CSRD: What you need to know about the EU's new directive on corporate sustainability reporting

Prof. Dr. Christian Fink, ESG | 8 min. read

In both the political discourse and society in general, the subject of sustainability has already been gaining importance for several years. Reporting related to environmental, social, and governance (ESG) aspects is playing a central role in companies and their business models, as well. This is why the EU Commission has set its sights on becoming a pioneer in the provision of meaningful, high-quality sustainability information.

Back on April 21, 2021, it published a draft directive containing its proposals for the further development of sustainability reporting. After some contentious debate, a political compromise regarding the new Corporate Sustainability Reporting Directive (CSRD) was reached on June 21, 2022 during the trilogue negotiations involving the EU Commission, the European Parliament, and the European Council. The European Parliament and European Council then officially agreed to the compromise on November 10 and November 28, respectively.

CSRD set to replace previous CSR directive

The final draft of Directive (EU) 2022/2464 on sustainability reporting (in short, the CSRD) was published in the Official Journal of the European Union on December 16, 2022. It then took effect on January 5, 2023. In addition to replacing the previous CSR directive (2014/95/EU), the CSRD entails changes in the subject matter of other legislation, particularly Directive 2013/34/EU (on financial statements and related reports). The EU’s member states (including Germany) must now transpose the new directive into their national laws by July 2024 at the latest.

To whom does the CSRD apply?

The CSRD represents a huge expansion of the range of entities that will be required to submit sustainability reports. According to Article 19a, para. 1 of the revised directive on financial statements, sustainability reporting duties now apply to the following companies:

  • All large companies with limited liability (i.e. listed companies and limited-liability partnerships) in the EU
  • All large insurance companies and credit institutions in the EU (regardless of their legal form)
  • All capital-market-oriented companies in the EU, including small and medium-sized companies (but not micro-enterprises)
  • Companies based outside of the EU that have generated more than €150 million in annual net turnover in the EU in each of the past two fiscal years and have a) at least one large or capital-market-oriented subsidiary in the EU or b) a branch in the EU that generated more than €40 million in net turnover in the most recent fiscal year
  • Companies based outside of the EU to which the CSRD applies and whose securities are approved for trade in a regulated EU market

“Large companies” are those that meet at least two of the following size criteria on two consecutive closing dates:

  • Balance sheet total of at least €20 million
  • At least €40 million in turnover in the 12 months prior to a given closing date
  • Annual average of at least 250 employees

Adjustments will apply analogously to reporting at the group level, although certain exemptions will be possible (especially in the context of parent companies and subsidiaries).

Who is exempt from these reporting requirements?

The CSRD offers subsidiaries the possibility of exemption from its sustainability reporting requirements. A subsidiary seeking exemption must meet the following prerequisites:

  • It is included in the group management report of its parent company
  • That group management report contains a group sustainability report that meets the CSRD’s specifications
  • The subsidiary provides certain information in its own management report (such as the name and headquarters of its parent company, a link where its parent company's group management report can be accessed online, and an acknowledgment that it is claiming exemption)

Large companies in the public interest are not eligible for this exemption, however. In addition, any parent company compiling a group sustainability report that exempts a subsidiary must describe in this report any significant differences that exist between the sustainability-related risks or ramifications of its group and those of one or more of its subsidiaries.

Comparable exemption possibilities apply for subsidiaries of companies based outside of the EU.

To what extent does the CSRD affect small and medium-sized companies (SMEs)?

Initially, the requirements of the CSRD will only apply to capital-market-oriented SMEs. Such companies will be able to opt out of the new reporting duties for a two-year transitional period. If they do, however, they will need to indicate why they decided against submitting sustainability reporting in their management reports. The CSRD also specifies reduced requirements for SMEs in various areas of sustainability reporting.

That said, even SMEs that are not oriented toward the capital market are expected to be subject to implicit reporting duties due to the tangential effects of the CSRD's disclosure requirements regarding value chains and supply chains. This is because companies that need to submit sustainability reports will have to request some of the necessary data from suppliers and other entities that are themselves not actually subject to the same requirements.

infographic enactment csrd

When will you need to meet the new requirements?

