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The Corporate Sustainability Reporting Directive (CSRD) exists as part of a broader framework of EU regulations and legislation aimed at enhancing transparency and accountability in sustainability reporting. Whilst regulations and requirements can sometimes feel nebulous, understanding the key legislations and how the CSRD interacts with them can provide a good picture of what you need to know.
EU Taxonomy
The EU Taxonomy is a classification system that defines what constitutes a sustainable economic activity. It provides a common language for companies and investors to identify and invest in environmentally sustainable projects. Essentially, it acts as a guidebook for businesses and investors, helping them to recognise activities that are truly environmentally friendly, ensuring that money is invested in activities that are truly beneficial to the planet.
The main goal of the EU Taxonomy is to channel green investments that benefit the environment in order to support the EU’s climate and sustainability targets. It does this by setting specific rules and standards for what qualifies as a sustainable activity. By providing these clear definitions and a common framework, the EU taxonomy helps companies and investors make more informed decisions by preventing misleading claims of environmental activities (greenwashing).
Since the CSRD mandates comprehensive reporting for a wide range of companies across the value chain, the Directive aligns itself snugly with the EU Taxonomy. Companies must use the classification system set forth by the EU Taxonomy to disclose any of their activities that can be considered environmentally sustainable. The common framework also means that reports are more transparent and hold each company to the same classifications and standards, ultimately ensuring that greenwashing is minimised; companies are held accountable; and investors, policymakers, and stakeholders can make better-informed decisions.
The Sustainable Finance Disclosure Regulation (SFDR)
Where the CSRD targets large companies across the corporate sector to report on their overall sustainability efforts, the SFDR specifically targets the financial sector. It has been created to ensure these entities disclose how they integrate environmental, social, and governance (ESG) factors into their investment decisions. This helps investors understand the sustainability of their investments.
Whilst they may sound similar, the interplay between the CSRD and SFDR is important to understand to ensure compliance. In essence, the CSRD provides the underlying data and information that financial market participants need to comply with the SFDR. The CSRD requires companies to report on their sustainability performance, including key metrics relevant to SFDR disclosures. This alignment helps financial market participants, like asset managers and fund providers, to gather the necessary information for their own reporting.
A crucial part of this lies in the CSRD’s materiality assessment. Suppose a company subject to the CSRD declares an indicator as non-material. In that case, financial market participants can assume that this indicator does not contribute to the corresponding principal adverse impact (PAI) indicator for SFDR disclosures. This means that the value of the investment related to this non-material indicator does not need to be considered in the numerator of the PAI indicator.
Both regulations require specific disclosures, such as the proportion of investments aligned with the EU Taxonomy or the consideration of adverse sustainability impacts. This creates a consistent framework for reporting and comparison.
Become CSRD-ready with RSM’s leading ESG and sustainability experts
RSM can help you and your business prepare for CSRD compliance with our two primary service offerings:
- Double Materiality Assessment services – Conducting an independent Double Materiality Assessment to support the company’s auditors meet their assurance reporting requirements.
- CSRD compliant audit and assurance services – Subject to observing independence issues, RSM also provides CSRD Assurance services.
RSM also offers comprehensive support for EU Taxonomy compliance, including eligibility assessments, impact analysis, and reporting assistance. Our experts can help interpret the complex taxonomy criteria, determine which economic activities are taxonomy-aligned, and prepare the required disclosures for stakeholders and regulators.
RSM can also provide guidance on classification of financial products under SFDR, assist with developing sustainability risk policies, and support the preparation of pre-contractual and periodic disclosures. Our experts help financial market participants integrate sustainability factors into their investment decision-making processes and advise on how to align products with the SFDR's sustainability categories.
Frequently Asked Questions
The CSRD expands upon and replaces the NFRD, broadening the scope of companies required to report and introducing more detailed disclosure standards.
The CSRD incorporates reporting requirements from the EU Taxonomy Regulation, requiring companies to disclose the proportion of their activities that are environmentally sustainable.
While the CSRD focuses on reporting, the CSDDD mandates due diligence processes. Companies within the scope of both directives can use their CSRD report to fulfil CSDDD reporting obligations.
The CSRD's climate-related disclosures are designed to be consistent with TCFD recommendations, potentially allowing companies to meet both requirements simultaneously.
The CSRD sets minimum standards for sustainability reporting across the EU, but member states may introduce additional requirements when transposing the directive into national law.
The CSRD complements the SFDR by providing standardised sustainability information that financial market participants can use to meet their SFDR disclosure obligations.
The European Commission aims to ensure interoperability between CSRD standards and global initiatives like the ISSB standards while addressing EU-specific requirements.
Companies may be able to use information gathered for CSRD reporting to support compliance with national due diligence laws, but they should be aware of any specific national requirements.