Adapting to Mandatory Sustainability Reporting: CSRD & ESRS Explained

Adapting to Mandatory Sustainability Reporting: CSRD & ESRS Explained

Sustainability reporting is undergoing a dramatic transformation across Europe and beyond, driven by a wave of new regulations and standards. At the heart of this change are the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS), set to redefine how companies must disclose their environmental, social, and governance (ESG) performance. Businesses, regardless of size or sector, now face increasing pressure to comply, innovate, and adapt. This article provides a comprehensive, up-to-date guide to understanding and navigating CSRD and ESRS—offering practical insights for organizations at every stage of their sustainability journey.

What Is the CSRD? Mandatory Sustainability Reporting CSRD & ESRS

The Shift from NFRD to CSRD

• Background: The CSRD is the successor to the Non-Financial Reporting Directive (NFRD) introduced in 2014. While the NFRD required certain large companies to disclose some ESG data, its scope and rigor were seen as insufficient. Mandatory Sustainability Reporting CSRD & ESRS

• Why CSRD? The European Commission designed the CSRD to address growing stakeholder demand for high-quality, comparable, and reliable sustainability information. CSRD aims to bridge ESG data gaps and provide a comprehensive framework for transparency.

Key Provisions of the CSRD

• Expanded Scope: Applies to nearly 50,000 companies in the EU (up from 11,000 under NFRD), including large enterprises, listed SMEs (except micro-undertakings), and even some non-EU entities with substantial EU operations.

• Assurance Requirement: Sustainability reports must be audited for limited assurance, similar to financial reporting.

• Digitalization: Requires companies to prepare and submit sustainability data in a digital, machine-readable format.

• Integrated Reporting: CSRD mandates that sustainability disclosures be included in management reports, not as separate documents.

• Double Materiality: Companies must assess and report on both the impact of their activities on people and the environment and how sustainability risks affect the business.

Who Must Comply—and When?

Company Category	First Reporting Year	Publication Deadline
Large public-interest entities (PIEs)	2024	2025
Other large companies (meeting size thresholds)	2025	2026
Listed SMEs (with opt-out until 2028)	2026	2027
Non-EU companies (net turnover >€150M in EU)	2028	2029

Note: Companies must meet two of these three criteria for "large": 250+ employees, €40M+ net turnover, €20M+ total assets.

Understanding the ESRS: The Backbone of Sustainability Reporting

What Are the ESRS?

Developed by the European Financial Reporting Advisory Group (EFRAG), the European Sustainability Reporting Standards (ESRS) provide detailed guidance on what, how, and where to report on sustainability matters under CSRD. These standards are designed to harmonize disclosures and ensure data is relevant, comparable, and decision-useful.

ESRS Architecture: General vs. Topical Standards

• General Standards:

  • ESRS 1 (General Requirements): Addresses concepts like double materiality, value chain, and reporting boundaries.

  • ESRS 2 (General Disclosures): Sets baseline requirements for governance, strategy, impact, risk, and opportunity management.

• Topical Standards: Cover key ESG topics—including climate change, pollution, water, biodiversity, workers, communities, business conduct, and more.

Materiality and the Reporting Process

• Double Materiality Assessment: Companies must determine which matters are material from both an “inside-out” (impact on society and environment) and “outside-in” (impact on company value) perspective.

• Value Chain Consideration: Reporting must extend across the company’s value chain, not just its own operations.

Key Reporting Topics Under ESRS

ESRS Standard	Topic Areas Covered
E1 - Climate Change	Emissions, targets, transition plans
E2 - Pollution	Air, water, soil, substances of concern
E3 - Water & Marine	Water use, impact on marine resources
E4 - Biodiversity	Impacts on ecosystems, preservation efforts
E5 - Resource Use	Circularity, raw material sourcing
S1 - Own Workforce	Employment, diversity, working conditions
S2 - Work in Value Chain	Workers in supply chain, human rights
S3 - Affected Communities	Community impact, indigenous rights
G1 - Business Conduct	Governance, ethics, anti-corruption, lobbying

Practical Steps to CSRD & ESRS Compliance

1. Establish a Cross-Functional ESG Team

• Involve finance, legal, sustainability, HR, procurement, and IT teams.

