.
• A second set of ESRS will set out sector-specific standards for selected sectors associated with known high negative impacts: Textiles, Accessories, Footwear, Jewellery, Mining and Coal Mining, Road Transport, Food and Beverages, Energy Production and Utilities, Agriculture and Farming, Oil and Gas (oil and gas mid to downstream and oil and gas upstream).
• CSRD reporting will eventually be housed in the European Single Access Point (ESAP), a forthcoming EU-wide platform that will create a single location for a company’s financial and sustainability-related information to be stored. Companies will be required to digitally tag the information in their annual reports and apply external limited assurance to their disclosures.
• The European Commission will now consult EU bodies and Member States on the draft standards, before adopting the final ESRS as Delegated Acts in June 2023. This will be followed by a review period by the European Parliament and Council.

Who is captured under the CSRD

• Large “public interest” companies with over 500 employees (already covered by the NFRD) will be required to disclose from 2025 for financial years starting on or after 1 January 2024. Public interest companies include large, listed companies, banks, and insurance companies.
• Large companies will be required to disclose from 2026 (for financial years starting on or after 1 January 2025) if they meet at least two of the following criteria: (i) average of 250 employees over the financial year (ii) €40 million net turnover (iii) €20 million in total assets.
• SMEs will be expected to disclose for the first time in 2027 if they are listed on EU regulated markets and meet at least two of the following criteria: (i) average of 50 employees over the financial year (ii) €8 million net turnover (iii) €4 million in total assets.

New due diligence reporting requirements

The first set of cross-cutting draft ESRS map closely to the OECD reporting requirements set out in the OECD Due Diligence Guidance for Responsible Business Conduct and will require companies to disclose:

• Board responsibilities for human rights and environmental negative material impacts and risks. Although the CSRD does not create any new director’s duties (this may be covered under the CSDD), companies will have to disclose the administrative, management and supervisory bodies (such as a board committee or similar) or individual within a body responsible for oversight of human rights and environmental impacts and risks, how this person/body is informed about material impacts relating to these risks, and how the board considers negative material human rights and environmental impacts and risks when making decisions.
• Policies that the company has in place to address the identification, assessment, management and/or remediation of negative material impacts. This includes a description of the scope of the policy in terms of activities, value chain, geographies and, if relevant, affected stakeholder groups.
• The company’s negative material human rights and environmental impacts and the process that the company took to identify and prioritise these. This includes a description of where in its value chain negative material impacts are concentrated, how these affect people or the environment, the time horizons for when those impacts could occur, whether the impacts are a result of the company’s activities or those of its business relationships, and if and how the company has consulted with relevant stakeholders to understand how they may be impacted.
• Key actions to address negative material human rights and environmental impacts. This includes the list of key actions taken in the reporting year and planned for the future, including targets, their expected outcomes and, where relevant, how their implementation contributes to the achievement of policy objectives. This also includes quantitative and qualitative information regarding the progress of actions or action plans disclosed in prior periods.
• Key actions to provide for and cooperate in or support the provision of remedy for those harmed by actual negative material impacts.
• Targets and metrics to track the effectiveness of a company’s actions to address negative material impacts. Companies will have to report on measurable time-bound outcome-oriented targets, defined in terms of expected results for people, the environment, or the company.

Implications for business

• The CSRD is the first step in bringing human rights and environment impacts onto an equal footing with the other material impacts that companies are required to disclose (i.e., financial, legal, operational and reputational risks that affect the company). It is important to note that the disclosures on human rights and environmental impacts relate to the company’s impacts upon people and the environment, and not upon the company itself.
• All companies should expect to be challenged by stakeholders including civil society where they fail to disclose material human rights and environmental impacts and risks that would be considered foreseeable.
• For most companies, the CSRD will entail a much more rigorous, exacting, and technical level of disclosure than what is typically disclosed within their sustainability and annual reports. This will be particularly the case for companies operating in sectors with known high-risk negative impacts.
• The original EU draft from the European Commission included minimum standards for sanctions that Member States needed to transpose into their national legislation. This included publicly naming the company and administrative sanctions. The final draft of the CSRD dropped all binding penalties, which aligns with the current status under the NFRD. EU member states will therefore choose which sanctions to apply when they transpose the directive. Some member states may choose not to introduce sanctions.

Due Diligence Design’s proprietary reporting tool helps companies understand what they need to be reporting on based on where they operate, their size and human rights and environmental negative material impacts. Our tool catalogs reporting requirements under the CSRD, German Supply Chain ACT, Norway Transparency ACT, the UK Modern Slavery Act and OECD due diligence guidance.