What Is CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation aimed at enhancing transparency in corporate sustainability reporting. It succeeds the Non-Financial Reporting Directive (NFRD), which had been in effect since 2014. Initially proposed by the European Commission in April 2021, CSRD was formally adopted by the European Parliament and the Council of the European Union in November 2022.

Building on the legacy of NFRD, CSRD requires companies to disclose their environmental, social, and governance (ESG) performance in a standardised and comparable manner. This aligns with the EU’s broader Green Deal strategy, pushing businesses across Europe to embrace more sustainable practices and report these efforts consistently. By 2025, the directive will play a key role in shaping how both EU-based and non-EU companies approach ESG disclosure.

Who Does CSRD Apply To, and How To Tell If You Need To Comply?

Under CSRD, companies need to check if they meet at least two of the following three criteria:

1. More than 250 employees
2. Annual turnover exceeding €50 million
3. Total assets over €25 million

If your organisation hits these thresholds, you’re legally required to comply with the Corporate Sustainability Reporting Directive. The scope is significantly broader than older regulations, capturing a wider range of businesses that must now align with ESG reporting standards.

Does CSRD Apply to SMEs?

Listed SMEs (Small and Medium-sized Enterprises) on EU-regulated markets are subject to CSRD but benefit from simplified reporting standards. Non-listed SMEs, on the other hand, are not directly required to comply unless:

• They operate within the supply chains of larger companies falling under CSRD, or
• They voluntarily adopt EU sustainability reporting to satisfy investor or partner demands.

SMEs enjoy an opt-out until 2028 before full compliance becomes mandatory for listed entities. However, they may still face indirect pressure from partners needing consistent ESG data for their own reporting obligations.

Does CSRD Apply to Non-EU Companies?

Yes. Non-EU companies generating more than €150 million in turnover within the EU must comply with CSRD if they have:

• A large subsidiary in the EU meeting the 250 employees, €50M turnover, or €25M asset criteria, or
• A branch generating over €40 million within the EU.

By extending these requirements to non-EU businesses, the directive ensures fair competition and consistent reporting standards for all companies benefiting from the European market.

When Does CSRD Come Into Effect?

The CSRD compliance timeline is staggered to allow companies time to adapt. Here’s the phased schedule:

Company TypeFirst Reporting Year (Financial Year Covered)Large companies already reporting under NFRD2025 (FY 2024)Large companies newly covered by CSRD2026 (FY 2025)Listed SMEs, small banks, and insurers2027 (FY 2026)(with opt-out until 2028)Non-EU parent companies meeting EU turnover threshold2029 (FY 2028)

If you’re an SME, early preparation can help avoid last-minute compliance hurdles. As ESG frameworks evolve, having robust systems in place well ahead of deadlines will streamline the reporting process.

Does CSRD Apply to the UK?

Even though the UK is no longer part of the EU, CSRD still has implications for UK-based companies:

1. EU Operations
   • If a UK business has EU subsidiaries or branches that meet CSRD thresholds, those entities must comply.
2. Supply Chain Impact
   • UK firms supplying goods or services to EU companies may be asked for sustainability data, as their partners will need it to fulfil CSRD requirements.

Additionally, the UK is developing its own Sustainability Disclosure Requirements (UK SDR), which may in future align with elements of CSRD. Staying informed can help UK businesses prepare for both EU and UK sustainability regulations.

Is CSRD Mandatory?

Yes. For companies within scope, CSRD compliance is a legal obligation. Non-compliance could result in:

• Financial Penalties: Fines varying by EU Member State.
• Reputational Risks: Potential loss of investor and consumer trust.
• Exclusion From Opportunities: Limited access to sustainable investment funds or public procurement contracts.

Crucially, CSRD includes third-party assurance (auditing) to combat greenwashing. Auditors will scrutinise reported data for consistency and accuracy, ensuring reliable ESG metrics and preventing misleading claims about sustainability.

Why Is CSRD Important?

1. Enhanced Accountability
   By standardising ESG reporting, CSRD brings greater transparency to corporate sustainability practices. Investors, policymakers, and customers can better compare sustainability performance across industries.
2. Support for the EU Green Deal
   CSRD contributes to the European Union’s Green Deal mission and climate neutrality goals by 2050. It encourages companies to adopt low-carbon and socially responsible models, creating a level playing field for sustainable growth.
3. Better Decision-Making
   Reliable ESG data helps businesses identify long-term risks like climate impacts, supply chain vulnerabilities, and evolving regulatory standards. This foresight can lead to stronger governance and strategic choices.
4. Investor Confidence
   As sustainable finance grows, aligning with CSRD reporting can open doors to new investment and partnerships. Being transparent about environmental and social impact builds trust in a rapidly evolving market.

