CSRD Explained: A Guide to the EU Corporate Sustainability Directive

More than 50,000 companies will soon face Europe’s most comprehensive corporate disclosure regime. The CSRD (Corporate Sustainability Reporting Directive), which took effect in January 2023, requires businesses to report on everything from carbon emissions to supply chain labor practices with the same rigor they apply to financial statements. The stakes are real: reported information must be audited by external assurers, marking a fundamental shift from voluntary sustainability frameworks to mandatory, verified disclosure.

For global corporations with European operations, the CSRD represents a fourfold increase in reporting obligations compared to the previous Non-Financial Reporting Directive, which covered approximately 11,000 companies. The regulation aims to provide investors and stakeholders with reliable, comparable data to assess sustainability risks and impacts, effectively ending an era where companies could cherry-pick which environmental and social metrics to disclose.

What Is the CSRD and Why Does It Matter

The CSRD entered into force in January 2023, replacing the Non-Financial Reporting Directive (NFRD) that governed sustainability reporting since 2014. The directive requires companies to disclose detailed information about their environmental impact, social practices and governance structures according to standardized European Sustainability Reporting Standards (ESRS).

More than 50,000 companies will eventually fall under the directive’s scope, according to European Commission estimates. This represents a fourfold increase from the approximately 11,000 companies previously covered under the NFRD. For businesses, this means sustainability reporting will receive the same scrutiny as financial statements, with reported information audited by external assurers.

Understanding the Phased Timeline

The CSRD implementation follows a staggered approach. Companies already subject to the NFRD began reporting under the new standards for the 2024 financial year, with their first reports published in 2025.

However, recent regulatory changes have altered the original schedule. In December 2025, the European Parliament approved the Omnibus I package, which significantly narrows the CSRD’s scope and extends deadlines. Large unlisted companies will now start reporting in 2028 for the 2027 financial year instead of 2026, and listed small and medium-sized enterprises (SMEs) in 2029 for the 2028 financial year instead of 2027.

Non-EU companies with substantial European operations face their own requirements. Businesses based outside the EU will be subject to CSRD if they generate net turnover of 150 million euros in the EU and have at least one large or listed subsidiary in the EU, or at least one branch with more than 40 million euros in net turnover. This provision takes effect starting in the 2028 financial year.

New Thresholds Reshape Reporting Obligations

The Omnibus I package introduced substantial changes to which companies must comply. Under the revised framework, mandatory reporting applies only to companies with more than 1,000 employees and either revenue exceeding 50 million euros or a balance sheet total over 25 million euros.

This adjustment represents a dramatic reduction in scope, potentially excluding approximately 80 percent of initially targeted companies. The changes reflect European policymakers’ efforts to balance sustainability ambitions with concerns about administrative burdens on smaller enterprises.

The Double Materiality Principle

One of the CSRD’s defining features is its embrace of double materiality. Companies must report from two distinct perspectives: how sustainability issues affect their financial performance, and how their operations impact the environment and society.

The first perspective examines financial materiality, analyzing how climate change, resource scarcity and social issues create risks and opportunities for the business. The second assesses impact materiality, evaluating how company operations affect communities, ecosystems and the planet.

This dual approach distinguishes European requirements from other international frameworks that focus primarily on investor-relevant financial risks. Companies cannot simply report on topics that matter to their bottom line. They must also account for their broader societal and environmental footprint.

European Sustainability Reporting Standards Define the Details

Companies subject to the CSRD must prepare disclosures according to the European Sustainability Reporting Standards. The European Financial Reporting Advisory Group (EFRAG) developed these standards, which the European Commission officially adopted in July 2023.

The framework consists of 12 sector-agnostic standards covering environmental, social and governance topics. These include five environmental standards addressing climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy. Four social standards cover the company’s workforce, workers in the value chain, affected communities, and customers. One governance standard addresses business conduct.

Two cross-cutting standards apply universally. ESRS 1 establishes general requirements and foundational principles. ESRS 2 specifies general disclosures that all companies must provide regardless of materiality. The remaining 10 topical standards are subject to materiality assessment, providing flexibility while maintaining comprehensive coverage.

Climate Disclosure Takes Center Stage

Climate-related reporting represents one of the most demanding aspects of CSRD compliance. The climate change standard requires detailed disclosures about policies, transition plans, energy consumption and greenhouse gas emissions across all three scopes.

