What is the CSRD, and why does it matter?

The European Union has been at the forefront of regulation on transparency regarding issues such as carbon emissions, deforestation and biodiversity, labour standards and other sustainability issues. Having started the process of requiring environmental and social impact disclosures from companies, the EU is beginning to impose penalties on businesses that misrepresent the sustainability of their activities. The Corporate Sustainability Reporting Directive is the latest piece of legislation designed to increase transparency for asset managers, investors, business partners and other stakeholders.*

The European directive CSRD (Corporate Sustainability Reporting Directive) requires certain companies to measure their environmental and societal impact and to publish a non-financial sustainability report.

In theory, the first requirements for the publication of information are already applicable to companies entering the first wave of implementation. However, since it is a directive, in order to be applicable in an EU Member State, the State in question must first transpose it into national law, which is not yet the case in Luxembourg at the end of 2025. Thus, in the States that have transposed the directive, the largest companies had to collect the data from their 2024 financial year in order to publish their first mandatory report in 2025.

For the other companies subject to the CSRD directive, the “Omnibus” package of measures, currently being adopted, provides for several adjustments intended to simplify the directive and to revise certain deadlines.

First of all, the “Stop the clock” directive, integrated into the Omnibus package, postponed by two years the deadlines for implementation for large European companies and listed SMEs that are not yet engaged in the process. Thus, companies that were initially supposed to publish in 2026 (financial year 2025) would see their deadline extended to 2028 (financial year 2027), and those that were supposed to publish their first sustainability report in 2027 (financial year 2026) could do so in 2029 (financial year 2028).

Furthermore, the discussions around Omnibus will confirm or not whether the companies subject to the CSRD will be limited to structures with more than 1,000 employees and a turnover above 450 million euros. For the moment, these thresholds do not yet replace the initial criteria of 250 employees and more than 50 million euros in turnover or 25 million euros in total balance sheet.

Finally, SMEs not subject to the CSRD directive but wishing to enhance or establish a sustainability strategy will be able to voluntarily publish their information based on the recommendations of the voluntary standard for SMEs (VSME) published by EFRAG (European Financial Reporting Advisory Group).

Note: the text of the Omnibus law has not yet been definitively adopted (it was voted by the European Parliament on November 13, 2025, but discussions are still ongoing among the Member States). The requirements and criteria are therefore likely to evolve.

Thanks to the publication of this information, investors will have at their disposal a whole series of new data to interpret and will thus be able to better understand how sustainability factors can influence the long-term prospects of a company.

Insights into long-term operational sustainability

The CSRD is not completely new, but it represents a major step forward from the EU’s Non-Financial Reporting Directive, the previous EU sustainability reporting framework for large listed companies. Over time, the CSRD will expand the number of companies that are required to provide sustainability disclosures, along with their scope.

The disclosures are designed to ensure that companies report not just on financial performance, but on their long-term operational sustainability, including that of companies in their supply chains.

The CSRD requires reporting requirements on companies’ impact on the environment, human rights and other social standards, as well as on their sustainability-related risk. The disclosures are designed to ensure that companies report not just on financial performance, but on their long-term operational sustainability, including that of companies in their supply chains.

The aim is to help investors and stakeholders understand whether a company’s growth is in harmony with or at the expense of the natural environment, human rights or society at large – and to enable asset managers to report on the sustainability characteristics of their own investment products under the EU’s Sustainable Finance Disclosure Regulation. While the legislation does not require companies to change their behaviour, there is a presumption that public disclosure will give them an incentive to embrace a more sustainable business model.

European Sustainability Reporting Standards

CSRD requirements are comprehensive and complex. The regulator has created a framework for the disclosure, the European Sustainability Reporting Standards (ESRS), in order to help companies describe their environmental, social, and governance impact. It provides a standardised view of a company’s ESG risks, impact and opportunities through metrics as diverse as climate emissions and gender pay difference.

