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The Corporate Sustainability Reporting directive (CSRD) came into force on January 5th, 2023. This directive is part of the European Green Deal program and essentially requires companies with businesses in the European Union (EU) to collect and report their sustainability data in a standardized and verifiable way. Additionally, the directive aims to prevent greenwashing and foster greater trust and transparency in ESG reporting.
Its predecessor, the Non-Financial Reporting Directive (NFRD), was active since 2018 and required around 11,700 EU-based companies to report their ESG performance. With the CSRD modernizing and strengthening these rules, around 50.000 companies will be now under this policy.
As mentioned above, more companies will fall under the scope of the CSRD. Sustainability data has become increasingly relevant for investors, consumers, and financial institutions, to name some. Thus, the information reported will also be subject to assurance, to ensure transparency and reliability. This was not the case with the NFRD.
Companies subject to these reporting requirements will now have to report according to mandatory common European Sustainability Reporting Standards (ESRS). The standards structure the requirements in a way that is manageable for companies, lowering the cost and the complexity of reporting. Additionally, they enable reporting organizations to demonstrate the efforts they are making to meet the green deal agenda, aiding in the access of sustainable finance opportunities.
*Infographic: Sustainable finance refers to funding and financial services that prioritize environmental, social, and governance (ESG) objectives. It directs capital toward projects and companies that contribute to sustainability goals, such as decarbonization, renewable energy, and social equity. Examples are green bonds, Sustainability-Linked Loans (SLLs) and Climate Transition Financing.
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2024: All companies that were already subject to sustainability corporate reporting requirements under the NFRD. They will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.
2025: All other large companies in the EU. Large companies considered as those who tick at least two of the following requisites:
2026: SMEs listed on EU-regulated markets. SMEs have the option to opt-out until 2028.
2028: Non-EU companies with at least one EU subsidiary or branch and with a higher turnover than €150M.
Exemptions:
Subsidiaries, if included in the parent company’s report.
Listed micro companies that tick at least 2 of the following:
The vast majority of Small and Medium Enterprises (SMEs) in the European Union are not listed on the stock exchange, meaning they are not legally subjected to these requirements. However, we begin to see that a fraction of these SMEs receive information requests from banks and other large corporations that are legally required to report on sustainability. This is due to the fact that large companies that fall under the CSRD need to report also on their supply chain, which may include SMEs.
To reduce the burden this may have on SMEs, the European Financial Reporting Advisory Group (EFRAG) is currently working on a framework for use on a voluntary basis for these SMEs, that are simple enough to be usable, but also robust enough to meet the requirements of these banks and large companies. Separate standards for non-EU companies are also being developed in the coming years.
As previously noted, the demand for sustainable data has risen in the past few years affecting various stakeholders across industries. This growing need for reliable and comprehensive sustainability information has placed pressure on companies, supply chains, and regulatory frameworks alike, creating a shift toward more transparency and accountability.
By making data accessible to investors and stakeholders, the CSRD enables a clearer assessment of the social and environmental impacts companies may have, as well as the financial risks and opportunities arising from climate change and other sustainability issues, such as regulatory shifts.
These regulatory shifts occur because climate change has only lately been recognized as a major issue demanding immediate and widespread action. As a result, we are learning and responding in real time, fine-tuning rules as we discover gaps or obstacles. The CSRD exemplifies this iterative approach. It primarily addresses accountability for a company's impacts, providing transparency about how these affect communities and the environment.
Through this policy, companies also gain a structured approach to collect and manage sustainability information. Similar to financial reporting, it gives companies the possibility to assess which information is crucial for their long-term success, and utilize it within the company’s management, incorporating it into future strategic decisions. This, essentially, ensures companies are competitive and resilient.
Familiarize yourself with the CSRD framework and understand if your company is required to report, and if so, by when. Identify the specific reporting obligations that apply to your organization. These typically include reporting on Scope 1, 2, and 3. In summary, Scope 1 emissions are generated from sources under control of the company, excluding emissions from electricity (e.g. company vehicles’ fuel). Scope 2 emissions are derived indirectly from the generation of used energy (e.g. consumption of electricity). Scope 3 refers to emissions occur in the value chain of the company (e.g. emissions generated from the purchase of merchandise from a supplier). Once these elements are determined, set your reporting timeline and check if your organization qualifies for any exemptions.
This principle requires you to consider both the impact of your business on the environment and society, as well as the impact of environmental and societal issues on your business. For example, a company involved in oil refining impacts the environment by polluting the air. Conversely, air pollution also affects the company, as it exposes workers in the refining process to health risks. Conduct a materiality assessment to identify the ESG factors most relevant to your business and stakeholders by using the double materiality principle to guide this process, combining stakeholder input and business impact analysis.
Audit existing sustainability practices, policies, and reporting mechanisms and determine whether your company is already aligned with standards like the GHG Protocol, GRI, TCFD, or Science-Based Targets Initiative. Identify gaps in your current reporting, especially around Scope 3 emissions, social disclosures, and governance factors.
Measure and document your baseline sustainability metrics, including:
Develop or upgrade systems to track and collect sustainability data efficiently. You may also look into investing in software tools or platforms for ESG reporting, ensuring accurate and reliable data. Establish processes for verifying and auditing the collected data.
Use the ESRS templates and guidelines to structure your report and include all the collected data and any other relevant information. Make sure it contains:
Engage a third-party auditor or verifier to ensure compliance with the CSRD’s assurance requirements, ensuring it meets the reasonable assurance level required.
Publish your CSRD report in alignment with applicable timelines, ensuring it is accessible to stakeholders, investors, and regulators. To enhance transparency and build trust, communicate your sustainability progress through multiple channels, including your website, social media platforms, and investor presentations.
Continuously use feedback from stakeholders and the audit process to refine your reporting practices. Stay informed about evolving regulatory standards and adjust your sustainability strategy to remain compliant and effective.
At OTC Flow, we understand that navigating the complexities of sustainability reporting and decarbonization can be challenging. Our portfolio of products and expertise is designed to support your efforts in reducing emissions across Scope 1, 2, and 3. Whether it’s through market-based solutions for Scope 2 emissions, such as renewable energy procurement, or providing high-quality carbon credits for offsetting Scope 3 emissions, we can help you achieve meaningful progress toward your decarbonization goals.
By integrating our solutions into your sustainability strategy, your business can take actionable steps to meet CSRD requirements and align with broader climate goals. Let us help you bridge the gap between your current practices and a more sustainable, future-proof operation.
Ready to get started? Contact our team to learn how we can help you.