CSRD reporting: What you need to know

US entities with EU operations may be affected

The EU’s Corporate Sustainability Reporting Directive (CSRD) is expected to affect up to 50,000 entities that are not currently required to report on environmental, social and governance (ESG) activities under the EU’s Non-Financial Reporting Directive (NFRD). Many companies located in and outside of the EU will be affected during the CSRD’s phase-in period beginning in fiscal year 2024.

The CSRD creates reporting obligations for certain U.S. parent entities with operations in the EU at both a consolidated parent and EU-subsidiary level. The CSRD requires different disclosure standards and staggered effective dates, depending upon the type of entity. Due to the layers of complexity, U.S. entities with revenue or operations in the EU are encouraged to evaluate the impact of the CSRD immediately.

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A green deal in the EU

Extensive ESG reporting requirements take shape

With the creation of the European Green Deal in 2019, the European Commission laid out its plan to transform Europe into the world’s first climate-neutral continent through a series of policy initiatives and legislative acts. A key element of climate neutrality involves shaping a green economy, which means directing public and private capital toward sustainable business.

Legislative acts such as the EU Taxonomy and the CSRD aim to improve the reliability and usefulness of sustainability information to investors. The EU taxonomy provides clear criteria for economic activities to qualify as “sustainable,” while the CSRD greatly enhances the breadth, depth and uniformity of the EU’s ESG and sustainability reporting ecosystem.

The CSRD replaces the EU’s existing NFRD and establishes comprehensive ESG reporting requirements within a distinct section of the management report. The reporting requirements combine and modernize several existing frameworks.

This timeline describes how the CSRD was proposed as a replacement for the NFRD in April 2021 and the major development milestones that have occurred and are expected since then.

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More entities, more complexity

CSRD applicability determination is complex

Determining whether your company needs to comply with the CSRD and when to report is complicated. Below are some key characteristics of entities that will be subject to the CSRD.

Companies with listed securities on an EU-regulated market (excluding micro-undertakings that do not meet two of the following three size criteria for two consecutive balance sheet dates: 1) €450,000 in total assets; 2) €900,000 in net turnover; 3) Average of 10 employees)
EU-based large undertakings, regardless of listed status. A large undertaking has two of the three following characteristics on consecutive balance sheet dates:
- An annual net turnover exceeding €50 million
- A balance sheet (assets) exceeding €25 million
- At least 250 employees on average throughout the year
The EU-based parent of a group of entities that meet the large undertaking criteria as a whole, including certain accommodations for consolidated or combined reporting
Parent companies from a third country (including the U.S.) that in consolidation generate more than €150 million in net turnover in the EU and meet any of the following criteria:
- Owns a subsidiary that is considered a large undertaking in the EU
- Owns a subsidiary with debt or equity securities listed on an EU-regulated exchange
- Owns a significant EU branch with net turnover exceeding €40 million

This chart shows how CSRD reporting requirements will be phased in gradually based on the type and size of the reporting entity.

Given the complexity involved, some entities, especially those with complex legal structures or those that are considering taking advantage of parent or group consolidated or combined reporting accommodations, may benefit from working with legal counsel to understand and optimize the reporting requirements for their organizational structure.

All companies in the CSRD’s scope are required to obtain limited assurance from a third-party verifier in their first reporting year. The need to obtain reasonable assurance is being evaluated for feasibility by the European Commission and may be adopted at a future date.

General requirements

CSRD establishes ESRS reporting framework

The CSRD directs the European Financial Reporting Advisory Group (EFRAG) to establish a reporting framework called the European Sustainability Reporting Standards (ESRS). The draft framework includes general, cross-cutting requirements applicable to all in-scope companies and topical disclosures that may or may not be material to a company. Below is a summary of the currently available draft standards:

These are the 12 draft standards released by the ESRS in November 2022 - Two cross-cutting standards and ten topical (E, S, or G) standards.

Each ESRS topical standard is organized to inform the reader on a uniform set of disclosure areas, including governance; strategy and business model; impact, risk and opportunity management; and metrics and targets.

The ESRS will also require disclosures related to sector-specific impacts, risks and opportunities. The EFRAG is currently developing the sector-specific standards, which are expected to be released by June 2026. See the expected summary of ESRS standard-setting activity below:

This timeline shows the expected development of the ESRS overlayed with relevant activities by the EU Commission and the CSRD reporting phase-in timeline.

Rethinking materiality

Identify relevant topical standards using double materiality

While the ESRS framework addresses a broad swath of ESG topics, only those that present material impacts, risks and opportunities need to be included in a CSRD-compliant management’s report. The CSRD mandates that materiality be assessed through a “double materiality” lens, considering both impact and financial materiality. In addition, within its general disclosures, a company will report on how it determined its material topics.

Impact materiality

Impact materiality is known as the “inside out” approach, as it relates to the impact (actual or potential, positive and negative, over the short-, medium-, and long-term time horizons) that the company has on a sustainability matter. Impacts include those caused or contributed to by the company’s own operations, products, or services through its business relationships. Materiality is considered based on the impact’s severity (scale, scope and irremediable character) and likelihood.

Financial materiality

Financial materiality is known as the “outside in” approach, as it relates to the effects of sustainability matters on the company (such as its current or future cash flows, development, performance, position, cost of capital, or access to finance). The scope of financial materiality for sustainability reporting is broader in scope than that used in the process of determining materiality for the financial statements. Risks may include factors of value creation that do not meet the financial accounting definition of assets/liabilities but contribute to the generation of cash flows or development of the undertaking. Materiality of risks is assessed based on a combination of the likelihood of occurrence and the size of the potential financial effects.

Chart shows the characteristics of impact materiality (“inside out”) and financial materiality “outside in”

Entities are required to consider each materiality perspective individually, disclosing information material under both materiality perspectives and information that is only material under either an impact or financial materiality perspective.

What to do now

Next steps for adopting the CSRD’s requirements

The path toward CSRD compliance is unique to every company based on the nature of its business, its phase-in timetable, and its current sustainability reporting status. Below is an overview of recommended next steps:

Determine in-scope entities for CSRD reporting, including reporting accommodations
Perform a “double materiality” assessment to identify relevant ESRS impacts, risks and opportunities
Identify and address gaps between the ESRS requirements and the currently available information
Collect relevant data, including climate and workforce metrics
Prepare for and obtain limited assurance