The ESRS standards are, at present, structured around cross-cutting standards and thematic standards. The cross-cutting standards are divided into two main sections: ESRS 1 describes the concepts and general principles to be respected by companies when preparing their report (general drafting conventions, due diligence procedures, and the definition of the concept of double materiality); ESRS 2, for its part, defines the reporting requirements in key areas (governance, strategy, objectives, indicators, management of impacts, risks, and opportunities).

The thematic standards specify the data to be provided on environmental, social, and governance issues.

These ESRS standards aim to help companies standardize their data in order to ensure transparency and comparability.

This information must be verified by a statutory auditor or an independent third-party body. The standards and guidelines on the procedures for these verifications are expected to be adopted and published during the third quarter of 2026.

The notion of double materiality

Double materiality is a key concept in the CSRD. All companies must carry out its assessment as part of their reporting obligations. It concerns both the impact of the company’s activities on the environment, natural resources, and society (impact materiality), and the relationship between sustainability issues (climate change, environmental risks, etc.) and their effects on the company’s financial performance (financial materiality).

Financial materiality examines how sustainability factors can influence a company’s financial performance, such as the impact of rising fossil fuel prices on the cost base of an airline, or how long-term water scarcity can affect a chemical manufacturer.

Impact materiality considers a company’s footprint, and its impact on the environment and society in the short, medium and long term. That entails examining areas such as a company’s supply chain, and its positive or negative effects on the natural environment. This provision aims to ensure that companies are not ‘outsourcing’ their carbon emissions to third parties in their supply chain, or indirectly encouraging poor labour practices.

The double materiality assessment determines whether the company must disclose additional data judged to be of material importance according to the EU’s standards, involving multiple parts of the business, including the legal, audit, finance and operations functions, as well as third-party suppliers. Companies are also encouraged to consider input from other stakeholders including customers, employees, shareholders and civil society organisations. All this will require a co-ordinated approach at the top of any organisation.

Non-European companies with significant activities in Europe or with subsidiaries or branches in Europe, and which meet the thresholds defined by the CSRD, will also be subject to the new rules.

Requirements for non-European companies

Non-European companies with significant activities in Europe or with subsidiaries or branches in Europe, and which meet the thresholds defined by the CSRD, will also be subject to the new rules. Their first sustainability report is expected in 2029, covering activities from 2028. However, this timetable as well as the thresholds may be modified depending on legislative developments.

They will have to comply with the same standards as European companies subject to the CSRD directive.

Disclosure from suppliers

The European Commission says the CSRD requirements “will ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment, and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues. Reporting costs will be reduced for companies over the medium to long term by harmonising the data to be provided.”

As disclosure becomes more widespread, it should help provide investors with a broader understanding of a company’s sustainability impact and risk. This may ultimately be reflected in share prices, if investors shun companies with substantial future risks, and embrace those that manage these threats in good time.

Although at present the legislation applies only to large companies, they are likely to require greater disclosure from their suppliers.

Although at present the legislation applies only to large companies, they are likely to require greater disclosure from their suppliers. It could become business-critical; companies may increasingly want to do business with other sustainable providers. As companies effectively are required to assimilate the carbon emissions and sustainability footprint of other businesses, they may well adapt their business practices accordingly. Investors should bear this in mind when making decisions.

Nevertheless, the protection of subcontractors and suppliers has been strengthened. The European Commission has indeed recommended that large companies subject to the CSRD limit the amount of information they request from SMEs. Thus, in the latest version available at the time this article is reviewed (November 2025), companies not falling within the scope of the CSRD will not be required to provide more information than that set out in the voluntary standard for SMEs (VSME). They are therefore “protected” as of now against excessive requests from their partners.

The CSRD’s aim is to foster a more sustainable and resilient economic system by encouraging businesses to adopt more responsible social and environmental practices, and to partner with other responsible businesses. Although compliance may represent a significant burden in the short term, it should enable investors to make more informed decisions.

* Content translated from French by the BIL GPT AI tool