The Age of Sustainability: As New European Disclosure Requirements Take Shape, Here’s How Businesses Should Stay Ready

Ellen Holder, Managing Director Sustainability and ESG Lead Europe, Protiviti Germany
Jaap Gerkes, Managing Director ESG Lead The Netherlands, Protiviti The Netherlands

UPDATE: The European Council approved the Corporate Sustainability Reporting Directive (CSRD) on November 28, 2022. Read the Protiviti Flash Report.


The Corporate Sustainability Reporting Directive (CSRD) is to become the backbone of sustainability reporting within the European Union (EU). Its goal is to remedy problems with insufficient sustainability information provided by financial market participants that investors and other stakeholders consider important, and improve standardization, verifiability and accountability. It supports the EU’s Green Deal goal of transitioning to a sustainable, low-carbon economy.

Earlier this year, the European Council of Ministers, the European Parliament, and the European Commission reached a political compromise on the contents of the CSRD. Compared to previous directives, the CSRD significantly expands the scope of both the companies that will be subject to the directive and the sustainability information they need to report. The CSRD will create standardization in terms of topics covered and requires reporting on a significantly increased level of detail compared to previous standards. In essence, the European Commission aims to put sustainability reporting on the same level as financial information reporting.

The reporting requirements of the CSRD will be specified in the European Sustainability Reporting Standards (ESRS), which are currently being developed by the European Financial Reporting Advisory Group (EFRAG) in its role as technical adviser to the European Commission. At present, sustainability reporting, also known as non-financial reporting, leaves considerable room for interpretation by the reporting organizations. This will be replaced by strict definitions and detailed reporting requirements, including pre-defined KPIs.

EFRAG is developing the ESRS in collaboration with the Global Reporting Initiative (GRI); Shift, a nonprofit organization specializing in human rights due diligence advisory services; and the Task Force on Climate-Related Financial Disclosures (TCFD). In this context, EFRAG launched a public consultation on the basis of the Exposure Drafts (EDs) of the first set of industry sector-agnostic standards as part of the ESRS. (Additional sector-specific information to be disclosed by the organizations within each sector is determined in the sector-specific ESRS, which currently identify 40 industry sectors and 14 sector groups.)

A broad spectrum of stakeholders responded to the public consultation. Currently the inputs are being reviewed by EFRAG bodies. The resulting first set of Draft ESRS is expected to be handed over to the European Commission in November 2022 to be considered for adoption by way of delegated acts at a later stage after the European Commission’s process and consultations. The first set of standards is expected to be adopted by the European Commission by June 30, 2023, and implementation will begin in financial year 2024, based on specified criteria.

Although the deadlines for the implementation of the CSRD may not seem particularly urgent, the rules are surely coming and are going to place significant pressure on organizations as they progress through this transition. Here, we provide relevant information as a first overview of what companies need to know.

Who will have to report according to the CSRD and ESRS?

Under the CSRD, the scope of companies that need to report will increase significantly, from around 12,000 organizations today to around 50,000. All companies listed on an EU-regulated market are covered by the new reporting requirement, except micro-entities. In addition to the listed companies, those that meet two of the three following criteria must also report with the CSRD:

  • Companies with more than 250 employees
  • Companies with more than €40M turnover
  • Financial institutions with more than €20M in total assets

These companies are also responsible for assessing the information at the level of their subsidiaries. Further, non-EU companies that have net sales of over €150 million in the EU and have at least one subsidiary or branch in the EU must report as well.

When does reporting begin?

The implementation of the reporting requirements is being staggered as follows:

  • FY 2024 for companies subject to the Non-Financial Reporting Directive (NFRD)
  • FY 2025 for companies that are not subject to the NFRD but meet the criteria as defined above
  • FY 2026 for listed small and medium-sized enterprises (SMEs) and small non-complex credit institutions and active insurance companies
  • FY 2028 for non-EU companies with EU branches or EU subsidiaries
  • Opt-out possibility for capital market-oriented SMEs: Use of a two-year transition period, i.e., first-time application possible in FY 2028

Relation of the CSRD to other sustainability reporting standards

Europe is not the only place where evolving sustainability reporting requirements are under way. The U.S. Securities and Exchange Commission (SEC) has issued a proposal for the disclosure of climate-related information for consultation, with a final rule expected in the latter part of this year. Further, at the end of March 2022, the International Sustainability Standards Board (ISSB) published two exposure drafts for the disclosure of sustainability and climate-related information for consultation with the aim of creating future global minimum standards for sustainability reporting. The publication of the final standards is scheduled for the end of 2022.