The CSRD will be phased in for different types of companies over the next several years. Depending on the type of company, its specifications will need to be fulfilled starting in different fiscal years:

  • Companies that are already subject to the Non-Financial Reporting Directive: CSRD requirements take effect for fiscal years that begin after January 1, 2024
  • Other large companies with limited liability: CSRD requirements take effect for fiscal years that begin after January 1, 2025
  • Small and midsize enterprises (SMEs) oriented toward the capital market: CSRD requirements take effect for fiscal years that begin after January 1, 2026
  • Companies based outside of the EU that are subject to the CSRD: CSRD requirements take effect for fiscal years that begin after January 1, 2028

What does a sustainability report look like in practice?


According to the specifications of the CSRD, a sustainability report must contain information that is needed to determine how the respective company's actions affect various aspects of sustainability (the “inside-out” perspective) and, by the same token, understand how these aspects impact the development, performance, and current situation of the company (the “outside-in” perspective). The following subject areas are considered aspects of sustainability:

  1. Environmental factors
  2. Social and human rights factors
  3. Corporate governance factors

In addition, the CSRD will require various detailed disclosures that reference these sustainability aspects, including with regard to the following:

  • Business models and strategies
  • Time-bound sustainability goals
  • Sustainability concepts (described in the CSRD as an “undertaking's policies”)
  • Incentive systems related to sustainability
  • The role of company bodies in connection with aspects of sustainability
  • Due diligence processes carried out in relation to aspects of sustainability
  • Negative effects (both actual and potential) of a company's own actions and those of entities along its value chain
  • Measures to prevent, mitigate, or eliminate negative effects
  • Sustainability-related risks
  • Sustainability-related performance indicators

Companies may opt out of providing information related to their value chains for a transitional period of three years starting from the date the CSRD initially took effect. If they do, however, they will need to explain the efforts they have made to gather this data and why they have been unable to do so. They will also have to describe how they plan to acquire the information in the future.

Materiality of sustainability information

According to the CSRD, the materiality of sustainability information is to be judged based on the principle of double materiality. This means sustainability-related information always needs to be disclosed whenever it:

  • Is necessary to understand the course of business, results, and situation of the company in question or
  • Describes the impact of the company's activities on the sustainability aspects cited above

Specification of report content

The European Financial Reporting Advisory Group (EFRAG) has been commissioned to draw up the European Sustainability Reporting Standards (ESRS) and provide them to the EU Commission in the form of specialized recommendations on reporting. Now that the public consultation on the draft standards is complete, they will be considered for adoption as legal acts by the EU Commission, at which point they will immediately become obligatory for companies to which the CSRD applies.

On November 22, 2022, an initial set of 12 draft ESRS corresponding to the basic areas of reporting and aspects of sustainability was handed over to the EU Commission, which is to approve them by June 30, 2023. Set 1 comprises the following draft standards:

  • ESRS 1: General Requirements
  • ESRS 2: General Disclosures
  • ESRS E1: Climate Change
  • ESRS E2: Pollution
  • ESRS E3: Water and Marine Resources
  • ESRS E4: Biodiversity and Ecosystems
  • ERES E5: Circular Economy
  • ESRS S1: Own Workforce
  • ESRS S2: Workers in the Value Chain
  • ESRS S3: Affected Communities
  • ESRS S4: Consumers and End Users
  • ESRS G1: Business Conduct

A second set of ESRS specific to SMEs, certain sectors, companies based outside of the EU, and other subjects is to be approved by June 30, 2024.

Where sustainability information is to be provided

The CSRD requires companies to incorporate sustainability reports into their management reports. In doing so, they are to submit sustainability information in a “clearly identifiable dedicated section” (Article 19a, para. 1 of the revised Directive 2013/34/EU) of their management reports – meaning in a separate segment. This effectively precludes companies from fully integrating such information, which is often the goal in the context of integrated reporting (especially in cases involving capital-market-oriented groups).


