Practitioner's Guide to CSRD and ESRS

The CSRD is a new EU directive designed to standardise sustainability reporting, making it easier for investors and other financial market participants to assess and compare risks. It aims to provide consistent, downloadable information, similar to the International Financial Reporting Standards (IFRS), ensuring better transparency and informed decision-making.

The directive primarily affects companies falling under the EU's previous non-financial reporting directive, but it extends to many others. Key criteria include a balance sheet total exceeding €25 million, a net turnover over €50 million, and an average of more than 250 employees. Listed SMEs and non-EU parent companies with EU subsidiaries are also included, making the "more than 250 employees" rule a useful indicator of scale.

The implementation is phased. Starting 1 January 2024, companies previously regulated by the Non-Financial Reporting Directive (generally those with over 500 employees) must begin collecting information for 2025 reports. Other large companies start collecting data in 2025 for 2026 reports. Listed SMEs and other entities, like non-EU parent companies with EU subsidiaries, begin in 2026 for 2027 reports. All reporting must be in an electronic format, such as XHTML or ESEF.

The primary goal is disclosure – getting sustainability information into the public domain to help stakeholders make informed decisions. It focuses on reporting rather than setting performance targets, acknowledging that various parties need to understand a company's environmental and social impacts. While familiar to large listed companies and those reporting under the TCFD, it represents a significant step up for smaller and private firms.

Materiality is central to the CSRD. Companies only need to report on information that is deemed material to their business, meaning it significantly impacts their operations or stakeholders. Climate change and workforce information are considered material for all companies and are mandatory. The European Sustainability Reporting Standards (ESRS) provide guidance, including a helpful flowchart for determining materiality.

There are 12 ESRS, applicable across all sectors. Two are cross-cutting: one outlining general requirements and the other introducing the reporting framework. The rest cover environmental, social, and governance topics. Environmental standards include climate, pollution, water and marine resources, biodiversity, and resource use. Social standards cover the company's own workforce, workers in the value chain, affected communities, and consumers. Governance covers business conduct.