CSRD and ESRS

Businesses will have to comply with the rules at different times between 2024 and 2028, depending on their size:

- Financial year 2024, with reports due in 2025: Large public interest entities with more than 500 employees already covered by the NFRD.

- Financial year 2025, with reports due in 2026: Large companies not currently covered by the NFRD, i.e. companies with more than 250 employees and/or a turnover of more than €40 million and/or total assets of more than €20 million.

- Financial year 2026, with reports due in 2027: Listed SMEs and other companies. SMEs have the option to opt out of reporting until 2028.

CSRD significantly increases the number of companies subject to sustainability reporting requirements. Companies that meet two of the following requirements will have to report under the rules:

- 40 MEUR in turnover

- 20 MEUR in assets 

- 250 or more employees

There are specific rules for first-time application and several exceptions. For example, listed SMEs can choose to defer their reporting from 2026 to 2028, and there are special rules for non-EU parent companies with significant activities and revenues in the EU.

The CSRD is expected to raise the bar significantly for corporate sustainability reporting. Among other things, it introduces new requirements for companies to report based on a double materiality analysis, which means that both the impact on society (impact materiality) and the risks and opportunities for the company (financial materiality) must be considered. Companies must also include their entire value chain in their reporting, which means they must consider the impact of suppliers, customers and other stakeholders involved in production and distribution.

The European Sustainability Reporting Standards (ESRS) are the new reporting standards that companies must follow under the CSRD. The ESRS consist of general standards covering areas such as climate, environment, society and corporate governance. Sector-specific standards will also be published that affect companies depending on their activities. The aim of the standards is to increase transparency and comparability in sustainability reporting.

The standards are divided into three overarching areas:

Environmental aspects: Includes climate change, pollution, impacts on water and oceans, biodiversity, resource use and circular economy.

Social issues: Includes working conditions for employees within the company and at suppliers, impact on society, and consideration for consumers and users.

Corporate governance: Includes disclosure of how the company manages sustainability issues, including impacts, risks and opportunities, metrics and targets for sustainability reporting.

Each category must be reported in four areas: governance, strategy, impact, risks and opportunities, and metrics and targets. These standards should provide both general and topic-specific information.

In addition to the standards related to the ESG aspect of reporting, there are two further categories of standards:

General standards: Includes information on how the reporting should be carried out and what level it should be at.

Sector-specific standards: The sector-specific standards are under development and will contain specific information relevant to the sector in which the company operates.

Dual materiality means that companies must work from both an impact materiality perspective and a risk and opportunity perspective (financial materiality). Companies need to consider the impact of sustainability risks on their own business as well as the impact of their business on society and the environment. This shift requires companies to take a holistic view of sustainability by considering both financial and non-financial impacts of their activities.