What Is CSRD? The EU Sustainability Reporting Directive Explained

The Corporate Sustainability Reporting Directive (CSRD) is the EU's framework for mandatory sustainability reporting. It replaces the Non-Financial Reporting Directive (NFRD) and significantly expands both the scope of companies required to report and the depth of information they must disclose. For companies within its scope, CSRD is not optional: sustainability reporting becomes a legal requirement equivalent to financial reporting.

The Problem CSRD Solves

Before CSRD, sustainability reporting in the EU was:

• Voluntary for most companies: Only large public interest entities (PIEs) were required to report under NFRD
• Inconsistent: Companies reported using different standards (GRI, SASB, CDP, proprietary frameworks), making reports incomparable
• Unverified: Reports were not subject to third-party assurance
• Surface-level: Reports described sustainability commitments rather than measured performance

The result: investors, lenders, customers, and regulators could not reliably compare companies' sustainability performance or verify claims. "Greenwashing" — presenting sustainability performance in a misleading positive light — was pervasive.

CSRD addresses this by:

• Expanding mandatory reporting to ~50,000 companies
• Requiring reporting to the European Sustainability Reporting Standards (ESRS)
• Requiring limited assurance (moving to reasonable assurance)
• Making reports machine-readable and integrated with financial reporting

Who Must Report Under CSRD

CSRD expands the reporting obligation in three waves:

Wave 1 (from financial year 2024, reports due 2025):

• Large public interest entities (PIEs) already subject to NFRD
• Approximately 11,700 companies
• Criteria: listed companies, banks, and insurance companies with 500+ employees

Wave 2 (from financial year 2025, reports due 2026):

• Large companies meeting two of three criteria: 250+ employees, €40M+ net turnover, €20M+ balance sheet
• Approximately 40,000 additional companies

Wave 3 (from financial year 2026, reports due 2027):

• Listed SMEs (on EU regulated markets)
• Small non-complex credit institutions and captive insurance undertakings
• Approximately 900 additional entities

Non-EU companies (from financial year 2028, reports due 2029):

• Companies with net turnover exceeding €150M in the EU and with at least one large subsidiary or branch in the EU

What CSRD Requires: The Four Pillars

1. Report to the European Sustainability Reporting Standards (ESRS)

Unlike NFRD, which allowed companies to choose their reporting framework, CSRD mandates the use of the European Sustainability Reporting Standards (ESRS) developed by EFRAG.

ESRS cover:

• Cross-cutting standards: General requirements (ESRS 1) and General disclosures (ESRS 2)
• Environmental: Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy
• Social: Own workforce, workers in the value chain, affected communities, consumers and end-users
• Governance: Business conduct

2. Double Materiality Assessment

Companies must conduct a double materiality assessment — assessing both:

• Impact materiality: How the company's activities impact the environment and society
• Financial materiality: How sustainability issues create financial risks and opportunities for the company

Only topics found to be material through this assessment need to be reported in full. But the double materiality assessment process itself must be documented and disclosed.

3. Assurance

CSRD reports require third-party limited assurance — and the directive provides for escalation to reasonable assurance as standards develop. This means an external auditor (not necessarily the financial auditor) must verify the sustainability disclosures.

Limited assurance: "Nothing has come to our attention that causes us to believe the report is materially misstated." Reasonable assurance (future): "The report presents fairly in all material respects."

4. Machine-Readable Format (ESEF)

CSRD reports must be tagged using the European Single Electronic Format (ESEF) — making them machine-readable for regulators and market participants. Data tagged in ESEF can be aggregated, compared, and analysed at scale.

Relationship to Other ESG Frameworks

CSRD is not an alternative to existing ESG frameworks — it is the mandatory layer on top:

• ESRS: The mandatory reporting standards under CSRD
• GRI: Many ESRS disclosures are aligned with GRI Standards; companies reporting to GRI will find significant overlap
• TCFD: Climate disclosures under ESRS E1 align closely with TCFD recommendations
• SFDR: The Sustainable Finance Disclosure Regulation requires financial products to disclose sustainability characteristics. CSRD-reported data flows into SFDR disclosures
• EU Taxonomy: CSRD requires disclosure of EU Taxonomy alignment — how much revenue/capex/opex is aligned with EU Taxonomy criteria

Timeline Summary