What Is the CSRD? Corporate Sustainability Reporting Directive explained

CSRD definition: origins and background of the directive

With the introduction of the NFRD (Non-Financial Reporting Directive) in 2014, the European Union took an important step toward greater transparency on environmental, social, and governance (ESG) aspects within companies. The goal was to give investors and other stakeholders better insight into the non-financial risks and impacts of corporate activities.

To support the goals of the European Green Deal from 2019, in particular reducing net greenhouse gas emissions in the EU by at least 55% by 2030 compared to 1990 and reaching net zero by 2050, the regulatory framework for sustainability reporting was significantly expanded. A central part of this development is the Corporate Sustainability Reporting Directive (CSRD).

The CSRD is designed to close existing gaps in the NFRD and enable clearly standardized, comparable, and verifiable sustainability reporting.

What is the CSRD?

The CSRD sets out which sustainability information companies must report and how this information should be structured and disclosed. Reporting is based on the European Sustainability Reporting Standards, which were adopted in July 2023. These standards define uniform requirements for disclosing environmental, social, and governance information. The CSRD changes both the scope of the reporting obligation and the depth and standardization of reporting compared to the previous NFRD.

The introduction of the CSRD represents a significant step toward corporate accountability and transparency in carbon accounting, as it requires key European economic actors and CO₂ emitters to provide detailed and traceable emissions information at the company level. Beyond this, the CSRD requires transparency across nine other environmental, social, and governance areas.

Why was the CSRD introduced?

Providing transparent sustainability information is of great importance to affected companies. The EU Taxonomy, which is closely linked to the CSRD, creates a direct connection to financial reporting by assessing revenue, CapEx, and OpEx based on sustainability criteria. This gives investors and other stakeholders a better basis for assessing a company’s sustainability performance and making informed investment decisions.

Which sustainability aspects actually need to be reported is determined as part of the double materiality assessment under the CSRD. It considers both financial materiality and a company’s impacts on the environment and society. This enables companies to identify their material sustainability topics and focus their reporting efforts on the information that is relevant.

Which companies are affected by the CSRD?

The EU Sustainability Omnibus I package adjusted the scope of the CSRD.

Directly affected

Under the current legal framework, companies are required to report if they meet both criteria: more than 1,000 employees and more than €450 million in revenue. The reporting obligation is being phased in, and individual deadlines have additionally been pushed back by two years under the Stop-the-Clock Directive.

• Wave 1, FY 2024 (reports from 2025): capital-market-oriented EU companies with more than 1,000 employees and more than €450 million in revenue, previously subject to reporting under the NFRD. Smaller capital-market-oriented companies drop out of this wave.
• Wave 2, FY 2027 (reports from 2028): large, non-capital-market-oriented EU companies with more than 1,000 employees and more than €450 million in revenue.
• Wave 4, FY 2028 (reports from 2029): non-EU companies with more than €450 million in EU revenue and an EU subsidiary or EU branch with more than €200 million in revenue.
• No longer subject to the CSRD: small capital-market-oriented EU companies (formerly Wave 3) and large companies below the new thresholds are fully exempt from CSRD reporting obligations under Omnibus I. Voluntary reporting under the VS(ME) standard can still be worthwhile, particularly for companies that act as suppliers to CSRD-obligated business partners.

Indirectly affected

The CSRD sets off a "snowball effect" that must be taken into account when determining the scope of affected companies. For example, original equipment manufacturers (OEMs) may be directly required to disclose information on their supply chain emissions. This can mean that companies not yet subject to reporting obligations themselves must still provide sustainability indicators such as the Product Carbon Footprint (PCF) or energy mix data to their business customers. This interconnected reporting structure means that disclosure requirements cascade along the supply chain, ultimately contributing to a more comprehensive understanding of CO₂ emissions and sustainability performance.

CSRD reporting: process and requirements

Companies subject to the CSRD must publish their sustainability information as part of the management report within their annual report. Reporting takes place:

• according to the European Sustainability Reporting Standards (ESRS)
• in a standardized digital format
• with mandatory external assurance (audit), currently with limited assurance

A central principle is double materiality. Companies only report on topics identified as material through this assessment. If climate change is assessed as a material topic (which is common), Scope 3 emissions also play an important role in reporting. These cover indirect emissions along the entire value chain, for example from purchased materials, business travel, logistics, or the use and disposal of products.

Consequences of non-compliance with the CSRD

1. Sanctions and PenaltiesSetting sanctions is the responsibility of individual EU member states. Germany is currently still drafting its CSRD implementation law (German-language source), expected sometime in 2026. Under current German law, companies can be penalized for false or incomplete reports with fines or up to three years' imprisonment under Section 331 (1) No. 1 and 2 of the German Commercial Code (HGB). Fines may also be imposed under Section 334 (1) No. 3 and 4 HGB.
2. Reputational DamageViolating the CSRD can lead to loss of trust and significant reputational damage, with long-term business consequences.
3. Competitive DisadvantagesCompanies that fail to meet sustainability standards risk losing customers and investors. This can lead to revenue losses and a weaker competitive position. In addition, non-compliance with the CSRD can result in exclusion from public tenders under Sections 289 et seq. HGB.

How to prepare for CSRD requirements

Many mid-sized industrial companies face major challenges when implementing CSRD requirements. Even if a company is not directly subject to reporting obligations, requirements can still arise from supply chains, ESG ratings, banks, or investors. It is therefore worthwhile to start collecting and structuring sustainability data early. Given the complexity of the requirements, using suitable software can provide valuable support.