How the EU’s CSRD regulation will impact European businesses’ sustainability reporting

What is the EU’s CSRD regulation?

• The new EU CSRD legislation is set to dramatically impact how European businesses need to report on sustainability.
• It compels EU businesses — including large companies and SMEs — to disclose ESG impacts through the new ESRS framework.
• Large non-European companies with a large EU subsidiary, or a significant EU presence, must also align with CSRD.
• The first wave of affected companies will need to report in alignment with CSRD by 2025.
• Non-compliant companies will face a range of penalties, including subsidy suspension and financial penalties.

The Corporate Sustainability Reporting Directive (CSRD) is a new EU legislation requiring businesses to publish regular reports disclosing their environmental and social impacts. Aiming to encourage more transparent disclosure on sustainability issues, it is the first time the European Commission has defined a common reporting framework for non-financial data.

The CSRD builds on and updates the Non-Financial Reporting Directive (NFRD), which was introduced in 2014 to improve companies’ accountability on their environmental, social and governance (ESG) performance.

In effect since 5 January 2023, the CSRD will be further phased in over several waves. Many EU companies must apply new rules for the first time in 2024, for reports to be published in 2025, disclosing their ESG impacts through the European Sustainability Reporting Standards (ESRS) framework.

How does ESRS relate to CSRD?

The European Sustainability Reporting Standards (ESRS) are the foundation for CSRD compliance. While CSRD is the name of the legislation, the ESRS are the standards: a structured sustainability reporting framework for companies to communicate their sustainability impacts. 

The ESRS framework is divided into two main categories: 1) cross-cutting standards and 2) topical standards.

Cross-cutting standards

Companies preparing for CSRD readiness must consider two mandatory cross-cutting standards, meaning they apply to many topic-specific areas. ESRS 1 and ESRS 2 advise businesses how to structure their disclosures to ensure clarity, relevance, and consistency:

ESRS 1

ESRS 1 outlines the minimum requirements for CSRD compliance, ensuring companies align with essential sustainability reporting standards relating to environmental, social or governance aspects.

It also requires all standards — apart from ESRS 2 — to be subjected to a double materiality assessment. The ESRS defines double materiality as analyzing: 

• Impact materiality (business’ broader societal and environmental impacts); and
• Financial materiality (the effects of ESG  factors on the company’s financial performance).

The double materiality exercise is a tool for businesses to narrow their scope, reporting in more depth on issues deemed the most important for the company. Companies will have to provide detailed explanations for any standards they classify as non-material.

ESRS 2

ESRS 2 explains the overarching disclosure requirements which are universally applicable, regardless of company activity or sustainability maturity. It outlines three key reporting areas: 

• Governance: How sustainability is integrated into a company’s corporate governance framework;
• Strategy: What role sustainability plays in the company's long-term planning and decision-making processes;
• Impact, risk and opportunity management: How companies manage and respond to all sustainability-related factors, as well as how businesses integrate it into their corporate risk management approach.

Companies must also provide information about the extent to which their full value chain — upstream and downstream — is covered in the report.

Topical standards

The ESRS outlines ten non-mandatory topical standards, which include specific reporting requirements for different ESG matters, as outlined below.

Tailored to enable topic-specific reporting, they provide an opportunity for companies to evaluate and report on their ESG factors more comprehensively.

Which companies will be affected by the CSRD?

A range of companies — inside and outside the EU — will be impacted by the CSRD this decade: 

• Large EU companies (whether listed or not) and large non-European companies which are listed on regulated EU markets, and which fulfill two of the following three criteria: 
  • a) over 250 employees; 
  • b) assets worth over €20 million; 
  • c) a turnover of over €40 million.
• All EU and non-EU small and medium-sized enterprises (SMEs) which are listed on European regulated markets. Micro-enterprises are exempt. SMEs who fit two of the following three criteria will be affected:
  • a) over 10 employees; 
  • b) a balance sheet over €350,000; 
  • c) a turnover over €700,000.
• Other large non-European companies with a large EU subsidiary or a significant EU presence i.e. a turnover of over €150 million.

Will non-EU companies be impacted by the CSRD?

