The Corporate Sustainability Reporting Directive (CSRD) is ushering in a new era of transparency and accountability for companies. While its objectives are clear—to provide comparable, reliable, and accessible sustainability data through CSRD reporting, which is essential for compliance requirements under the CSRD—many myths still cloud its understanding and implementation. This guide debunks the most common CSRD misconceptions and provides a comprehensive FAQ section to address key questions.
What is the Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive (CSRD) is a groundbreaking regulation introduced by the European Union (EU) to elevate the standards of corporate sustainability reporting. This directive mandates that companies disclose comprehensive sustainability information within their annual and management reports. By aligning with the detailed standards set forth by the European Financial Reporting Advisory Group (EFRAG), the CSRD ensures that environmental, social, and governance (ESG) data is integrated with financial disclosures. This integration requires the collaboration of finance, sustainability, audit, and risk teams, making the CSRD a pivotal element in corporate sustainability reporting.
1. I need to collect 1,200 data points
A widely circulated myth is that complying with the CSRD requires companies to collect 1,200 data points. While this figure corresponds to the total number of indicators in the European Sustainability Reporting Standards (ESRS), not all of these indicators will be relevant to your business. The key lies in conducting a thorough materiality analysis, which determines which sustainability factors are significant to your operations.
For most businesses, the number of data points typically falls below 700. Furthermore, half of these are narrative disclosures rather than quantitative data. By focusing on material issues and integrating financial and sustainability information, you can streamline the process and avoid unnecessary work.
2. I have the time
Underestimating the time required for CSRD preparation is a mistake many companies make. Implementing the CSRD involves multiple stages, including the double materiality assessment, stakeholder engagement, and extensive data collection. For companies addressing these requirements for the first time, the process is particularly time-intensive.
Experts recommend allocating at least three months to prepare for data collection and another three to four months to gather and validate the necessary information. Delaying the process increases the risk of late or incomplete reporting, which can result in reputational damage, financial penalties, and strained relationships with stakeholders.
3. CSRD is just an issue for our sustainability leaders
Another misconception is that the CSRD is solely the responsibility of the sustainability department. On the contrary, the directive’s reporting requirements affect multiple facets of the business and demand cross-departmental collaboration.
Finance teams will need to address metrics like net turnover, IT and data teams must ensure data integrity and compliance, HR departments will provide employee-related disclosures, and purchasing teams will address supply chain transparency. Additionally, company boards must oversee the process to align it with overall corporate strategy, including restructuring existing report frameworks to incorporate new data and insights related to sustainability in the management report. Engaging a trusted external partner may also prove invaluable for first-time implementation.
4. It’s useless
Some companies dismiss the CSRD as an unnecessary administrative burden. However, the CSRD’s value lies in its ability to provide investors, consumers, and other stakeholders with comparable data on sustainability performance.
Effective CSRD compliance can distinguish a company from its competitors, bolstering its reputation and long-term viability. It aligns with the European Green Deal’s goals and the EU Taxonomy by promoting environmentally sustainable economic activities. This classification system is integral to encouraging investments in sustainable projects and ensuring that regulations support the transformation toward a modern, resource-efficient economy. In fact, embracing the CSRD is often a strategic move that secures a company’s future in a rapidly changing world.
5. I don’t need a digital tool
Managing the CSRD requirements in spreadsheets may seem feasible, but it’s far from practical. High-performance digital tools simplify the process by managing collection roles, automating workflows, ensuring governance, and generating XBRL format reports.
Digital platforms are designed to handle the complexity of reporting requirements, saving companies time and money. By streamlining tasks and ensuring accuracy, these tools become indispensable for large companies that need to manage extensive data sets and comply with rigorous standards. Find the right one for your company, using our dedicated resource.
6. Compliance is expensive
Complying with the CSRD does involve costs, but so does inaction. Companies that fail to meet reporting requirements face penalties, reputational risks, and diminished stakeholder trust. Additionally, studies suggest that companies focusing on sustainability often outperform their peers financially. A report by McKinsey and company has highlighted that companies which excel in financial growth, profitability, and ESG (“triple outperformers”) deliver up to 7% higher annual total shareholder return (TSR) than those excelling only in financial metrics.
Investing in CSRD compliance can be viewed as a strategic decision that mitigates risks and unlocks new opportunities. With careful planning, the benefits far outweigh the costs.
