On November 23, 2022, EFRAG delivered the first set of draft ESRS to the European Commission (EC). The set is expected to be adopted in June, 2023 by EC.

Since the Corporate Sustainability Reporting Directive (CSRD) will be applied to European companies and some non-European companies in the future, it is imperative to grasp this outline and start preparing for the report’s publication as soon as possible. 

This article in a series provides an overview of the CSRD/ESRS, key points of application, and its relevance to the GRI, with which EFRAG is currently collaborating.

The first article provides a brief of the first draft of ESRS, 4 things to complying with CSRD/ESRS, the scope and the timeline.

※The CSRD/ESRS has been formally adopted by the EC on the 31st of July 2023.
Read more here.

You can get a CSRD/ESRS Guidebook, which has been compiled from the series of articles. Sign up here!

What is NFRD and CSRD?

Currently, Europe has a sustainability disclosure standard, the NFRD (Non-Financial Reporting Directive). This applies to listed companies with 500 or more employees, banks and insurance companies.

Europe has a “Green Deal” with the ambition of “climate neutrality” to achieve virtually zero greenhouse gas emissions by 2050.

In this context, with taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), the NFRD has been revised, and a legally binding CSRD has been established to strengthen sustainability-related corporate disclosure.

CSRD: Corporate Sustainability Reporting Directive

An initiative to strengthen and standardize the integration disclosure of European companies’ impact (Environmental and Social) and financial information by European Commissions

Key changes of NFRD to CSRD

Scope of applicationLarge companies > 500 employees including banks and insurance companies1, For European companies
The CSRD will first apply to large European companies that meet at least 2 out of the following 3 criteria:
– More than 250 employees
– Turnover that exceeds EUR 50 million
– A balance sheet that exceeds a total of EUR 25 million
(Revised on 17/10/23′)

2, For Non- European companies✴︎1
Companies with subsidiaries or branches in Europe meet at least one or more of the following 2 criteria on the condition of substantial business activity:
– Net turnover (on a consolidated basis) that exceeds EUR 150 million within Europe
– The existence of a subsidiary (large or listed company) or a branch (with a net turnover that exceeds EUR 40 million)
TimelinesFY2018a, Companies to which the NFRD applies: FY2024/Report 2025
b, Companies not covered by the NFRD but matching two of the above scopes: FY2025/Report 2026
c, SMEs listed on a stock exchange: FY2026/Report 2027
d, Non-European companies: FY2028/Report 2029
Applicable companies11,600approx. 49,000 – 50,000
Independent 3rd party assuranceNot requiredMandatory
– Limited assurance will be obtained within 3 years of CSRD implementation
– Reasonable assurance within 6 years after implementation.
Report formatOnline or PDFDigital
XHTML format by “tag” following ESAP model
Where to reportIncluded in the Annual ReportInclusion in the Management Report

*1: Since the CSRD is a local European rule, it applies to a wholly-owned subsidiary of a third-country company within Europe if it meets the two criteria as the first European entity. 

If the third-country company is located outside of Europe as a parent company, and the parent company has implemented disclosure the consolidated report under the CSRD and has received a third-party guarantee, this wholly-owned third-country subsidiary is exempt from reporting disclosure.

However, this consolidated sustainability report must comply with sustainability reporting standards specified in Article 29b or be equivalent to those standards in a third country.

Overview of the ESRS

ESRS: European Sustainability Reporting Standards

The new reporting standard developed by EFRAG (EFRAG=European Financial Reporting Advisory Group) based on CSRD

As an overview of the ESRS, a sustainability reporting standard based on the CSRD, look at the structure of the disclosures. 

  1. Sector agnostic: Sector-common items 
  2. Sector-specific: Sector-specific items 
  3. Entity specific: Items specific to each company 
  4. Article 8 of Regulations 2020/852: EU Taxonomy 

This draft is a proposal for a first sector common standard, which the EC will adopt by June 2023, and the second one by June 2024.

Here is the latest draft agreed upon on November 23.

The ESRS is a set of 12 standards that comprehensively cover environmental, social, and governance matters, providing the basis for a legal framework for sustainability reporting under double materiality.

Organizations are required to disclose all items that they have identified as materiality.