What Is “Double Materiality” in CSRD?

Under CSRD, companies must apply double materiality, meaning they report on:

1. Financial Materiality
   • How do sustainability issues (e.g., climate risks) affect the company’s financial performance and stability?
2. Impact Materiality
   • How does the company’s business model affect the environment and society at large (e.g., carbon emissions, workforce welfare, or biodiversity loss)?

This dual perspective ensures ESG reports capture both the internal financial implications of sustainability factors and the company’s external impact on people and planet.

Does CSRD Require Scope 3 Emissions Reporting?

Yes, but only if material to the company’s overall emissions profile. Scope 3 includes indirect emissions across a company’s value chain, such as:

• Supplier Operations
• Product Use and Disposal
• Business Travel
• Waste Management

Given that Scope 3 often forms the largest portion of a company’s carbon footprint, companies must carefully assess these emissions. Collecting data from suppliers and partners can be challenging, but accurate Scope 3 reporting is vital for full ESG transparency and CSRD compliance.

What Are the Penalties for Non-Compliance With CSRD?

Each EU member state enforces CSRD independently, but penalties typically include:

• Financial Fines: Could vary in scale depending on the nature and duration of non-compliance.
• Legal Actions: Regulatory scrutiny may lead to additional enforcement measures.
• Reputational Damage: Failing to meet EU sustainability standards can undermine stakeholder trust and investor confidence.
• Risk of Losing Contracts: Some public and private procurement processes may require documented CSRD compliance.

To minimise these risks, companies should prioritise timely preparation and thorough ESG data validation.

How Should Companies Prepare for CSRD Compliance?

1. Conduct a CSRD Readiness Assessment
   • Identify gaps in current sustainability disclosures.
   • Review existing ESG data collection and governance frameworks.
2. Implement Data Collection Systems
   • Establish robust processes for measuring key sustainability KPIs.
   • Explore carbon accounting and ESG tracking software for real-time insights.
3. Develop a Reporting Strategy
   • Align reporting with ESRS (European Sustainability Reporting Standards).
   • Create a clear compliance timeline, especially if you’re newly covered by CSRD.
4. Ensure Governance and Assurance
   • Assign internal task forces or hire ESG consultants with knowledge of CSRD.
   • Plan ahead for third-party assurance (auditing) to validate your reported data.
5. Engage Stakeholders
   • Communicate CSRD obligations to suppliers, investors, and employees.
   • Align sustainability objectives with broader business strategy, ensuring buy-in at all levels.

Leafr Can Help You Prepare for CSRD

Here at Leafr, we specialise in cutting through complexity to help businesses meet sustainability goals seamlessly. From data collection to ESG strategy, our network of vetted consultants can guide you through every step of CSRD compliance. We provide:

• Bespoke Talent: Access sustainability experts with track records in your sector.
• Efficient Tools: Streamline carbon accounting and ESG reporting tasks.
• Hands-On Support: Tailor a roadmap for meeting EU sustainability standards and double materiality requirements.

Ready to take the next step? Get in touch today to stay ahead of CSRD obligations and transform compliance into a competitive advantage.

Key Takeaways

• CSRD extends ESG reporting requirements to a broader range of companies, including some non-EU firms.
• It replaces the NFRD, demanding greater transparency in sustainability data and the application of double materiality.
• Compliance will phase in from 2025 through 2029, with mandatory third-party assurance to ensure data quality.
• SMEs face simplified but still rigorous requirements, with a limited opt-out until 2028 for listed companies.
• Scope 3 emissions reporting is necessary when material, often presenting a significant challenge due to complex supply chains.
• Non-compliance can result in financial penalties, reputational harm, and restricted business opportunities—so early preparation is crucial.

By embracing CSRD now, organisations can bolster investor confidence, mitigate regulatory risks, and foster a more sustainable future.

Note: This article reflects the Corporate Sustainability Reporting Directive requirements as of Jan 2025. Companies should confirm the latest updates from the European Commission and individual EU Member States to ensure complete and accurate compliance.

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