On 21 June, the European Parliament and the Council reached political agreement on the Corporate Sustainability Reporting Directive (CSRD), following a year of negotiations. The CSRD aims to improve the way companies report sustainability information, which varies from one company to another and is not easily comparable. The CSRD updates and strengthens the rules first introduced by the Non-financial Reporting Directive (NFRD), which was adopted in 2014.

EU Green Deal

The CSRD represents an important element of the European Green Deal and is a game changer when it comes to sustainability reporting in the EU and beyond. For the first time ever, sustainability reporting will be on an equal footing with financial reporting. Investors will have access to the information they need to assess investment risks arising from climate change and other sustainability issues. Furthermore, it will be possible for investors and the public at large to measure the success of companies not just in financial terms, but also to assess their contribution to a sustainable and fair economic system.

Double materiality

The CSRD incorporates the concept of ‘double materiality’. This means that companies have to report not only on how sustainability issues might create financial risks for the company (financial materiality), but also on the company’s own impacts on people and the environment (impact materiality). 

Investors are increasingly interested in both sides of this equation. They of course want to understand the risks to their investments, and in this respect the sustainability reporting requirements reinforce investor protection. But many investors also want to know how their investments impact people and the environment. This is partly as a result of the growing market for sustainable investment products, and partly because investors themselves are required to report on these impacts, especially under the EU’s Sustainable Finance Disclosure Regulation. 

Other stakeholders, including civil society organisations and trade unions, expect a transparent and objective account of a company’s impact on issues such as biodiversity, climate change or human rights. Clear and consistent impact-materiality disclosure requirements and external certification by auditors or other assurance providers will reduce the risk of ‘greenwashing’.

European sustainability reporting standards

The centrepiece of the CSRD is the mandate for the Commission to adopt mandatory European Sustainability Reporting Standards (ESRS). The European Financial Reporting Advisory Group (EFRAG) will develop draft standards in several tranches. EFRAG is already consulting on the first set of thirteen draft ESRS covering all environmental, social and governance issues as required by the CSRD for Commission adoption by June 2023. Next year – and for adoption by the Commission by June 2024 – EFRAG will develop sector specific reporting standards and proportionate standards for listed SMEs.

In order to prepare for this new standard setting task, and following mandates from Executive Vice-President Valdis Dombrovskis and Commissioner Mairead McGuinness, EFRAG changed its governance structure by establishing a sustainability reporting board (SRB) supported by a dedicated technical expert group. In line with the public policy perspective of the CSRD on sustainability reporting, EFRAG enlarged its membership base to integrate civil society organisations and trade unions.  

ESRS disclosure requirements should be meaningful, proportionate and respect the mandate of the CSRD. The CSRD achieves proportionality by phasing-in of reporting requirements for different types of companies: NFRD companies (first reporting over 2024), other large companies (2025) and listed SMEs (2026). ESRS need to strike a balance between on the one hand useful information for investors and other stakeholders, and on the other hand the potential costs and burden for reporting companies. The responses to EFRAG’s public consultation on the first set of ESRS will be of critical importance for that.

Ultimately, ESRS will provide clarity to companies about what they have to disclose, which should help them to cope more efficiently with the ever-increasing demands for sustainability information. ESRS will establish a reporting framework allowing companies to report in a systematic, credible and comparable manner about their sustainability performance.

International level

At the international level, there are several standard setters dealing with climate and sustainability reporting. In particular, the establishment by the IFRS Foundation of the ISSB (International Sustainability Standards Board) gets a lot of attention. The EU fully supports the objectives of the ISSB to set a global baseline that different jurisdictions can incorporate into their own rules. But the narrower financial materiality reporting objective of the ISSB and the so-far limited coverage of sustainability issues (only climate-related reporting) mean that ISSB standards cannot fully meet the EU’s needs or ambitions.  

The CSRD does not foresee the adoption of ISSB standards in the way that the EU decided in 2002 to do for IFRS financial reporting standards. Rather, EU standards should integrate the content of ISSB standards to the extent that it is consistent with the EU’s legal framework and the ambitions of the European Green Deal. For this to work optimally, unnecessary differences between ISSB standards and ESRS should be eliminated. To that extent, the Commission together with EFRAG is participating in the ISSB jurisdictional working group and has started bilateral discussions with the ISSB to achieve as much interoperability as possible between ESRS and ISSB standards.

Read more on the CSRD

Read more on the draft reporting standards (EFRAG)