Questions and answers for your CSRD compliance

Many questions surround the Corporate Sustainability Reporting Directive (CSRD) and its reporting framework, the European Sustainability Reporting Standards (ESRS), even as Member States begin implementation in 2024. Here we answer the most common questions surrounding compliance.

Which of the 12 standards are applicable to my organisation?

ESRS 1: General requirements and ESRS 2: General disclosures are applicable and mandatory regardless of the type of organisation or industry. Every company that is within scope must report on these cross-cutting standards. ESRS 1 outlines the principles of reporting to be followed while ESRS 2 defines the specific information required, many of which are already part of annual reporting disclosures such as the size of the organisation and the nature of business activities.

Then we have the ten topical ESG standards. Not all of these are mandatory. You must rely on a thorough double materiality assessment that meets ESRS criteria – namely double materiality – to determine which of the topical standards are the most applicable to your organisation.

What is the double materiality concept?

The principle of double materiality is a central tenet of the ESRS. At its core, it is not difficult to understand. It simply requires materiality to satisfy two conditions: that a topic creates financial impact to the organisation, OR that it creates impact on external stakeholders. For the latter, ESRS further breaks it down into several criteria for actual and potential impacts that involve the use of certain parameters such as severity, scale, scope, likelihood, and possibility of remedy, whose definitions can be referred to in the ESRS technical document.

The concept of double materiality and how it translates to your organization can be hard to grasp, you can find more insights in our CSRD super guide:

My company is an SME – does the ESRS apply to us in full?

While listed SMEs must comply eventually, the standards for SMEs are more lenient. At the time of this article’s publication, the developing body of the ESRS, EFRAG, is developing a separate set of standards for use by SMEs. As we anticipate the release of the first guidance drafts for SMEs, SMEs can take this time to prepare reporting in alignment with the Global Reporting Initiative (GRI) or the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards or the Sustainability Accounting Standards Board (SASB) Standards. By aligning with these existing standards, SMEs can enhance their reporting framework to build ESRS readiness later on.

We already use an existing sustainability reporting framework (GRI/SASB) – how does the ESRS change this?

If your reporting is already aligned with an internationally recognised reporting framework such as the GRI or ISSB, then you are in good stead. The ESRS is to certain degree compatible with these frameworks and was in fact developed to enable close integration with international standards. Chances are your current reporting practices put you in a position of nearly full compliance with the ESRS, save for a few key additions introduced by the ESRS such as ensuring double materiality and presentation of disclosures in the XBRL electronic format. You do not need to make drastic changes to your existing reporting processes – it is possible to integrate ESRS criteria in order to retain GRI or ISSB alignment while also complying with the ESRS.

For starters, the principle of double materiality should be absorbed into your materiality assessment, keeping in mind the criteria of financial materiality and impact materiality. This does alter the materiality assessment process and outcomes and you should expect to see some changes in the prioritisation of your top material matters. As for XBRL reporting, this can easily be done with the help of automated data management such as Daato’s reporting software.

Additionally, ESRS-aligned reporting must also include the impacts, risks, and opportunities (IROs) of a material topic, whereas it is possible that current reporting may leave out one or more of these. Reporting companies should always check their reports for alignment with the ESRS.

What are the penalties for non-compliance?

Penalties have not been defined as yet, but if the CSRD’s predecessor – the Non-Financial Reporting Directive (NFRD) – is anything to go by, non-compliance can incur fines of anywhere from EUR10 million or 5% of the company’s annual turnover (whichever is higher) up to EUR25,000, and/or imprisonment of a company’s directors. Ultimately, the value and nature of penalties are subject to transposition by the Member States when the CSRD is finally adopted.

Is full compliance required in the first year of CSRD implementation?

Recognising the challenges of CSRD implementation, legislators have deployed a phased approach for compliance with its disclosure requirements. Required disclosures differ for companies with fewer than 750 employees and those with more than 750 employees over a two-year phase-in. Keep in mind that disclosures are only required if they are deemed material.

