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Navigating the Rapidly Changing World of Climate-Related Disclosures Part 4: The EU’s Corporate Sustainability Reporting Directive (CSRD) 

May 17, 2024

By: Mariah Gehle Costello

In our blog series, we started by looking at U.S.-centric climate-related disclosures, namely the U.S. Security and Exchange Commission’s (SEC) climate rules and California’s SB 253 and SB 261. We then transitioned to a more global view, with an overview of the International Financial Reporting Standards S2 (IFRS S2). In Part 4 of our blog series, Navigating the Rapidly Changing World of Climate-Related Disclosures, we continue our focus on the global landscape.

In this blog, Mariah Gehle Costello delves into the Corporate Sustainability Reporting Directive (CSRD), a significant regulatory requirement by the European Union (EU) that aims to enhance transparency and accountability in corporate sustainability and climate reporting.

What is the CSRD?

The CSRD builds upon the EU’s existing Non-Financial Reporting Directive (NFRD). It encompasses not only financial information but also non-financial aspects. Its primary objective is to standardize and expand sustainability reporting, recognizing that environmental, social, and governance aspects are critical for informed decision-making by investors, stakeholders, and the public. Companies subject to the directive will disclose relevant data related to their environmental impacts, social practices, and governance structures.

The CSRD leverages the European Sustainability Reporting Standards (ESRS) as a framework for companies to disclose sustainability-related information. These standards were developed by the European Financial Reporting Advisory Group (EFRAG) and provide consistency, comparability, and reliability in reporting. They cover various topics, such as climate change, biodiversity, human rights, and the circular economy.  Companies must conduct a double materiality assessment to determine which topics are most relevant to their operations and value chain and then report against the corresponding ESRS standards.

Who is subject to CSRD disclosure requirements?

The CSRD has a wide-reaching scope, requiring a diverse range of companies to report sustainability and climate information. Importantly, the scope is not limited to EU-based companies, and many North American companies are finding themselves having to comply with CSRD requirements. Understanding the timing and specific requirements for different company types can be complex. The table below provides a high-level summary for reference.

Company TypeMust report in year……for financial year
Phase 1:
Undertakings (i.e., companies) already subject to NFRD. This includes companies with annual turnover greater than €40 million or balance sheets over €20 million with more than 500 employees.
US perspective:
This includes US companies which are listed on an EU-regulated market that also meet the thresholds above.
Phase 2:
Large undertakings not already subject to NFRD.
A large company is defined as a listed or non-listed company in the EU that meets two of the following criteria:
· Annual turnover greater than €50 million
· Balance sheet over €25 million
· Greater than 250 employees
US perspective:
This includes US-based companies listed on an EU-regulated market as well as EU subsidiaries of US-based companies if they meet the definition of a ‘large undertaking.’
Phase 3:
Small and medium enterprises (SME) listed on an EU-regulated market. A SME is defined as a company that meets the following criteria:
· Annual turnover between €900,000 and €50 million
· Balance sheet between €450,000 and €25 million
· Between 10 and 250 employees
US perspective:
This includes subsidiaries of US companies listed on an EU-regulated market that meet the definition above.
Phase 4:
Non-EU headquartered companies that generated more than €150 million net turnover in the EU in each of the last two years and have at least one of the following:
· An EU-based subsidiary that meets the definition of a large undertaking
· An EU-based subsidiary listed on an EU-regulated market
· An EU branch with more than €40 million of net turnover
US perspective:
This includes US-headquartered companies that meet the definition above.

Climate-related disclosures and ESRS E1

One of the most critical aspects of the CSRD is its focus on climate-related disclosures, as set forth in the ESRS E1 Climate Change standard. The ESRS E1 Climate Change standard specifies disclosure requirements that enable users of sustainability statements to understand how an organization impacts, and is impacted by, climate change. It covers both positive and negative effects, actual and potential risks, and actions taken by the company. A breakdown of the standard and the related disclosure requirements is provided below.

Transition Plan for Climate Change Mitigation
Outline transition plan for climate change mitigation, including an explanation of how the company strategy and business model support the transition to a sustainable economy.
Policies Related to Climate Change Mitigation and Adaptation
Disclose policies implemented by the company to manage material impacts, risks, and opportunities related to climate change mitigation and adaptation.
Actions and Resources in Relation to Climate Change Policies
Disclose climate change mitigation and adaptation actions and the resources allocated for their implementation. Include the achieved and expected GHG emissions reductions.
Targets Related to Climate Change Mitigation and Adaptation
Disclose whether and how the company has set GHG emissions reduction targets and/or other targets to manage material climate-related impacts, risks, and opportunities.
Energy Consumption and Mix
Report the company’s energy consumption from renewable and non-renewable sources; include absolute consumption as well as consumption intensity based on net revenue.
Gross Scopes 1, 2, 3 and Total GHG Emissions
Report the company’s Scope 1, 2, 3, and total GHG emissions; include absolute emissions as well as emissions intensity based on net revenue.
GHG Removals and Mitigation Projects Financed Through Carbon Credits
Disclose GHG removals resulting from projects in a company’s own operations, in its upstream/downstream value chain, and outside of the value chain (through carbon credits).
Internal Carbon Pricing
Disclose whether the company applies an internal carbon price and, how this process supports decision making and incentivizes the implementation of climate-related policies and targets.
Potential Financial Effects from Material Physical and Transition Risks
Disclose potential financial effects from material physical risks, transition risks, and climate-related opportunities, to the extent that these risks have (or are likely to have) a material influence on the company’s cash flows, performance, position, development, cost of capital, or access to finance.

The takeaway? The CSRD has broad (and potentially complicated) applicability, expanding beyond EU-based companies. This drastically shifts the climate (and overall sustainability) reporting landscape from voluntary to mandatory for many organizations. It is not too early to start preparing for CSRD compliance.

If you would like a trusted advisor to guide you through CSRD – whether it is understanding if your company is subject to the regulation or starting the process of meeting its requirements, we are here to help. We pride ourselves on meeting our clients where they are and on teaching our clients along the way, rather than simply doing.

Mariah Gehle Costello
Project Consultant, Sustainability and Climate Advisory
Mariah is a Project Consultant on Montrose’s Sustainability and Climate Advisory team. In addition to supporting clients, Mariah also leads the day-to-day efforts on Montrose’s own sustainability journey. She has over six years of experience in sustainability frameworks and disclosures. She has led Montrose’s materiality assessment, annual sustainability report, and disclosures such as CDP and Ecovadis. She also support’s Montrose – and clients – on Scope 1, 2, and 3 greenhouse gas (GHG) inventories and science-based target setting. Currently, Mariah is preparing to kick-off Montrose’s own climate risk assessment (following the IFRS S2 standard) as well as our pan-Montrose decarbonization plan.

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