The European Union’s Corporate Sustainability Reporting Directive, or CSRD, expands the horizon of sustainability reporting both in terms of the number of companies in scope and the quality of disclosures required. While the reporting directive primarily impacts companies based in the European Union (EU), U.S. companies that operate in the EU may be required to participate if they meet certain criteria. These new requirements could affect U.S. companies across sectors and add to the growing number of environmental, social and governance (ESG) and sustainability reporting obligations many companies already face.
Background on the CSRD
The CSRD replaces the existing Non-Financial Reporting Directive (NFRD) and applies to all public companies in the EU with more than 250 employees. Aligned with the European Sustainability Reporting Standards (ESRS) and developed by the European Financial Reporting Advisory Group (EFRAG), the CSRD requires organizations to disclose information related to sustainability issues—including their ESG impacts—in publicly disclosed management reports. Further, it requires companies to disclose information through the lens of double materiality, stating how sustainability issues affect their business as well as how their actions impact the environment and society.
Required CSRD disclosures include the following, among others:
- Greenhouse gas (GHG) emissions, with mandatory Scope 1 and Scope 2 disclosures and conditional Scope 3 disclosure.
- Specific GHG reduction targets and progress toward these targets.
- Climate and sustainability risk assessment.
Under CSRD rules, the information disclosed must undergo third-party assurance prior to disclosure, making data quality and transparency critical in the reporting process.
What Does the CSRD Mean for U.S. Companies?
The CSRD applies to EU-based companies with 250 or more employees that are listed on an EU stock or security exchange and meet any two of the following general scoping requirements:
- Net revenue: €40 million or more.
- Total assets: €20 million or more.
- Employees: 250 or more.
Additionally, the CSRD applies to any subsidiary of a U.S. company that has a physical presence in an EU country and meets the same general scoping requirements above. This condition will trigger reporting requirements for the subsidiary organization but spare the U.S.-based parent organization. However, the parent organization will be compelled to report if it meets the following two criteria:
- It generated more than €150 million in the EU for the previous two consecutive financial years.
- It either has an EU subsidiary that meets the general scoping requirements or has one physical location in the EU that generated more than €40 million in the preceding financial year.
So, to comply with CSRD reporting requirements, U.S.-based companies must be prepared to:
- Quantify their GHG emissions, set specific emissions reduction goals and develop a strategy to achieve those reductions.
- Evaluate climate risks to their organization and broader value chain, discuss how these risks impact the business and develop risk-minimization strategies.
- Disclose how their activities impact the environment and social well-being of stakeholders and the public at large.
CSRD vs. SEC Disclosure Rules
Like the CSRD, the Security and Exchange Commission’s (SEC) climate-related disclosure rules promote transparency and accountability in non-financial reporting, but there are a few key differences between them:
- SEC disclosures would apply to SEC-registered public companies based in the U.S., while the CSRD has different levels of scopes of eligibility for both EU and non-EU-based companies.
- The SEC rules would mandate disclosure of climate-related information only, while the CSRD requires companies to report on broader sustainability and social impacts in addition to climate-related information.
- The CSRD mandates the development of a set of reporting standards (ESRS) with which companies are required to comply. The SEC disclosures follow the GHG Protocol and the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) and require information to be disclosed as part of the company’s annual Form 10-K report, but it has not proposed any reporting standards to follow. The CSRD’s ESRS 2 General Disclosures are mandatory; the remaining ESRS standards are voluntary.
How Sphera Can Help You Prepare for CSRD and SEC Disclosure Requirements
The CSRD requires companies to disclose environmental impacts in alignment with the EU Taxonomy, including mitigation and adaptation measures, impacts on marine and aquatic environments and pollution. Reporting these impacts requires companies to measure their complete environmental footprint, including Scopes 1, 2 and 3 GHG emissions. Both the EU Taxonomy and the CSRD recommend life cycle assessment (LCA) as a scientific method to measure additional environmental impacts. And while CSRD reporting will not be due until early 2025, the time to start preparing is now.
The SpheraCloud Corporate Sustainability software platform provides a flexible ESG software solution to help quantify impacts, set reduction targets and track progress against environmental impacts that are key to the CSRD’s guidelines. The solution facilitates transparent, audit-proof data and reporting while delivering key business insights to improve operational performance and meet the requirements of a variety of reporting frameworks, including the CSRD, SEC, TCFD, CDP and more.
In addition to the Corporate Sustainability reporting solution, Sphera’s LCA for Experts software can help companies measure and report a broad spectrum of environmental impacts associated with their products and operations. With over 16,000 impact inventories from 20+ industrial sectors, LCA for Experts is the industry’s leading LCA software solution.
Finally, Sphera’s Sustainability Consulting team of 120+ sustainability experts from across the globe can support and advise companies on a wide variety of ESG and sustainability needs, including compliance with the CSRD and other reporting frameworks, program development, life cycle assessment, decarbonization strategies and more.
Start preparing for the CSRD today with Sphera and you will automatically be ready for SEC disclosures.