What is CSRD and ESRS – and who is impacted?

As part of the European Green Deal, the Corporate Sustainability Reporting Directive (CSRD) requires in-scope companies to disclose sustainability information following the European Sustainability Reporting Standards (ESRS). These standards were drafted by the European Financial Reporting Advisory Group (EFRAG) under a mandate from the European Commission, which formally adopted them in July 2023. The goal is to enhance corporate transparency and accountability regarding environmental, social, and governance (ESG) factors.

Who is Impacted?

CSRD reporting requirements affect approximately 50,000 entities within the EU, including certain third-country entities operating in the EU (e.g., subsidiaries or branches). The directive extends beyond large public-interest entities, significantly increasing the number of organizations required to disclose sustainability data.

• SMEs: Small and medium-sized enterprises (SMEs) that are not publicly listed generally fall outside the direct scope of CSRD. However, they may still be indirectly affected through supply-chain obligations and stakeholder expectations.

ESRS Reporting: Key Elements and Requirements

ESRS Standards and Sustainability Reporting

The European Sustainability Reporting Standards (ESRS) provide a harmonized framework for companies to disclose sustainability-related information. They integrate various existing sustainability initiatives, reduce redundant reporting efforts, and apply the principle of double materiality—evaluating both financial impacts of sustainability and the organization’s impacts on society and the environment.

Key elements introduced by CSRD and ESRS include:

• Forward-looking information: Disclosing not just current sustainability performance but also future goals and projections.
• Value chain assessment: Reporting spans upstream and downstream activities.
• Sustainability due diligence: Organizations must identify and address sustainability risks across operations and supply chains, aligning with the upcoming Corporate Sustainability Due Diligence Directive (CSDDD).
• Sector-specific reporting: Additional ESRS standards will be tailored to specific industries, offering more precise disclosure requirements.

ESRS CSRD Implementation Timeline

The CSRD introduces a phased implementation approach, impacting different types of entities in the following timeline:

• 2024: Large public-interest entities, banks, and insurance companies already under the Non-Financial Reporting Directive (NFRD).
• 2025: Large companies not previously covered under NFRD.
• 2026: Listed small and medium-sized enterprises (SMEs).
• 2028: Potential voluntary reporting for non-listed SMEs to align with broader sustainability practices.

ESRS Framework: Structure and Reporting Categories

Under the final ESRS adopted by the Commission, standards are organized as follows:

1. ESRS 1 – General Requirements
   Outlines how to apply ESRS in practice and details the double materiality approach.

2. ESRS 2 – General Disclosures
   Sets out overarching, cross-cutting disclosures required of all organizations.

   • Governance structure and oversight
   • Business model and strategy related to sustainability
   • Risk management processes
   • Stakeholder engagement

3. Topical Standards

   • Environmental (E1–E5): Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy.
   • Social (S1–S4): Own workforce, workers in the value chain, affected communities, and consumers/end users.
   • Governance (G1): Business conduct, corporate ethics, and broader governance processes.

ESRS 2: The Role of General Disclosures

ESRS 2 is mandatory for all in-scope organizations and establishes core disclosure principles:

• Double Materiality: Companies must assess both financial materiality (how sustainability matters affect the company’s financial performance) and impact materiality (how the company’s operations affect people and the planet).
• Stakeholder Engagement: Explains how companies identify stakeholder expectations and integrate feedback into decision-making.
• Governance & Risk Management: Details governance processes and risk management approaches for sustainability issues.
• Consistency with Other Frameworks: Aligns ESRS with global standards such as GRI and ISSB to facilitate comparability.

Reporting Challenges and Best Practices

Although ESRS and CSRD compliance is now a clear requirement, many organizations face challenges aligning with the new standards:

• Data Collection: Ensuring consistent, accurate ESG data from multiple locations or departments.
• Integration with Financial Reporting: Harmonizing sustainability disclosures with existing financial reporting processes.
• Regulatory Complexity: Staying informed of evolving EU and international sustainability regulations.

Best Practices for smoother ESRS reporting:

1. Adopt Digital Reporting Solutions: Use specialized software or AI-driven tools to streamline ESG data collection and analysis.
2. Engage Stakeholders: Proactively involve suppliers, employees, and investors to gain a comprehensive view of sustainability risks and opportunities.
3. Regular Sustainability Audits: Periodically evaluate processes and data to ensure continuous compliance and improvement.
4. Embed Sustainability in Strategy: Align ESG considerations with core business objectives and governance structures.

ESRS and CSRD: Why Compliance Matters

Compliance with ESRS and CSRD is critical for companies operating in or interacting with the EU. Beyond meeting legal obligations, robust sustainability reporting can:

• Increase corporate transparency and credibility.
• Attract ESG-conscious investors and business partners.
• Enhance risk management strategies.
• Align organizations with global sustainability initiatives.

Conclusion: Preparing for ESRS Compliance

To fully align with CSRD and ESRS, companies should:

• Conduct a Gap Analysis: Compare current reporting practices against ESRS requirements.
• Leverage Technology and Data Analytics: Facilitate ESG data collection and ensure high-quality disclosure.
• Engage Stakeholders: Develop collaborative approaches to identifying and addressing sustainability issues.
• Plan for Continuous Improvement: Maintain flexibility to adapt to future sector-specific standards and evolving regulations.

By embracing the European Sustainability Reporting Standards and prioritizing transparent disclosure, businesses not only fulfill regulatory obligations but also strengthen their long-term competitiveness in an ESG-focused market.