CSRD: Understanding the new directive on extra-financial reporting.

CSRD: Understanding the new directive on extra-financial reporting.

Focus on the CSRD, the new European directive that will require more than 50,000 companies to provide more accurate extra-financial reporting and a commitment to finance and deploy an ambitious climate strategy.

Mylan Hoang

Mylan Hoang

Climate consultant


What is CSRD?

The CSRD or Corporate Sustainability Reporting Directive is a European directive on the publication of extra-financial data by companies. It complements the current NFRD, or Non Financial Reporting Directive, which until now has set a relatively vague framework for the publication of CSR data by companies.

The CSRD largely specifies the extra-financial reporting expected by companies while expanding the number of organizations concerned by this reporting. By leaving less room for interpretation on the expected data and their level of accuracy, the CSRD's objective is to make publicly disclosed information more exhaustive and reliable, particularly for investors:

  • By standardizing non-financial reporting through the implementation of Europe-wide reporting standards, defined by EFRAG. Until now, companies were free to choose which standard they wanted to follow. This will make it easier to compare the reporting of different companies thanks to a common language for all.
  • By making it mandatory for the reports to be audited by the statutory auditor - or by an independent third party, as each EU member state wishes.
  • By expanding the scope of companies covered, which will be five times greater than that of the NFRD. The reporting will thus concern more than 50,000 companies.

This new directive aims to redirect investment flows towards projects that are in line with the sustainable development objectives of the European Union. They are therefore in line with the SFDR - Sustainable Finance Disclosure Regulation and the European taxonomy.

This reporting will be mandatory for companies covered by the scope, and the penalties incurred will be set by each member country in the coming months.

Who is affected by the CSRD?

European companies

The European entities concerned by this new reporting obligation are those that meet at least two of the following three criteria:

  • Employ 250 or more employees.
  • Generate 40 million euros or more in sales.
  • Have a balance sheet of 20 million euros or more.

Also concerned are SMEs listed on European markets that meet at least two of the following three criteria:

  • Employ 50 or more employees,
  • Generate 8 million euros or more in sales.
  • Have a balance sheet of 4 million euros or more.

As part of their commitment to transparency, unlisted SMEs will also be able to publish their extra-financial data within the same framework.

Non-European companies

Non-European companies with a net turnover of more than 150 million euros in the EU will also have to publish data on the sustainability of their activities.

What information on climate change should be included in the reporting?

EFRAG, the European Financial Reporting Advisory Group, has recently published a first version of the reporting information expected under CSRD. The set of data is divided into 12 separate documents , each of which addresses a specific reporting topic around CSR, Corporate Social Responsibility:

Each document describes the information and content expected in the extra-financial report on a social and environmental topic. Below is a summary of the "Climate Change" document and the content that would be required by the CSRD on the specific topic of climate change (climate change mitigation and adaptation):

Carbon footprint and transition action plan.

In the climate change section of the CSRD report, the company shall submit:

  • Its impact on the climate, i.e. its carbon footprint. The standard to be followed will be the GHG protocol and GRI 305. An accounting of emissions over the entire value chain is required and must therefore cover scope 1, scope 2 and scope 3.
  • Its capacity to adapt to the current projected climate change (+1.5°C) but also to the climate change projected by less optimistic scenarios. It must specify the risks and opportunities (financial and material) of the company related to climate change.

Objectives, trajectories and commitments.

Each company will be required to identify a GHG emissions reduction pathway and explain how it will achieve its goals. Companies will be required to submit:

  • A goal compatible with a +1.5°C trajectory (accordingly to the Paris agreements) with an emissions reduction target. Companies will also have to disclose the actions implemented in the past, present and future, and their impact (past, present and future) on the company’s emissions and specify whether it is science-based or not.
  • A trajectory to 2030, or even 2050 if possible, with a revision of the objective and a redefinition of the reference year every five years from 2030.

Each company will also have to justify the consistency of its transition plan with its business and financial strategy.

The means allocated to the implementation of the transition plan.

The report should also include a complete summary of the transition plan and present the means and financial resources invested in this transition plan, notably by communicating the significant volumes of CapEx and OpEx mobilized.

Companies will also be required to report annually on their progress in implementing their transition plan.

Corporate policies.

In order to explain how the company is able to implement its climate transition plan, the company's policies related to the environment should be outlined along five lines:

  • Climate change mitigation,
  • Adaptation to climate change,
  • Energy efficiency,
  • Deployment of renewable energy,
  • Miscellaneous for the remaining topics.

The company's energy mix.

Companies will have to communicate their energy consumption in absolute terms, as well as specify their energy mix. A clear separation of energy consumption by energy source will need to be detailed for companies in high climate impact sectors, communicating:

-> On the one hand, on the consumption of non-renewable energy sources,

  • Coal,
  • Petroleum fuels,
  • Gas,
  • Other fuels,
  • Nuclear products,
  • Electricity, heating network, steam network, cooling network of non-renewable origin,

-> On the other hand, on the consumption of energy from renewable sources,

  • Biogas,
  • Electricity, heating network, steam network, cooling network of renewable origin,
  • Internal power generation.

Funding for GHG sequestration and climate change mitigation projects.

Companies will also have to communicate on the amount of GHGs removed from the atmosphere and sequestered in the long term. They should be distinguished according to the type of project:

  • GHG sequestration within the company's value chain,
  • GHG sequestration through projects financed outside the company's value chain.

The objective of this guideline is to measure the company's ability to contribute to the net zero goal.

The internal price of carbon.

If applicable, companies that have implemented an internal carbon pricing system should explain the system implemented and the scope of application: activities and entities covered, quantity of GHGs by categorization (scope 1, 2 or 3), calculation methodology.

The important notion of Dual Materiality.

A very important notion required in the CSRD is the approach of all the points mentioned above by the one of dual materiality. Each company will have to explain in its report how it impacts climate change but also how it impacts its activities and its transition plan (physical and financial impacts on the whole value chain of the company). Thus, it will have to present a rigorous analysis of the risks and opportunities related to climate change and justify its capacity to adapt to climate change. This section of the report will include an analysis of the positive and negative financial impacts of climate change:

  • Potential financial impacts related to physical hazards (e.g., risks of water stress, fire outbreaks),
  • Potential financial impacts related to the inherent risks of the company's transition (e.g., changes in costs, implementation of new legislation),
  • The ability to seize potential new opportunities related to climate change.

CSRD Calendar: Key dates.

The deployment of this new obligation will be progressive until 2026 depending on the size of the company.

In order to assist companies in this first reporting exercise, EFRAG plans to issue standards and drafting guidance in two parts.

-> June 30, 2023: publication of the first draft of reporting standards,

-> June 30, 2024: addition of information on reporting standards,

  • Sectoral guidelines,
  • SME-specific guidelines, more commensurate with the size of these companies.

How to prepare your company for CSRD?

Ifyour company was already subject to the NFRD, thebig change ahead for you will be the requirement to carry over to a CSR impact reduction strategy.

If so, you will have to start collecting ESG data in early 2024 in order to delay the deadline until January 1, 2025. To get a head start, you can, among other things:

  • Ask yourself about the place of your company and the role it can play in the energy and ecological transition,
  • Identify risks and impacts on ESG criteria,
  • Collect initial ESG data(carbon footprint is an example),
  • Prepare a CSR strategy to reduce your impact.


Corporate Sustainability Reporting Directive proposal


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