• Assign clear roles and project ownership for the CSRD transition.

2. Conduct a Double Materiality Assessment

• Engage stakeholders.

• Map out key ESG risks and opportunities by considering both impact materiality (how your activities affect society/the environment) and financial materiality (how ESG factors affect your business).

3. Gap Analysis Against ESRS

• Review current disclosures versus ESRS requirements.

• Identify data collection needs, processes, and system upgrades.

• Address areas where existing controls or information are insufficient.

4. Data Management and Digitalization

• Implement or enhance ESG data management systems (preferably integrated with financial data).

• Prepare for electronic data tagging and submission using the European Single Electronic Format (ESEF).

5. Engage With Auditors and Assurers Early

• Plan for limited assurance on sustainability information.

• Conduct “dry runs” before mandatory assurance applies.

6. Strengthen Value Chain Reporting

• Assess the maturity of value chain data collection.

• Work with suppliers and partners to ensure upstream and downstream ESG information is reliable and accessible.

7. Board and Executive Involvement

• The board must oversee and approve sustainability disclosures.

• Embed ESG into corporate strategy and risk management.

8. Training and Change Management

• Raise awareness of CSRD and ESRS within the organization.

• Provide targeted training to staff handling ESG data and reporting.

Common Challenges and How to Overcome Them

Data Collection and Reliability

• Challenge: Many companies lack robust systems for gathering ESG data—especially from value chain partners.

• Solution: Invest in high-quality ESG software and collaborate with suppliers to align reporting expectations.

Interpreting Materiality

• Challenge: Double materiality requires nuanced judgment which can be subjective.

• Solution: Use established guidelines, consult with auditors, and benchmark against peers.

Limited Internal Expertise

• Challenge: Sustainability reporting expertise is still developing in many organizations.

• Solution: Upskill staff, hire ESG professionals, or seek specialist consultancy help.

Ensuring Consistency and Comparability

• Challenge: Uniformity in data definitions and methodologies is crucial for comparability.

• Solution: Follow ESRS guidance closely, document methodologies clearly, and participate in industry initiatives.

What Happens if You Don’t Comply?

• Regulatory Sanctions: Member States will set penalties for non-compliance (fines, audit issues, reputational risks).

• Investor Exclusion: Lack of transparency can lead to exclusion from investment portfolios, financing, and ESG indices.

• Supply Chain Pressures: Non-compliant companies risk losing access to corporate value chains, especially those tied to EU partners.

Preparing for the Future: Timeline and Next Steps

Key Milestone	Deadline
Large PIEs (NFRD entities) first apply CSRD	FY 2024 (reports in 2025)
Large companies (non-PIE)	FY 2025 (reports in 2026)
Listed SMEs (with possible opt-out)	FY 2026 (reports in 2027)
Non-EU companies (with EU turnover)	FY 2028 (reports in 2029)

• Stay Informed: The ESRS will continue to evolve—future standards will address sector- and SME-specific requirements.

• Iterate and Improve: View first-year reporting as a baseline, with ongoing enhancements based on feedback and evolving best practices.

• Collaborate: Engage with industry associations, peer networks, and ESG initiatives to remain aligned with leading practices.

Frequently Asked Questions (FAQ)

What if my company is headquartered outside the EU?

If your business generates net turnover of more than €150M in the EU and has at least one large or listed EU subsidiary or branch, you must comply with CSRD for your EU operations starting in 2028.

How is CSRD different from other ESG standards (e.g., GRI, TCFD, SASB)?

CSRD/ESRS are legally binding in the EU and cover a broader set of topics, with a strong focus on double materiality and value chain. However, ESRS align closely with global frameworks—leveraging elements from GRI, TCFD, and others to help promote interoperability.

Will sustainability information receive the same scrutiny as financial data?

Yes. Assurance requirements under CSRD mean sustainability disclosures are now subject to a similar degree of internal control and external audit as financial statements, marking a fundamental shift toward reliable ESG data.

The introduction of the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards marks a new chapter for business accountability and transparency. Proactive organizations will seize this opportunity to enhance trust, unlock value, and future-proof their operations. With robust preparation—rooted in cross-functional engagement, solid data systems, and ongoing learning—companies can not only comply but thrive in this new era of sustainability reporting.