As the business environment continues to advance swiftly, elements related to environment, social, and governance (ESG) are becoming increasingly crucial to corporate operations and strategic planning. With changing societal values emphasizing sustainable and responsible corporate conduct, regulatory structures have been established to enforce and normalize sustainability reports.  

At the vanguard of this evolution is the European Union, launching two principal initiatives: The Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standard (ESRS). These initiatives are instrumental to the EU’s endeavor to improve sustainability reporting practices throughout its member states. Despite being interrelated, CSRD and ESRS each serve unique roles within the broader framework of corporate sustainability transparency.  

In the following analysis, we will explore these two essential elements of the EU’s sustainability blueprint, focusing on their goals, implications, and the key distinctions between the CSRD and the ESRS. 

What Is ESRS? 

European Sustainability Reporting Standards (ESRS) are a set of standards developed by the European Financial Reporting Advisory Group (EFRAG) [2]. These standards are designed to provide detailed guidance on what information companies need to disclose about their sustainability performance. The goal of ESRS is to harmonize sustainability reporting across the EU, making it easier for stakeholders to compare and assess the sustainability practices of different companies. 

The ESRS covers a wide range of topics, including environmental, social, and governance (ESG) factors. This comprehensive approach ensures that all aspects of a company’s operations and their impact on the environment and society are transparently reported. The ESRS is aligned with global sustainability standards, such as those set by the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD). 

What Is CSRD? 

Corporate Sustainability Reporting Directive (CSRD) is a regulatory framework introduced by the European Union to enhance and expand the existing Non-Financial Reporting Directive (NFRD) [1]. The CSRD aims to increase the consistency, comparability, and reliability of sustainability information disclosed by companies. 

The CSRD mandates that a broader range of companies, including listed companies, large non-listed companies, and SMEs (Small and Medium-sized Enterprises), adhere to more rigorous and standardized reporting requirements. This directive ensures that sustainability information is reported in a more structured and accessible manner, thus improving the quality of data available to investors, consumers, and other stakeholders. 

Key Differences Between ESRS And CSRD 

While ESRS and CSRD are closely related, they serve different purposes and have distinct characteristics: 

1/ Nature and Scope: 

• ESRS: These are detailed reporting standards that provide specific guidelines on what sustainability information companies need to disclose. 
• CSRD: This is a directive that sets the regulatory framework and legal requirements for sustainability reporting, mandating which companies need to report and what they need to report on.

2/ Purpose: 

• ESRS: Focuses on standardizing the content and format of sustainability reports to ensure consistency and comparability. 
• CSRD: Aims to expand the scope of companies required to report on sustainability and ensure the reliability and transparency of the reported information. 

3/ Application: 

• ESRS: Applicable to companies within the EU that fall under the reporting scope of the CSRD, providing them with the guidelines on how to report. 
• CSRD: Applies to a wider range of companies, including those not previously covered by the NFRD, and enforces compliance with the new reporting requirements. 

How Do ESRS And CSRD Work Together? 

The ESRS and CSRD are designed to work in tandem to create a robust sustainability reporting ecosystem in the EU. The CSRD sets the legal framework and broad requirements for reporting, while the ESRS provides the detailed standards that companies must follow to comply with the CSRD. 

For instance, a company subject to the CSRD will need to adhere to the reporting requirements set forth by the directive. To ensure their reports meet these requirements, the company will follow the guidelines provided by the ESRS. This integrated approach ensures that sustainability reports are both comprehensive and comparable across different organizations. 

What’s Next? Implications For Businesses 

	First financial year covered	First filing year
Large companies subject to NFRD	2024	2025
Large companies not subject to NFRD	2025	2026
SMEs	2026	2027
NON-EU companies	2028	2029

As of the 2024 fiscal year, all corporations previously aligned with the NFRD are mandated to adopt the ESRS reporting protocol, with the first submissions due by 2025. For larger corporations not under the remit of the NFRD, their transition to ESRS will be initiated in the fiscal year of 2025, with their inaugural report submission slated to the EU CSRD in 2026.  

Moreover, SMEs (both listed and unlisted) operating within the European Union will embark on their reporting journey in 2027, accounting for the 2026 fiscal year. The final phase of this transition applies to non-EU corporations that generate an annual revenue exceeding €150 million within the EU and maintain an EU branch with revenues surpassing €40 million. This cohort is expected to adhere to the new reporting protocol by 2029. 

The introduction of the CSRD and the development of the ESRS have significant implications for businesses operating in the EU: 

• Increased Reporting Requirements: More companies will be required to report on their sustainability practices, and the depth and breadth of information required will increase. 
• Standardization: Companies will need to adopt standardized reporting practices, which will facilitate better comparison and benchmarking across industries. 
• Enhanced Transparency: Stakeholders, including investors, consumers, and regulators, will have access to more reliable and comparable sustainability information. 
• Compliance: Companies will need to ensure they are compliant with both the CSRD requirements and the ESRS guidelines to avoid legal and reputational risks. 

Conclusion 

The CSRD and ESRS are pivotal milestones in the EU’s transition towards a sustainable corporate environment. By standardizing reporting practices and enhancing the caliber of revealed information, these initiatives equip stakeholders with the necessary insight to make judicious decisions, institute positive transformations, and contribute towards a fairer, greener future. When corporations align with these frameworks, they don’t merely adhere to regulatory standards, but also establish themselves as frontrunners in sustainability, exhibiting capability to confidently and purposefully tackle the intricate landscape of ESG factors. 

References: 

[1] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/654213/EPRS_BRI(2021)654213_EN.pdf 

[2] https://efrag.org/