CategoryThemeSubjectRequirement Level
General PrinciplesStrategy, Governance and materiality assessment disclosure requirementsMandatory
ESRS E1 – E5EnvironmentalE1 Climate change
E2 Pollution
E3 Water and marine resources
E4 Biodiversity and ecosystems
E5 Resource use and circular economy
Depends on materiality issues (If the undertaking concludes that climate change is not material and therefore omits all disclosure requirements in ESRS E1 Climate change, it shall disclose a detailed explanation of the conclusions of its materiality assessment with regard to climate change)
(ESRS 1 P6>32)(Link: Commission adoption>Annex – C(2023)5303>245pages
ESRS S1 – S4SocialS1 Own workforce
S2 Workers in the value chain
S3 Affected communities 
S4 Consumers and end users
Depends on materiality issues
ESRS G1GovernanceG1 Business conductDepends on materiality issues

The revised standards further contribute to:
Harmonization of terminology and structure, interoperability with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), reducing disclosure requirements from the original drafts by 40% (e.g., G2), and clarification of the approach to materiality, including items that must be reported regardless of materiality (e.g., E1).

4 things to complying with the CSRD/ESRS

To be proactive to comply with the upcoming legislation is highly recommended.

1, Concept of Integrated Reporting

As the ESRS requires companies to disclose financial and impact (environmental and social) information in their reports, the guideline of the Integrated Reporting Framework is highly recommendable. Also, intangible assets that one of the factors that increase the value of a company can be measured is recommended.

2, Conduct a double materiality assessment

This is a necessary first step in developing a sustainability strategy that fully considers all stakeholders. The double materiality principle allows an organization to distinguish between its external and internal impacts and to disclose both perspectives, thereby increasing transparency and potentially preventing greenwashing.

3, Process Due Diligence in the Supply Chain

With the revision from NFRD to CSRD, it will expand the scope of application to cover a broader range of supply chains, and through the requirement of “ESRS S2 Workers in the Value Chain,” organizations will be more required to conduct due diligence in their supply chains.

The Corporate Sustainability Due Diligence Directive (CSDDD) is currently being prepared to enter into force as one of the EU GreenDeal as well as CSRD. Corresponding to this background, sustainable and responsible corporate action will be increasingly required throughout the global value chain.

4, Introduction of assurance schemes and digital access

As the table of key changes of NFRD to CSRD, independent auditing and certification of non-financial information will be mandatory for companies to provide reliable information. Specifically, limited assurance will be obtained within 3 years of CSRD implementation and reasonable assurance within 6 years after implementation.

Companies are required to publish their reports in digital access (XHTML format) and ensure that they are “tag” following a digital classification using the European Single Access Point (ESAP) model.

Preparations for the future – key points for non-European companies

As mentioned above, the European subsidiaries of non-European companies may become subject to the application at the earliest. In such a case, key points for them are as below:

1. A case in which the EU subsidiary takes the lead or in which one of the affiliated subsidiaries is responsible on a consolidated basis.

  • Are there human resources, managers, and departments that can deal with CSRD/ESRS within the local organisation? If yes, do you have any responsive knowledge? If not, whether it’s possible to hire newly learned people locally, or if there is support from the headquarters, or whether it is possible to entrust and partner with local experts, external organisations, etc.
  • If it’s not possible to report to a local corporation stand alone, how can you make it independent from now on? How much it would cost in that case.
  • In the context of Sustainable Finance Disclosure Regulation (SFDR), if investors are unable to obtain information (especially global information as a global company) about their negative impact on sustainability (Principal Adverse Impacts = PAI), it may affect their investment decisions (e.g., the possibility of asking for PAI information from their parent company).
  • In connection with the above, whether or not it will lead to differentiation from competitors.

2. A cases where third-country parent companies respond on a consolidated basis.

  • If the subsidiary exemption is applied and there is no sustainability reporting standard that is equivalent to the CSRD/ESRS in the third country, how will the European Commission assess and judge the third country’s reporting standard?
  • Nevertheless, in anticipation of extraterritorial application in a few years’ time, at what stage should preparations for extraterritorial application begin, including the development of a group-wide organisational structure while dealing with the 1 case above at the start of application.

In the next article, we provide the relevance of the GRI and ESRS.

Photo by Tyler Casey on Unplush