Benefits of the CSRD
The CSRD offers a multitude of benefits for companies, investors, and stakeholders alike. By mandating the disclosure of sustainability information, the directive promotes unparalleled transparency and accountability. This transparency empowers investors to make well-informed decisions regarding sustainable investments, fostering a more responsible investment landscape. For companies, the CSRD encourages the adoption of sustainable business practices, leading to reduced environmental impact and enhanced sustainability performance. Additionally, the CSRD supports the European Union’s ambitious goal of transitioning to a low-carbon, resource-efficient economy, thereby contributing to a more sustainable future for all.
Which companies are covered by the CSRD?
The CSRD applies to large companies operating within the European Union and certain non-EU companies with substantial EU activity. Specifically, it covers companies that meet at least two of the following criteria:
- Net turnover exceeding €40 million
- Total assets exceeding €20 million
- Over 250 employees
Additionally, listed small and medium-sized enterprises (SMEs) will need to comply with simplified reporting requirements by 2026. For more information see our dedicated resource.
What is the CSRD implementation timeline?
The CSRD is being phased in gradually. Large companies already subject to the Non-Financial Reporting Directive (NFRD) will need to begin reporting for the 2024 financial year. Other large companies will follow, reporting on their 2025 financial year. By 2026, listed SMEs and non-EU companies meeting specific thresholds will also need to comply. For more information, see our dedicated resource.
Will the CSRD apply to non-EU companies?
Yes, non-EU companies are required to comply with the Corporate Sustainability Reporting Directive if they generate more than €150 million in net turnover within the EU and have at least one subsidiary or branch in the region. These companies must report on their EU-based activities, ensuring a level playing field for all entities operating within the European market. For more information, see our dedicated resource.
What are the European Sustainability Reporting Standards?
The European Sustainability Reporting Standards (ESRS) provide the detailed framework for CSRD compliance. They specify the indicators and metrics that companies must report on, covering areas such as climate change, biodiversity, social factors, and governance. The ESRS ensures that all companies report in a standardized and comparable format, enhancing transparency across the board. For more information, see our dedicated resource.
How can businesses prepare for the CSRD?
To prepare for the CSRD, businesses should start by conducting a materiality analysis to identify the social and environmental issues most relevant to their operations. Engaging all relevant departments, from finance to HR, ensures alignment with the more detailed reporting requirements. Companies subject to the CSRD should establish systems for collecting non-financial data, engaging stakeholders, and embedding sustainability into their strategy. Early action is crucial for staying ahead of compliance deadlines and minimizing risks. For more information, see our dedicated resource.
What is double materiality?
Double materiality is a core concept of the CSRD. It requires companies to assess and report on:
- The impact of their operations on environmental and social factors (impact materiality)
- The financial risks and opportunities these factors pose to the company (financial materiality)
This dual perspective ensures that companies’ reports address both sustainability risks to the business and the broader impacts of their operations. For more information, see our dedicated resource.
How can you select the best CSRD reporting platform for your business?
Selecting the right platform is crucial for managing more detailed reporting requirements. Look for a solution tailored to EU regulated markets that facilitates data collection, validation, and submission. The platform should support disclosure of information on social and environmental issues, including compliance with human rights standards. Scalability, ease of integration, and automation capabilities are also key factors to ensure the platform evolves with your business needs. Publishing regular reports efficiently and accurately is essential for long-term success.
How should companies submit their report?
Companies must integrate their CSRD disclosures into their annual reports. These disclosures must follow the XBRL format, ensuring machine-readable and comparable data. A robust digital platform is essential to meet these submission requirements and maintain compliance with the ESRS.
What are the penalties for non-compliance?
Non-compliance with the Corporate Sustainability Reporting Directive can result in significant penalties. These may include fines, reputational damage, and increased scrutiny from stakeholders. Additionally, failing to meet reporting requirements could impact access to financing, as investors increasingly prioritize transparency and accountability.
Final thoughts
The CSRD represents a transformative shift in how companies report on sustainability performance. By debunking myths and addressing frequently asked questions, companies can better prepare for compliance and leverage the directive as a strategic advantage. As the world moves toward a sustainable future, the Corporate Sustainability Reporting Directive is not just a regulatory hurdle but a pivotal step in ensuring long-term success.
