EU Corporate Sustainability Reporting Directive

Introduction

The Corporate Sustainability Reporting Directive (CSRD) stands as a testament to the European Union's dedication to fostering sustainable corporate practices. Enacted to enhance corporate transparency and accountability, the CSRD mandates comprehensive sustainability disclosures from a broader spectrum of companies operating within the EU. This essay examines the CSRD's evolution, its foundational objectives, the recent amendments that have reshaped its scope, its key revisions, the challenges and criticisms it faces, and the prospective trajectory of corporate sustainability reporting within the EU.

Background on the CSRD

The CSRD updates the Non-Financial Reporting Directive (NFRD), which was designed to require large firms to report on how they managed social and environmental issues operationally. The NFRD was criticised for its superficial coverage in scope. It provided no detailed reporting requirements that would have made consistency and comparability possible across disclosures. In response, the European Commission released the CSRD to remedy these issues by trying to both broaden and deepen the detailed provisions around sustainability reporting. This directive forms the backbone of the European Green Deal, showcasing the EU's desire to spearhead sustainability efforts globally. The CSRD significantly broadens the reporting obligations by capturing more companies, especially large corporates and publicly listed SMEs, which increases the obligated reporters from roughly 11,700 to around 50,000 within the EU.

Challenges and Criticisms

Even with its noble goals, the CSRD still faces criticism and challenge, such as the following:

• Regulatory Burden on Companies: The directive comes with severe restrictions, specifically the reporting section of the directive, and for some businesses it can be considered as one more thing that needs to be managed. The cost of complying is very high, with some estimates putting it at €1 million a year for listed companies. This raises the issue of the directive not enhancing transparency, but rather benefiting consultants and accountancy firms.

• Impact on SMEs: There is contradiction in objectives of the CSRD with concern on effectiveness and cost compliance, especially for SMEs. Critics suggest that the cost associated with the directive will be too much for these smaller businesses and will reduce their ability to grow and compete.

• Risk of Greenwashing: There lies the chance that companies may dilute compliance in the attempt to increase transparency, which sounds pretty anticlimactic in this case. The outstanding question remains: how do you make sure that the reported information is actually as accurate and dependable as people hope it is?

Future Outlook and Recommendations

The CSRD represents a development towards the embedding of sustainability in corporate reporting. In order to make it impactful while managing the risks, the following guidelines have been recommended:

• Streamlined Reporting Requirements: Less stringent reporting requirements, particularly for small and medium enterprises (SME), can enable authentic compliance without an administrative overload. Smaller units may be assisted to meet the required standards by enabling guidelines which do not impede their working capabilities.

• Capacity Building and Support: Helping the companies with additional training and tools enables them to better meet the reporting requirements. Establishing support centers or aid lines could create an environment with constant aid, help, and positive advancement which could encourage the openness culture.

• Robust Assurance Mechanisms: Applying restrictive auditing and assuring processes can reduce the risks linked to the accuracy of sustainability reports which makes the cleansing green process easier. Hence, stakeholder trust will be improved.

• Stakeholder Engagement: Allowing free exchanges between sponsors and the financing companies as well as other groups can help resolve the issue of acceptability and convenience of the reporting processes. This approach makes certain that the directive is flexible enough to adapt to industry capabilities and societal requirements.

Latest Amendment

The European Council published in February 2025 an amendment to the CSRD that alleviated the market burden by limiting the scope of the directive. The new CSRD only aims at companies employing over 1,000 staff, aligned with the Corporate Sustainability Due Diligence Directive (CSDDD). The action exempts approximately 80% of companies from compliance. The measure is informed by the proportionality doctrine, recognising that smaller companies possess less decision-making capacity, create less pollution (on average) and have a lower societal footprint than larger companies. In addition to streamlining compliance, the initiative limits how much information that companies can request of their value chain partners, particularly those that are not directly on the hook under the CSRD. This tweak is aimed at reducing reporting burden for smaller players in the supply chain. The proposed amendments postpone reporting deadlines for companies originally scheduled to report in 2026 and 2027 by two years. These companies are now beginning to report in 2028 based on their 2027 fiscal year figures. But companies due to report in 2025 based on their 2024 data are required to maintain their initial schedule. The proposal aims to simplify the framework of reporting by removing the authority of the European Commission to adopt sectoral sustainability reporting standards. The amendments also suggest a phased implementation of the limited assurance requirements for sustainability reporting so that companies are given additional time to switch to the new standards.

Legal and Business Implications 

Overall, the amendment will help ease the burden on SMEs (small and medium-sized enterprises). While the directive has gained significant importance since its enactment, companies that previously prepared to comply but are now excluded might seek legal recourse for wasted compliance costs. However, it's important to note that the directive's parameters and duties stem from necessity rather than arbitrary decisions. Companies that are prepared to comply with the CSRD are making a forward-thinking investment for future generations. Even without mandatory compliance, they can help promote and expand sustainability practices in other business environments. 

Companies may raise significant challenges against CSRD requirements by arguing they are disproportionate relative to their organisational size, available financial resources, and operational capabilities. Particularly concerning is the situation of small and medium-sized enterprises (SMEs) operating within larger companies' supply chains, who could present a compelling case that the CSRD indirectly affects them through cascading compliance obligations, despite the European Union's conscious efforts to implement limitations on value chain reporting requirements. These mounting concerns about proportionality and indirect regulatory burden may ultimately lead to a comprehensive judicial review process at the European level. Such a review would carefully examine whether the directive's extensive reporting obligations exceeds the EU's proportionality principle, which requires that regulatory measures must not go beyond what is necessary to achieve their intended objectives.

References and Further Reading

“Compliance cost or stabilizing economic force? Why CFOs should consider what the CSRD means for global trade“ (IMD)

“Corporate sustainability reporting” (European Commission)

“Corporate Sustainability Reporting Directive (CSRD)” (EY)

Directive (EU) 2022/2464 of the European Parliament and of the Council 

“Omnibus Package: Proposed Amendments to CSRD and CSDDD” (Arthur Cox)

“Omnibus Proposal amending CSRD, CSDDD and Taxonomy Regulation published” (De Brauw Blackstone Westbroek)

“The indirect impact of the CSRD on SMEs” (Enhesa)