What Is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is European Union legislation that significantly expands mandatory sustainability reporting requirements for companies operating in the EU. Adopted in 2022 and phasing in from 2024, it replaces the earlier Non-Financial Reporting Directive (NFRD) with far more comprehensive, standardized, and audited disclosure obligations.

CSRD represents a fundamental shift in corporate transparency. Where previous requirements allowed flexibility and often produced inconsistent, incomparable reports, CSRD mandates reporting according to detailed European Sustainability Reporting Standards (ESRS), requires third-party assurance, and embeds sustainability information in management reports alongside financial statements.

The scope is expansive. CSRD ultimately applies to approximately 50,000 companies—including large EU companies, listed SMEs, and non-EU companies with significant EU operations. For US and other non-EU multinationals, CSRD reaches extraterritorially: companies generating €150 million or more in EU revenue with EU subsidiaries or branches will face reporting obligations.

The directive operationalizes the EU's sustainable finance agenda, providing investors and stakeholders the standardized sustainability data needed to direct capital toward sustainable activities and hold companies accountable for impacts.

Why CSRD Matters for Corporate Decision-Makers

CSRD is not optional, voluntary, or avoidable for companies within its scope. It's binding EU law with compliance deadlines, audit requirements, and potential enforcement consequences. Understanding and preparing for CSRD is a governance imperative.

The scope is broader than many expect. CSRD applies not only to EU-headquartered companies but to non-EU companies meeting revenue and presence thresholds. US multinationals with significant European operations will likely fall within scope. Assuming CSRD doesn't apply without careful analysis is risky.

Double materiality changes what gets reported. CSRD requires "double materiality" assessment—reporting on both how sustainability issues affect the company (financial materiality) and how the company affects people and environment (impact materiality). This expands reporting beyond investor-focused risk disclosure to encompass stakeholder impacts.

Standardization enables comparison—and scrutiny. ESRS prescribe specific disclosures across environmental, social, and governance topics. Standardization means stakeholders can compare companies directly. It also means gaps and weaknesses become visible. Companies can no longer craft narratives that obscure performance.

Assurance raises the bar. CSRD requires third-party assurance of sustainability information—initially limited assurance, moving toward reasonable assurance. Sustainability reports will face audit-like scrutiny. Unsubstantiated claims and inconsistent data will be flagged. The era of unverified sustainability storytelling is ending.

Integration with financial reporting signals importance. Sustainability information must appear in management reports, not standalone documents. This integration signals that sustainability performance is material to business performance and subject to governance processes comparable to financial reporting.

Value chain reporting extends obligations. CSRD requires reporting on value chain impacts where material—upstream supply chains and downstream product use. Companies must understand and disclose impacts beyond their operational boundaries, requiring supplier engagement and data collection capabilities.

How CSRD Compliance Works

1. Determine Applicability and Timeline Assess whether and when CSRD applies:

• Large EU companies: Already reporting under NFRD report for FY2024 (published 2025)

• Other large EU companies: Report for FY2025 (published 2026)

• Listed SMEs: Report for FY2026 (published 2027), with opt-out until 2028

• Non-EU companies: Report for FY2028 (published 2029) if meeting €150M EU revenue threshold

Thresholds for "large company" status: exceed two of three criteria—€50M revenue, €25M assets, 250 employees.

2. Conduct Double Materiality Assessment Identify material sustainability topics:

• Impact materiality: Assess actual and potential impacts on people and environment (positive and negative, short and long-term)

• Financial materiality: Assess sustainability-related risks and opportunities affecting enterprise value

• Stakeholder engagement: Involve affected stakeholders in materiality determination

• Documentation: Create auditable record of assessment process and conclusions

Material topics determine which ESRS disclosures apply.

3. Understand Applicable ESRS Requirements Map reporting obligations to material topics:

• Cross-cutting standards (ESRS 1 & 2): General requirements and disclosures applying to all companies

• Environmental standards (ESRS E1-E5): Climate change, pollution, water, biodiversity, circular economy

• Social standards (ESRS S1-S4): Own workforce, workers in value chain, affected communities, consumers

• Governance standards (ESRS G1): Business conduct

Each standard specifies disclosure requirements, metrics, and datapoints.