The CSRD applies to businesses located in the EU and certain EU subsidiaries of non-EU companies.

Non-EU companies will fall under CSRD’s scope if they are:

• Listed on an EU regulated market with securities like bonds or stocks;
• In excess of one or both of the following revenue thresholds:
  • Annual EU turnover has been above €150 million for the last two consecutive financial years;
  • An EU branch has an annual net turnover of over €40 million in the previous financial year.

The impact of the CSRD on the metals, energy and manufacturing sectors

Metals sector 

Metals moving through EU borders are increasingly under the spotlight thanks to the EU’s Carbon Border Adjustment Mechanism (CBAM), which mandates importers to account for and pay a price on these emissions. With the CSRD requiring companies to outline the risks that climate change poses to their business model, metals manufacturers will also need to better understand their impact across the value chain, including carbon-related impacts and opportunities. 

CarbonChain offers a solution purpose-built for carbon accounting in metals supply chains. We help steel and aluminum manufacturers, traders and distributors to develop a complete corporate carbon footprint to satisfy stakeholder demands. Start measuring emissions with speed and accuracy.

Energy sector (the case of methane)

Methane is a potent greenhouse gas (GHG) with a warming potential up to 80 times higher than carbon dioxide. Methane release occurs across the energy supply chain, from drilling and production, to processing, as well as in transport and distribution. 

Although the intensity of the exploration and production of oil can vary significantly from field to field, much of this is down to atmospheric methane release by operators during oil production — and the oil and gas industry accounts for over a third of methane emissions from human activity.

While energy products have not yet been impacted by the EU CBAM, advances in mandatory corporate reporting standards like the CSRD — as well as the EU’s new methane regulation — will put pressure on companies in the energy supply chain to quantify and report their upstream Scope 3 emissions, including methane. Major fossil fuel producers based outside of Europe could lose EU market share, as transparency and supply chain due diligence increases due to initiatives such as the CSRD.

Commodity traders need to get their energy supply chain ready as regulation closes in. By choosing the CarbonChain platform to get compliance-ready, you can track and report your methane emissions — as well as emissions from other GHGs — with speed, accuracy and ease.

Sustainable manufacturing

As legislators continue to zone in on decarbonization, manufacturers will need to switch to more sustainable production processes. Carbon pricing is already seriously impacting industrial supply chains and legislation like the CSRD, the U.S. Foreign Pollution Fee Act and the EU CBAM will impact importers of certain goods, such as cement, metals, fertilizers, hydrogen and electrical energy.

Manufacturers must transition to a lower-carbon business model and comply with legislation or face penalties. A crucial first step is for companies to assess their corporate carbon footprint, measure emissions to accurately report on them. 

To report with accuracy and future-proof your product lines on the road to net-zero, access the CarbonChain platform today, which offers precise carbon accounting for manufacturers.

What are the penalties for non-compliance with the CSRD?

When companies are found to have omitted key reporting information — or submitted non-compliant disclosures — they could face a range of penalties, including:

1) Financial penalties;

2) Subsidies’ suspension;

3) Publication of non-conforming information.

As an EU directive, the CSRD is implemented at a national level and the magnitude of fines is not defined in the legislation, meaning that the level and frequency of penalties will vary. Regulatory authorities in each member state will be responsible for ensuring CSRD compliance and administering penalties.

In certain circumstances, companies could be held legally liable. For example, if businesses are found to be deliberately concealing relevant information from stakeholders, then those responsible, including company executives, could face criminal prosecution.

If national regulatory authorities issue warnings, or request corrections, companies must submit supplementary information or provide clarifications as quickly as possible to avoid penalties.

• ‍France: Legislation in France revolves around the necessity for external assurance of CSRD reports, as outlined in its penalty clauses. According to the law, corporate directors may have to pay fines of up to €75,000 and face imprisonment for up to five years if they fail to provide essential information for external auditors to validate their CSRD-compliant reports — or if they obstruct the auditors’ work. Conversely, not having their CSRD report audited by an accredited entity could lead to a two-year jail term and fines of up to €30,000.
• ‍Ireland: Currently, an NFRD breach may lead to six months' imprisonment for company directors and/or a €5,000 fine.
• ‍Italy: The penalty is a fine of between €20,000 and €150,000.
• ‍Germany: Companies may face fines of either up to €10 million, 5% of the total annual turnover or twice the total profits made/losses avoided due to the breach.