Scope 3 emissions, which account for indirect emissions throughout a company’s value chain, often represent the largest portion of a company’s carbon footprint and prove notoriously difficult to measure. Recognizing this challenge, the EU has provided a one-year grace period on Scope 3 reporting for companies with fewer than 750 employees.

Companies must also develop transition plans aligned with the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius. These plans should outline concrete actions, timelines and resources allocated to reduce emissions and adapt business models to a low-carbon economy.

Value Chain Reporting Extends Beyond Company Walls

The CSRD’s reach extends far beyond a company’s direct operations. Businesses must report on sustainability matters throughout their entire value chain, encompassing upstream suppliers and downstream distributors.

This requirement creates significant data collection challenges, particularly for companies with complex global supply networks involving thousands of suppliers. The Omnibus I amendments introduced some relief through value chain caps, extending protection against excessive information requests to all companies with fewer than 1,000 employees.

Implementation Challenges Companies Face

Survey data reveals the scale of the challenge ahead. According to research by PwC, 59 percent of companies cite data availability and quality as the biggest obstacles to successful implementation, followed by value chain complexity at 57 percent.

Many companies expected to report in 2025 had not yet completed fundamental preparatory work. Activities such as confirming reporting obligations, conducting double materiality assessments and validating data availability remained incomplete for a substantial number of firms approaching their first reporting deadline.

The complexity of the European Sustainability Reporting Standards themselves poses additional hurdles. The technical nature of the requirements demands expertise spanning sustainability science, financial reporting and supply chain management.

The Assurance Requirement Raises the Bar

Unlike many voluntary sustainability frameworks, the CSRD mandates external assurance of reported information. This requirement brings sustainability disclosures closer to the rigor traditionally applied to financial statements.

Initially, companies must obtain limited assurance, which provides a moderate level of confidence that the information is free from material misstatement. The Omnibus I amendments removed the planned transition to reasonable assurance, permanently maintaining the limited assurance level.

This assurance requirement necessitates robust internal controls, documentation and data management systems. Companies must be able to demonstrate the reliability of their sustainability data to external auditors, who will examine everything from emissions calculations to social impact metrics.

Global Companies Face Extraterritorial Reach

The CSRD’s influence extends well beyond European borders. Non-EU companies with significant operations in Europe will find themselves subject to the directive’s requirements, creating implications for American, Asian and other international firms.

Independent analysis found more than 10,000 non-EU companies that meet the criteria for mandatory CSRD reporting, over 3,000 of which are American. These companies must navigate European sustainability standards even if their headquarters and primary operations lie elsewhere.

For multinational corporations, this creates questions about reporting strategy. Some may choose to implement CSRD-compliant reporting globally rather than maintaining separate systems for European operations.

Interoperability With Other Standards

The European Commission and EFRAG worked to align the ESRS with global reporting initiatives to reduce the burden on companies operating internationally. The standards show compatibility with frameworks including the Global Reporting Initiative (GRI) and the International Sustainability Standards Board’s (ISSB) climate disclosure standards.

However, differences remain. The CSRD’s double materiality approach diverges from the investor-focused perspective of standards like those issued by the ISSB. Companies reporting under multiple frameworks must navigate these variations, potentially maintaining different sustainability reports for different audiences.

What Companies Should Do Now

Organizations within CSRD scope should treat compliance as a strategic priority requiring cross-functional collaboration. Finance teams, sustainability officers, legal counsel and operations managers all play crucial roles in successful implementation.

First-wave companies should focus on refining their reporting processes based on initial experience. Those in subsequent waves should begin preparation immediately despite extended deadlines. This includes conducting gap analyses, investing in data management systems and engaging with suppliers about information sharing.

The most prepared companies recognize that CSRD compliance offers opportunities beyond regulatory adherence. Robust sustainability data enables better risk management, supports strategic decision-making and meets growing stakeholder expectations for transparency.

As the European Union demonstrates its commitment to sustainability disclosure through the CSRD, companies face a choice between viewing the directive as a compliance burden or embracing it as a catalyst for more sustainable business practices. The ones that succeed will be those that integrate sustainability into their core operations rather than treating it as a separate reporting exercise.