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How the EU’s new sustainability directive is becoming a game changer

The Corporate Sustainability Reporting Directive contributes to extending the European Green Deal across all sectors and existing regulation.

In brief

  • The EU Corporate Sustainability Reporting Directive (CSRD) amends the current Non-Financial Reporting Directive (NFRD).
  • The scope of the directive is considerably extended to apply to more European and non-European companies listed and operating in the EU regulated markets.
  • Companies start reporting, under the CSRD, from 2024 in line with mandatory EU sustainability reporting standards and alongside an external assurance of sustainability reporting.

The EU is set to adopt the Corporate Sustainability Reporting Directive (CSRD) in October 2022, amending the previously applicable Non-Financial Reporting Directive (NFRD). The CSRD supports 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 most contribute to meeting the EU’s environmental objectives. In addition, the package features six amending Delegated Acts on fiduciary duties, investment and insurance advice, which aim to ensure that financial firms include sustainability in their procedures and investment advice to clients.

Scope of the proposed directive

The scope of the directive is considerably extended to apply to more entities. 

EU companies

First, the directive will apply to all companies listed on the EU regulated markets, except for listed micro companies.1 Listed small- and medium-sized enterprises (SMEs) have until 1 January 2026 to comply with the reporting requirements, even though there’s an “opt-out” clause until 2028.

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 exceeds at least two of the following criteria:

  • A net turnover of €40 million
  • A balance sheet total of €20 million
  • 250 employees on average over the financial year

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.

Third-country companies 

Non-European companies with substantial activity in the EU market (net turnover of more than €150 million in the EU at consolidated level) and which have at least one subsidiary (large or listed) or branch (net turnover of more than €40 million) in the EU are required to draft a sustainability report at the consolidated level of the ultimate third-country undertaking.

The EU subsidiary or EU branch is responsible for publishing the sustainability report of the third-country undertaking.

The sustainability reports of the third-country undertaking should be prepared according to separate EU reporting standards (i.e., standards different to the ones applying to EU companies). The undertaking can also report according to the standards applying to EU companies, or according to standards which are deemed equivalent according to a Commission’s decision.

In order to ensure the quality and reliability of the reporting, the sustainability reports of third-country undertakings should be published alongside an assurance opinion by a person or firm authorized to give an opinion on the assurance of sustainability reporting, either under national law of the third-country undertaking or of a Member State.


The 27 EU Member States are expected to transpose the new directive into national law 18 months after its entry into force. Companies that are already subject to the NFRD will need to comply with the amended rules for fiscal years beginning on or after 1 January 2024 (reporting in 2025 on 2024 data).

Other large companies not subject to the NFRD must start reporting from 1 January 2025 onward (reporting in 2026 on 2025 data). So that the reporting burden on affected SMEs is minimized, they will not need to start reporting until 1 January 2026 (reporting in 2027 on 2026 data). For third-country companies, the new requirements apply from 1 January 2028 (reporting in 2029 on 2028 data).


Chapter 1

An EU perspective on sustainability reporting standards

The new directive brings sustainability reporting on par with financial reporting.

The 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 (i.e., principle of double materiality). According to the directive, sustainability reporting should be “comparable, reliable and easy for users to find and make use of with digital technologies”.

Reported information should be consistent with EU regulations, including the EU taxonomy, an EU-wide classification system that establishes a list of environmentally sustainable economic activities.

The directive aims to reduce unnecessary costs associated with sustainability reporting. Its goal is to enable companies to meet the growing demand for sustainability reporting in a cost-efficient manner. 

The revised directive amends 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 sustainability reporting standards being developed by the European Financial Reporting Advisory Group (EFRAG). In March 2021, EFRAG published a detailed roadmap for developing the new sustainability standards, as well as proposals for mutually reinforcing cooperation between the global and EU standard-setting initiatives. In 2022, EFRAG set the new Sustainability reporting pillar with the creation of the EFRAG Sustainability Reporting Board (SRB) and the EFRAG Sustainability Reporting Technical Expert Group (SR TEG). A consultation on a first batch of draft standards was launched in April 2022.

The sustainability reporting standards aim to meet the requirements of an inclusive range of stakeholders. They adhere to the principle of “double materiality”, with both “impact materiality” and “financial materiality” perspectives being applied in their own right and without ignoring the interactions between them.

The sustainability reporting standards shall ensure the quality and relevance of reported information, by requiring that it is understandable, relevant, verifiable, comparable and is represented in a faithful manner. The standards shall also avoid disproportionate administrative burden on companies, including by taking account to the greatest extent possible the work of global standard-setting initiatives for sustainability reporting, developed by the International Sustainability Standards Board (ISSB).

This set will specify the information that companies should disclose with regard to all sustainability topics, as well as any additional disclosure obligations for financial market participants. Furthermore, the Commission aims to adopt a second set of reporting standards by 30 June 2024, with sector-specific standards, standards for listed SMEs, standards for non-EU companies and other complementary information that companies should report on.

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.


Chapter 2

What does the directive mean for companies?

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. 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 remaining time to get ready for it — companies should now start preparing for its implementation. It’s important to familiarize with the directive and to consider what its requirements mean for their business on a practical level.

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 EU companies will be required to report sustainability information in future, compared with 11,600 companies at present3. While the directive 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 directive 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.

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 CSRD 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 on environmental, social and human rights, and governance (ESG) factors.

As the standards are currently being developed, more details will be made available in the coming months.

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.


Chapter 3

Evolving roles of audit committees and assurance providers

Audit committees 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 functions
  • 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 assurance providers

Role of assurance providers

Under the CSRD, there is a requirement for the company’s statutory auditor, another auditor (according to Member State’s option) or an independent assurance services provider (IASP) (Member State’s option), to provide limited assurance around a company’s reported sustainability information. Member States should set out equivalent requirements for IASPs around quality, independence and oversight in line with the Audit Directive.

There is also the option of moving toward reasonable assurance — the standard of assurance provided for financial information — at a later stage.

Oversight and enforcement

EU Member States are 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.


The CSRD will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information. Major public and private investments are needed to make the EU financial system sustainable and ensure Europe is climate-neutral by 2050. Better data from companies about the sustainability risks they are exposed to, and their own impact on people and the environment, is essential for the successful implementation of the European Green Deal and the Sustainable Finance Action Plan.

Companies only have a limited period of time to prepare for the implementation of the directive. As a result, it is essential they start taking action now to understand the impact of the directive on their sustainability strategy, as well as its impact on their corporate reporting, internal controls and other key business processes. These far-reaching changes will strengthen the nature of corporate performance and financial reporting widely across all sectors. 


The EU is set to adopt the Corporate Sustainability Reporting Directive (CSRD) in October 2022. The CSRD aims to ensure that companies publicly disclose adequate information about the risks, opportunities and impacts of their activities on people and the environment. The scope of the directive is considerably extended to apply to more entities, in comparison with the proposed text of the European Commission published in 2021. It applies not only to large companies and all companies listed on EU regulated markets but also to non-EU companies with substantial activity in the EU. Management teams and audit committees are also subject to enhanced responsibilities.

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