10 minute read 28 Jul 2021
Shadow of airplane over forest

How the EU’s new sustainability directive will be a game changer

Peter Wollmert

EY EMEIA Assurance Leader

Senior Assurance leader. Promoting quality and effectiveness in corporate reporting and the audit. Advocate for the future of the accounting profession. Passionate runner and scuba diver.

Andrew Hobbs

EY EMEIA Public Policy Leader

Public policy leader focusing on talent, technology, corporate governance and corporate reporting. Father of four, cyclist and dabbling homebrewer.

10 minute read 28 Jul 2021

The Corporate Sustainability Reporting Directive marks a step change in reporting and in the assurance of nonfinancial information.

In brief

  • The EU Corporate Sustainability Reporting Directive (CSRD) will amend the existing Non-Financial Reporting Directive (NFRD).
  • Expanding the scope of sustainability matters, the CSRD requires all large and listed EU companies to introduce mandatory sustainability reporting standards.
  • Companies will need to report in line with mandatory EU sustainability reporting standards and provide external assurance of sustainability information.

On 21 April 2021, the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD), which will amend the existing Non-Financial Reporting Directive (NFRD).

The revised directive will support the European Green Deal, a set of policy measures intended to combat the climate crisis by transforming the EU into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases by 2050. Furthermore, the directive is part of the bigger Sustainable Finance package, which enables the Green Deal by helping to channel private investment behind the transition to a climate-neutral economy.

The Sustainable Finance package includes the EU taxonomy (with the Climate Delegated Act), which provides clarification around the economic activities that contribute most to meeting the EU’s environmental objectives. In addition, the package features six amending Delegated Acts, which will ensure that financial firms include sustainability in their procedures and investment advice to clients.

Scope of the proposed directive

The scope of the proposed directive will be extended to apply to more entities:

  • First, it will apply to all companies listed on the EU regulated markets, except for micro companies1. Although listed SMEs2 will fall within the scope, they will have until 1 January 2026 to comply with the reporting requirements.
  • Second, it will apply to a “large undertaking” that is either an EU company or an EU subsidiary of a non-EU company. A “large undertaking” is a defined term in the Accounting Directive2 and means an entity that meets two of the following three criteria: a net turnover of more than €40 million; balance sheet assets greater than €20 million; more than 250 employees.
  • As a third category, the CSRD will apply to insurance undertakings and credit institutions regardless of their legal form.

There are also exemptions to the application of the CSRD. Most notably, a subsidiary will be exempt if the parent company includes the subsidiary in its report that complies with the CSRD. As mentioned above, listed micro companies and non-listed SMEs fall outside of the scope but can apply the provisions on a voluntary basis.

To respect the principle of proportionality, the European Commission will adopt mandatory sustainability reporting standards for large companies and separate, proportionate standards for SMEs. While SMEs listed on regulated markets will be required to use the proportionate standards from 1 January 2026, non-listed SMEs may still choose to use them on a voluntary basis.

The 27 EU member states will be expected to transpose the new directive into national law by 31 December 2022.


The 27 EU Member States will be expected to transpose the new directive into national law by 31 December 2022. As a result, companies that fall within the scope of the directive will need to comply with the amended rules for fiscal years beginning on or after 1 January 2023.

For SMEs, they will not need to start reporting in line with the directive until three years after its application, which is from 1 January 2026.

Aerial view of water purification plant
(Chapter breaker)

Chapter 1

An EU perspective on sustainability reporting standards

The proposed new directive aims to bring sustainability reporting on par with financial reporting.

The proposed CSRD aims to ensure that companies publicly disclose adequate information about the sustainability risks and opportunities they face, as well as the impacts they have on people and the environment (“double materiality”). The objectives of the proposal include:

  • Requiring reported information to be consistent with the EU regulations, including the EU taxonomy, comparable, reliable and easy for users to find and make use of with digital technologies
  • Aiming to reduce unnecessary costs and enable companies to meet the growing demand for sustainability reporting in a cost-efficient manner

The revised directive will amend four existing pieces of legislation:

  • The Accounting Directive
  • The Transparency Directive
  • The Audit Directive
  • The Audit Regulation

Defining EU sustainability reporting standards

When companies report under the directive, they will need to use a set of new sustainability reporting standards being developed by the European Financial Reporting Advisory Group (EFRAG). The proposed sustainability reporting standards by the EFRAG aim to meet the requirements of an inclusive range of stakeholders. They will adhere to the concept of “double materiality,” with both  “impact materiality” and “financial materiality” perspectives being applied in their own right. The opinion of the European Securities and Markets Authority on the technical advice provided by EFRAG will be required before the standards are adopted. The responsibilities of EFRAG will include:

  • Developing proposals for mutually reinforcing cooperation between the global and EU standard-setting initiatives
  • Compiling a detailed road map for developing new sustainability standards
  • Publishing recommendations for possible changes to EFRAG’s governance and funding, including a recommendation for a sustainability reporting pillar to be created alongside its existing financial reporting pillar

The Commission aims to adopt a first set of sustainability reporting standards, developed by EFRAG, by 31 October 2022.

This will specify the information that companies should disclose with regard to reporting and sustainability, as well as any additional disclosure obligations for financial market participants. Furthermore, the Commission aims to adopt a second set of reporting standards by 31 October 2023, specifying complementary sustainability information that companies should report on, including sector-specific considerations.

The Commission will review the standards every three years after the directive has been applied to take into account new developments, such as international standards.