Companies subject to the CSRD are to compile their management reports in a standardized electronic format in accordance with Commission Delegated Regulation (EU) 2019/815 (the ESEF Regulation). Accordingly, sustainability information is to be:

  • Compiled in XHTML format
  • Tagged according to a digital categorization system (read: a taxonomy) yet to be developed

The taxonomy will complement the development of an EU-wide platform for business information (the “European Single Access Point”) and thus dovetails with the Commission's previous work on digitalization.

Do sustainability reports need to be audited?

Since they are to form part of companies’ management reports, sustainability reports compiled in line with the CSRD are subject to auditing requirements. The directive will initially require an audit with limited assurance (in the sense of a review). This is meant to determine whether:

  • The sustainability report in question meets the requirements of the CSRD and the ESRS
  • The specifications regarding the tagging of sustainability information have been fulfilled
  • The reporting requirements pursuant to Article 8 of the Taxonomy Regulation have been met

By October 1, 2026, the EU Commission is to develop and approve European standards for audits that provide limited assurance. In addition, it will decide whether transitioning to audits that provide reasonable assurance (similar to the examination depth that applies to management reports) seems feasible and, if it does, develop and approve corresponding auditing standards by October 1, 2028 at the latest.

As part of the process of transposing the requirements of the CSRD into national law, each individual EU member state can determine who will be tasked with carrying out these audits. A member state can thus resolve to have the audits completed by a) a company-internal auditor, b) another auditor, or c) an independent provider of confirmation services.

What role do audit committees play?

The CSRD extends the role and responsibilities of audit committees to sustainability reporting. Accordingly, the directive revises Directive 2014/56/EU (the Auditing Directive) by requiring audit committees to:

  • Notify the administrative/supervisory body of the audited company of the results of its audit (and, if applicable, the audit results for its sustainability reporting) and illustrate how these findings have helped ensure the integrity of the company's accounting and sustainability reporting

  • Observe the company's accounting process (and, if applicable, its process for reporting sustainability information) with regard to its integrity

  • Observe the effectiveness of the company's internal governance and risk management systems (and, if applicable, that of its internal auditing activities) with regard to accounting and sustainability reporting without undermining the committee's independence in the process

  • Observe the auditing of the company's annual financial statement/consolidated financial statements and (group) sustainability report

  • Observe and appraise the independence of the auditor(s) in question

The EU member states have the option to allow companies to transfer the tasks of audit committees regarding sustainability reporting and the auditing thereof to an administrative/supervisory body or to a committee established by such a body to complete these specific tasks.

In dialog with employees

In addition, company executives are to keep employee representatives up to speed on these matters on a suitable level and discuss the relevant sustainability information with them, along with the ways in which it is collected and reviewed. In addition, they are to share their related assessments with the administrative, executive, and supervisory bodies of their company as they deem appropriate.

What challenges can you expect in connection with the new CSR directive?

The new regulations on sustainability reporting go hand in hand with a tremendous increase in the importance of this new type of reporting.

In practice, companies will face a number of challenges resulting primarily from the following factors:

  • The expanded scope of application of ESG reporting
  • The need to make sustainability reports digitally accessible
  • The redesign and expansion of the content of sustainability reports (including the applicable ESRS)
  • The need to have sustainability reports reviewed by an external auditor

The next step will involve the EU member states transposing the requirements of the CSRD into national law. For practical purposes, it will be particularly interesting to see how national legislators make use of their options as member states and whether they pass regulations that go beyond the wording of the directive. In Germany, for example, the reporting requirements could be extended beyond large limited-liability companies, which would potentially affect certain partnerships that involve an individual person with unlimited liability. The question of whether this is politically desirable or feasible for lawmakers to implement is difficult to answer at present.

Companies subject to the CSRD would do well to start taking a look at the new reporting requirements early on and prepare to implement the necessary processes.

All blog posts

Related posts