What’s in the draft ESRS?

The ESRS stipulates standardized disclosure requirements that apply to all organizations (sector-agnostic layer) and requirements that apply to organizations active in one or more specific sectors (sector-specific layer). In addition, the ESRS stipulates that an undertaking, as organizations are called in the drafts, shall disclose additional entity-specific information.

The current consultation covers 13 sector-agnostic standards. These standards consist of two cross-cutting standards covering principles and disclosures, and 11 topic-specific standards (five for environmental issues, four for social, and two for governance). These standards are mandatory for all organizations.

The topic-specific ESRS contains a large number of reporting requirements, which are specified and expanded through application guidance. While many different topics are covered, the topic-specific ESRS generally has the following consistent structure, by reporting area:

  • Strategy, including:
    • Strategy and business model in relation to sustainability/ESG
    • Governance and organization in relation to sustainability/ESG
    • Materiality assessment of the undertaking’s sustainability/ESG-related impacts, risks and opportunities (general, strategy, governance and materiality assessment)
  • Implementation measures, covering policies, targets, action plans and allocation of resources
  • Performance measurement, which refers to current achievements and results of the undertaking’s operations and activities based on metrics/KPIs

Key concepts in the CSRD — areas of special consideration

Double materiality as the basis for sustainability/ESG disclosures

The materiality assessment is not only relevant for the sustainability reporting but is also of strategic relevance when it comes to sustainability management and provides a blueprint for the organization’s sustainability/ESG strategy. Based on the conviction that a diverse range of stakeholders requires sustainability information on an organization’s performance, the EU follows the principle of double materiality in its reporting standards. Matters must be reported that are material either for the undertaking’s financial side or have an internal aspect — or for both (outside-in and inside-out perspective). All potential material sustainability matters, as pre-defined by ESRS in the sector-agnostic and sector-specific mandated disclosure requirements and entity-specific sustainability matters, must be assessed in the materiality assessment. If a sustainability matter does not reach materiality, it is rebuttable provided that the thresholds and/or criteria retained are disclosed.

Location of reporting prescribed in the (combined) management report

The CSRD requires that the sustainability reporting is part of the (combined) management report as a specific section. In addition, the reporting has to be machine-readable. Key figures and information will be transmitted and published in a standardized digital format. For this purpose, the sustainability information must be tagged in accordance with the European Single Electronic Format (ESEF).

Quality of disclosure and audit requirement (limited assurance)

To ensure that companies comply with the reporting requirements, an independent auditor or certifier must ensure, and report, that the sustainability information meets the certification standards adopted by the EU. In a first step, limited assurance for the sustainability information is required. Over time, in a “gradual approach from limited to reasonable assurance,” it is foreseen that the EU aims for a “reasonable assurance” for sustainability information as is the case for financial information. If a reporting undertaking fails to comply with the obligation to publish the information, official sanctions may be imposed in the form of fines.

Final thoughts

We are at a crossroads. The CSRD and ESRS are introducing new, extensive sustainability/ESG requirements for a larger number of organizations than ever before. While being a disclosure instrument, the CSRD and ESRS also require organizations to work intensely on all aspects of sustainability/ESG, set targets and prepare a strategy supported by common data management to enable transparency and reach these targets. Data requirements are clearly defined and are comprehensive, regarding both the subjects covered and the depth of information needed. At this point, sustainability/ESG needs to be part of an organization’s governance, decision-making and business model while establishing a high level of transparency of its activities and its results.

There is no time to lose; the planned transitional periods are going to require companies to act quickly in their adoption efforts. It’s a fact that room for interpretation and ways to limit application of the rules are significantly limited, and that the effective disclosure of reliable sustainability information will require a robust sustainability program. To prepare properly, organizations will need to assess their current status and design a sustainability strategy as a solid basis for the upcoming reporting requirements. Ultimately, the CSRD’s goal is to help organizations be more sustainable and have a positive impact on the environment and society; as such, companies should seize this opportunity to be not just compliant but also impactful.

Alix Weikhard, Country Market Lead and Managing Director with Protiviti Germany, contributed to this content.

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