Agricultural engineer working in the greenhouse
(Chapter breaker)

Chapter 2

Proposed directive: implications and expectations

The CSRD is a step change in corporate reporting.

The CSRD marks a major step change in corporate reporting with far-reaching implications for businesses on an individual basis, as well as for the future of sustainability reporting, both in Europe and globally. Companies, regulators, standard-setters and auditors will all need to devote significant time and resources to prepare for implementation of the directive — within a short timescale of less than two years. There will be certain expectations from businesses such as:

  • Disclosing more sustainability-related information than before about their business models, strategy and supply chains
  • Providing information that investors can compare with peers with expected capital flow toward companies authentically demonstrating a strong sustainability performance
  • Transforming how businesses approach their own decision-making processes and how they share their stories with their stakeholders

Preparing for an efficient implementation

Given the significance of the directive and the time required, it is imperative that companies start preparing for its implementation from the beginning of 2022 when the draft standards will be made available for public consultation.

Companies will need to consider how they identify and gather sustainability-related information, manage environmental, social and governance (ESG) risks, draw up policies, and set targets and KPIs  with an opportunity to reassess their relevance.  Companies should also remain abreast of any outcomes, interpretation and communications from EFRAG during the standard-setting process to get early visibility of how the standards are likely to look.


It is expected that approximately 49,000 companies will be required to report sustainability information in future, compared with 11,600 companies at present4. While the EU’s proposal aims to “reduce the unnecessary costs of sustainability reporting for companies” it is estimated that preparers will incur significant one-off costs as well as recurring annual costs to comply with the directive.

The proposal highlights that companies already face a growing bill to provide sustainability information due to stakeholder demand. As a result, companies could effectively save by using the standards, depending on their size, on the basis that the standards remove the need for additional information requests.

Impact analysis


companies will be required to report sustainability information in future, compared with 11,600 companies at present.

Sustainability reporting for SMEs

Listed SMEs will only be expected to provide sustainability reporting that is proportionate to their size and resources, and since this is a big step for SMEs, seeking professional expertise from external partners can support with the transition.

What companies will need to do in practice

Companies that fall within the scope of the proposed Corporate Sustainability Reporting Directive will need to make some significant changes to how they prepare and disclose sustainability information.

Management will need to:

Provide additional disclosures

All sustainability information disclosed should apply a forward-looking and retrospective view and should be qualitative and quantitative. It should also consider short-, medium- and long-term horizons and consider the company’s whole value chain.

Report in accordance with new sustainability reporting standards

Companies will use the new sustainability reporting standards to disclose information as part of their management report, thereby giving users of the report an integrated view of their impact and performance.

Use digital tagging

To make their sustainability information easier for users to search and machines to read, companies will be required to prepare both their financial statements and their management report in a single XHTML format and mark up sustainability information, tagged in accordance with a digital taxonomy.

Businesswomen thinking about the future
(Chapter breaker)

Chapter 3

Evolving roles of audit committees and auditors

Audit committees and auditors will need to oversee new reporting processes and monitor effectiveness of systems and controls setup.

Audit committees will have enhanced responsibilities under the new directive. Along with monitoring the company’s sustainability reporting process and submitting recommendations to ensure the integrity of the sustainability information provided by the company, they will need to:

  • Monitor the effectiveness of the company’s internal quality control and risk management systems and its internal audit function
  • Monitor the assurance of annual and consolidated sustainability reporting
  • Inform the company’s administrative or supervisory body of the outcome of the assurance of sustainability reporting
  • Review and monitor the independence of the statutory auditors or audit firms

Role of auditors

Under the proposed directive, there will be a requirement for the company’s statutory auditor, or an independent assurance services provider, to provide limited assurance around a company’s reported sustainability information.

All providers of assurance around sustainability information will need to be subject to the same high level of standards, qualifications, objectivity, independence, ethics, quality assurance and oversight that statutory auditors of financial statements are subject to currently.

Oversight and enforcement

EU Member States will be required to extend their current frameworks for providing public oversight of statutory auditors and audit firms to cover assurance of sustainability reporting.

The individuals within the company, who are responsible for the annual report will be required to confirm, to the best of their knowledge, that the management report is prepared in accordance with the sustainability reporting standards.


In future, the EU CSRD will contribute to a fully sustainable economic and financial system in accordance with the European Green Deal and the UN Sustainable Development Goals. With ESG emerging as a critical concept for stakeholders and organizations, all large and listed companies in the EU will need to make significant changes to how they disclose sustainability information, leading to far-reaching changes that will strengthen the nature of corporate performance and financial reporting. The first set of sustainability reporting standards is expected to be developed as early as October 2022.


The EU’s proposed Corporate Sustainability Reporting Directive aims to ensure that companies publicly disclose adequate information about the risks and sustainability issues they face, as well as the impacts that they are having on people and the environment. All large companies, and all companies listed on EU regulated markets except listed micro companies, will need to comply with the directive, which takes effect from 1 January 2023. Listed small and medium-sized enterprises (SMEs) have a grace period of a further three years in which to comply. The directive gives enhanced responsibilities to management teams, audit committees and statutory auditors.

About this article

Peter Wollmert

EY EMEIA Assurance Leader

Senior Assurance leader. Promoting quality and effectiveness in corporate reporting and the audit. Advocate for the future of the accounting profession. Passionate runner and scuba diver.

Andrew Hobbs

EY EMEIA Public Policy Leader

Public policy leader focusing on talent, technology, corporate governance and corporate reporting. Father of four, cyclist and dabbling homebrewer.