In recent years, there has been increasing pressure on businesses to become more transparent about their environmental, social, and governance (ESG) practices. This demand for accountability is reflected in regulatory frameworks, such as the Corporate Sustainability Reporting Directive (CSRD), introduced by the European Union (EU). The CSRD significantly enhances and extends the reporting requirements for companies operating in the EU, aligning sustainability disclosures with broader financial reporting standards.

This directive aims to standardize and improve corporate sustainability disclosures, providing stakeholders—such as investors, consumers, and regulators—with reliable, comparable, and relevant information about a company's sustainability performance. So, what exactly must companies disclose under the CSRD? Let's dive deeper into the key requirements and what businesses need to know.

1. Overview of the Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) was proposed by the European Commission in 2021 to replace the previous Non-Financial Reporting Directive (NFRD). The CSRD significantly expands the scope of sustainability reporting, aiming to make ESG reporting more consistent, comparable, and reliable across companies.

The CSRD applies to all large public-interest companies, including EU-listed companies, large non-EU companies that operate in the EU, and companies with more than 250 employees. Small and medium-sized enterprises (SMEs) are not directly impacted but may still be required to disclose certain information depending on their involvement in EU markets.

2. Key Disclosures Under the CSRD

a. Governance and Business Model

Under the CSRD, companies are required to disclose information about their governance structure, including how sustainability is integrated into their corporate strategy and decision-making processes. Specifically, businesses must explain:

  • The roles and responsibilities of the board and senior management in overseeing sustainability matters.
  • How the company's business model is designed to address sustainability risks and opportunities.
  • Any sustainability-related policies and how they are implemented.

This provides stakeholders with insight into how the company's leadership is committed to sustainability and whether they have the governance structures in place to address related challenges.

b. Sustainability Risks and Opportunities

The CSRD emphasizes the importance of double materiality—the concept that companies must report on both the financial implications of sustainability issues and how their activities impact the environment and society. Companies must disclose:

  • Environmental risks: This includes climate-related risks, such as the impact of climate change on the company's operations, supply chains, and financial performance. It also covers risks related to resource use, waste management, and biodiversity loss.
  • Social risks: Companies need to report on labor conditions, human rights issues, diversity and inclusion, and the social impact of their products and services.
  • Governance risks: Companies should disclose information about their governance practices, including ethical considerations, anti-corruption measures, and the management of corporate scandals or controversies.

c. Climate-Related Disclosures

Given the increasing importance of climate change, the CSRD mandates companies to provide detailed disclosures on their climate-related risks, targets, and mitigation strategies. Companies are required to:

  • Report their greenhouse gas (GHG) emissions and disclose their strategies for reducing these emissions, in line with the EU's climate goals.
  • Provide information on climate-related risks that may impact the company's financial position, including physical risks (such as extreme weather events) and transition risks (such as regulatory changes).
  • Disclose climate-related targets, such as carbon neutrality goals, and the progress made towards achieving those targets.

These disclosures are intended to help investors understand how companies are addressing the risks posed by climate change and their potential to transition to a low-carbon economy.

3. The Role of Digital Reporting

The CSRD also encourages companies to provide digital sustainability reports, making it easier for stakeholders to access and analyze the information. This digital format enhances the comparability and accessibility of sustainability data across companies, industries, and geographies.

Conclusion

The Corporate Sustainability Reporting Directive (CSRD) is a major step forward in ensuring that companies disclose comprehensive, reliable, and comparable information on their sustainability practices. By requiring businesses to report on a wide range of ESG factors—from governance structures to climate-related risks, biodiversity impacts, and human rights—the CSRD enhances transparency and drives accountability across industries.