What actions should companies impacted by the CSRD take?

With the first wave of companies reporting in alignment with ESRS in 2025, here’s where businesses should focus to become CSRD-ready:

1. Prioritize climate
2. Familiarize yourself with the timeline and reporting level
3. Identify gaps and undertake a double materiality assessment
4. Assign an adequate team and communicate about CSRD internally

1. Prioritize climate

‍Measuring a full carbon footprint

‍A full corporate carbon footprint will be required by the ESRS — including difficult-to-measure Scope 3 emissions — and companies must also outline the risks climate change poses to their business model. The E1 climate standard will be deemed material for most companies, especially those operating in carbon-intensive sectors — and all businesses will be impacted by the need to mitigate climate change and its impacts — so it is especially important for companies to prioritize carbon accounting.

Many companies seek external support to help identify reporting gaps, such as carbon emissions data.

CarbonChain's validated, Greenhouse Gas Protocol-aligned methodology provides information for Scope 1, 2 and 3 greenhouse gas emissions, which can be easily imported into key sustainability reporting frameworks such as the ESRS. CarbonChain also enables emissions target-setting — we provide climate risk management support and integration with science-based targets.

‍Other environmental issues to consider

‍ESRS topical standards also address other environmental issues:

• Pollution;
• Water and marine resources;
• Biodiversity;
• Resource use and circular economy.

Many European companies will not have substantially reported on these issues before. If deemed material to your business — following a double materiality assessment — your company will need to dedicate time and resources to them.

‍Addressing social and governance issues

‍To date, many companies have limited their sustainability reporting and activities to their environmental impact – particularly because of the urgency of the climate crisis and the need to accurately measure supply chain emissions. However, the CSRD requires higher levels of transparency on a broader range of social and governance issues, including: 

• Employee welfare;
• Managing relationships with suppliers;
• Business conduct;
• Approaches to preventing corruption and bribery;
• Payment practices.

Some companies may have never disclosed substantial information on these topics, and will need to start developing a more complete reporting approach.

2. Familiarize yourself with the timeline and reporting level

CSRD will roll out in four phases, depending on company type and size. Ensure you check the timelines for your business and the level of reporting needed.

Until 2029, if a company has multiple entities, it can submit reports per entity, to different EU countries. However, most businesses will likely find it easier to create one consolidated report which covers all of Europe, and appoint a cross-entity CSRD reporting team. From 2029, all companies will need to report at a consolidated level.

3. Identify gaps and undertake a double materiality assessment

Companies must review the finalized ESRS framework and embark on a double materiality exercise to assess which topical standards are material for their business.

If your business has previously published a sustainability report and/or undertaken a materiality exercise, it is imperative to compare them to the ESRS framework. Identified gaps must be signposted to the reporting team. Topics deemed material by your company will need to be measured and disclosed in detail, including data points, targets and other metrics.

4. Assign an adequate team and communicate about CSRD internally

Sustainability reporting has always been challenging, due to the scope of topics covered — and the disclosure levels required by CSRD are unprecedented. Companies will need to gather information and communicate more transparently than ever before. 

‍Assemble a CSRD reporting team

‍Businesses will need to bring together a cross-functional CSRD team. Companies should also notify other individuals and teams within the company who will need to be involved in data collection and communications e.g. HR, legal, procurement, risk management.

Inform management

Some management teams may be resistant to the level of disclosure required by CSRD. The reporting team must ensure all company executives are aware of timings and consequences of CSRD non-compliance. 

Executives must become aware of areas the company has not previously reported on that will now become mandatory — especially as they are ultimately responsible for the internal ESG policies which inform your company’s sustainability strategy.

Communicate to employees

Companies should also communicate about CSRD timings to all employees in advance of alignment. This will provide colleagues with a heads up that they may be called upon to support the team — including employees who may have never been involved in sustainability reporting before. Communicating in advance also ensures everyone in your company is aware of the consequences of non-compliance, as well as how CSRD may impact your company’s approach to sustainability.