Companies with less than 750 employees

Required from Year 1 of implementation onwards

ESRS SBM-1: Breakdown of total revenue by significant ESRS sector

Required from Year 2 of implementation onwards

ESRS E1: Scope 3 and total GHG emissions
ESRS S1: All disclosures regarding own workforce including detailed information

Companies with more than 750 employees

Required from Year 1 of implementation onwards

ESRS SBM-1: Breakdown of total revenue by significant ESRS sector
ESRS E1: Scope 3 and total GHG emissions
ESRS E4: Biodiversity and ecosystems
ESRS S1: Detailed information on own workforce
ESRS S2: All disclosure requirements related to workers in the value chain
ESRS S3: All disclosure requirements related to affected communities
ESRS S4: All disclosure requirements related to consumers and end users

For the disclosure topics below, companies are allowed to disclose only qualitative data for the first three years if quantitative data is not yet available:

ESRS SBM-3: Material impacts, risks and opportunities, and their anticipated financial impacts
ESRS E1: Anticipated financial impacts from material physical and transition risks, and climate-related opportunities
ESRS E2-5: Anticipated financial impacts from related material impacts, risks, and opportunities from the given topic

Do I have to prepare a separate report for ESRS?

A standalone sustainability report is not required. ESRS disclosures should be presented as part of the management report, in one of the following three ways:

In a single separately identifiable section of the management report
In four separately identifiable section of the management report according to general information and ESG sections
In relevant parts of the management report

The first option is preferred and recommended. Sustainability statements presented through options 2 or 3 above must include a location table identifying where in the report the ESRS information can be found.

How much of the value chain must be included in reporting?

The ESRS Social Standards specifically ESRS S2-4 are directly related to value chain reporting. They concern workers in the value chain, affected communities, and consumers and end users. Ultimately, the relevance of reporting on impacts, risks, and opportunities in your value chain depends on the outcome of your materiality assessment and whether the topical Social Standards are deemed material. Topical Environmental Standards related to the value chain such as ESRS E1 on Scope 3 emissions are also only required if deemed material. See our article on Value Chain for ESRS Compliance for further details.

We are an EU-listed subsidiary of a US multinational – must we report separately?

EU-listed subsidiaries of foreign companies that meet the following criteria are allowed to consolidate reporting at the parent level and do not need to report separately:

The subsidiary does not exceed EUR40 million in net turnover in the preceding financial year
The group level net turnover does not exceed EUR 150 million in the preceding two financial years

In the above case, an exemption on separate reporting would apply, but the consolidated report still needs to comply with the ESRS.

What are the conditions for exemption for EU subsidiaries of foreign companies?

There are three reporting pathways for EU subsidiaries that involve exemption for the parent company or exemption for the subsidiary.

Foreign parent company within scope of the CSRD with EU subsidiary: Prepare consolidated group-level report that satisfies ESRS requirements (subsidiary exempted from reporting)
EU subsidiaries of foreign company: The largest subsidiary prepares one consolidated report for all subsidiaries (smaller subsidiaries and parent company exempted from reporting)
EU subsidiaries within scope of the CSRD: Each prepare a report that satisfies CSRD criteria (parent company exempted from reporting)

In the second and third cases, the exemption expires in 2029 and thereafter the parent company must publish a group-level report subject to a separate reporting standard that has not been released.

Is assurance required and what are the provisions?

The CSRD requires “limited assurance” on ESG disclosures. This means that for the sustainability portion of the management report, information contained should be audited by an independent third party but the nature of the audit is not necessarily as comprehensive as that required of the financial audit. So long as disclosures are verifiable, a conclusive finding that no information has been found to be misreported is generally sufficient. No specifications pertain to the qualification of the auditor and they are allowed to be different from the auditor for financial statements. Assurance is required on four specific areas. See our article on Assurance Requirements of the CSRD for details on assurance provisions.