4. Establish Data Collection Systems Build infrastructure for required information:

• Internal data: Operational metrics, HR data, environmental monitoring

• Value chain data: Supplier information, product use data, end-of-life impacts

• Governance documentation: Policies, targets, incentive structures, due diligence processes

• Controls: Quality assurance, audit trails, documentation

Data systems must support annual reporting and third-party assurance.

5. Prepare Report Content Develop disclosures meeting ESRS requirements:

• Strategy and business model: How sustainability integrates with strategy

• Governance: Roles, responsibilities, oversight mechanisms

• Material impacts, risks, opportunities: Assessment results and management approach

• Metrics and targets: Quantitative performance indicators and goals

• Policies and actions: Management approaches and implementation status

Report content must be specific, complete, and consistent with ESRS requirements.

6. Obtain Assurance Engage third-party assurance provider:

• Limited assurance initially: Lower level of verification

• Reasonable assurance eventually: Approaching financial audit rigor

• Assurance provider: Statutory auditor or accredited independent provider

• Remediation: Address issues identified during assurance process

7. Integrate and Publish Finalize and release report:

• Management report integration: Embed sustainability information in annual report

• Digital tagging: Apply XBRL taxonomy for machine readability

• Board approval: Governance sign-off on sustainability disclosures

• Publication: Release within financial reporting timeline

CSRD vs. Related Frameworks

Common Misconceptions About CSRD

"CSRD only applies to EU companies." Non-EU companies with €150 million+ in EU revenue and EU subsidiaries or branches fall within scope. US multinationals with significant European operations should assess applicability carefully.

"We already do sustainability reporting, so we're prepared." Voluntary reporting rarely meets CSRD standards. ESRS are far more detailed and prescriptive than most current practice. Gap assessments consistently reveal significant additional work required.

"CSRD is just another reporting exercise." CSRD requires substantive governance, strategy, and data infrastructure changes—not just report production. Double materiality assessment, value chain engagement, and assurance readiness demand organizational capability beyond communications teams.

"We can wait until our compliance deadline approaches." CSRD preparation requires multi-year lead time for data systems, supplier engagement, and process development. Companies starting late will struggle to achieve compliance and quality.

"Assurance is just a formality." Auditors will test data, challenge claims, and flag deficiencies. Limited assurance still involves verification procedures. Companies with weak data or unsubstantiated assertions will face assurance findings.

When CSRD May Not Apply

If your company has no EU presence—no subsidiaries, branches, or securities listed on EU markets—and generates less than €150 million in EU revenue, CSRD likely doesn't apply directly. However, you may face CSRD-driven data requests from EU customers or investors.

For companies below CSRD thresholds, voluntary alignment with ESRS may still be valuable for stakeholder expectations, competitive positioning, or preparation for future requirements.

If your company falls within scope but hasn't started preparation, immediate action is essential regardless of compliance timeline. The infrastructure required takes years to build.

How CSRD Connects to Broader Systems

CSRD anchors the EU's sustainable finance architecture. It provides the corporate disclosure that feeds EU Taxonomy assessments, Sustainable Finance Disclosure Regulation (SFDR) reporting by financial institutions, and investor decision-making across European markets.

Corporate sustainability strategy must now incorporate CSRD compliance. Strategy, governance, targets, and performance management require documentation meeting regulatory standards. CSRD shapes how sustainability strategy is developed and governed.

Supply chain management transforms under CSRD's value chain reporting requirements. Companies must engage suppliers on sustainability data, extending CSRD's influence far beyond directly regulated entities.

Investor relations increasingly centers on CSRD-formatted sustainability information. European investors expect standardized disclosures; US investors with European exposure follow suit. IR teams need sustainability data fluency.

Risk management incorporates CSRD compliance risk alongside financial and operational risks. Non-compliance, assurance failures, and disclosure gaps create regulatory, reputational, and market access risks.

Related Definitions

→ What Is Double Materiality?

→ What Is TCFD?

→ What Is ESG Strategy?

→ What Is Scope 3 Emissions?

→ What Is SEC Climate Disclosure?