Implications of the Corporate Sustainability Reporting Directive of the EU Commission (CSRD) adopted on 21 April 2021

All large European public-interest entities with more than 500 employees must disclose a sustainability report that includes both the effects of sustainability on the company and the company’s impact on people and the environment (double materiality). This is similar to other large economies such as the USA, the UK or India.

What has changed?

On 21 April 2021, the EU Commission issued the Corporate Sustainability Reporting Directive (CSRD). The directive obliges all large European undertakings to include a section for firm-specific relevant sustainability matters within their management report for financial years beginning 01 January 2023 or during the calendar year 2023. Furthermore, the CSRD requires the opinion of an external auditor (limited assurance), which confirms compliance with the content-related demands of the directive. The same applies to small and medium-sized capital market-oriented companies as of 01 January 2026.

But what exactly is CSR?

Corporate Sustainability Reporting (CSR), ESG-Report and Sustainability-Report are usually synonyms for the same product. These terms generally stand for transparent and structured reporting of firms in terms of environmental, social and corporate governance issues (ESG). Specifically, CSR reveals a firm’s efforts in sustaining and enhancing sustainable business practices (e.g., green production, contributions to social equality, and welfare or fair tax accounting). It includes all relevant ESG matters and mostly considers the United Nations Sustainable Development Goals (SDG).

What to consider for an external audit?

To ensure comparability, global institutions such as the Global Reporting Initiative (GRI) provide standardised guidelines for CSR. Based on the globally accepted ISAE 3000, external auditors usually give an opinion (limited assurance) that confirms the sustainability report’s compliance with the underlying guidelines (mostly GRI standards). However, although ISAE 3000 already provides a regulatory framework for the audit of sustainability reports, the EU Commission considers the implementation of a new European regulatory standard for CSR.

Where to add the new section?

The EU directive suggests the incorporation of the sustainability report into the management report. One major intention for this is the growing trend towards integrated reporting to improve consistency between financial and non-financial sections. In addition, firms under the scope of the CSRD are required to prepare and disclose their financial statements in HTML format.

What are the effects on stakeholders?

Stakeholders will benefit from the higher transparency on how firms perform in sustainable issues for their decision-making processes. For instance, investors and creditors can compare firms regarding their sustainability efforts for their long- or short-term investment decisions. Moreover, suppliers and B2B customers will understand their business partners’ impact on people and the environment, which might help them improve the sustainability of their supply chain management.

Our business opportunities?

First, firms under the scope of the new directive are obliged to acquire a lot of knowledge on how to prepare an integrated report which consistently combines both financial and non financial information. Auditors will take a central role in consulting with and supporting firms during this process due to their comprehensive knowledge about the business environment and (financial) reporting requirements. Second, a huge number of firms will need an audit opinion for their sustainability reports. For instance, in January 2023 the number of German firms obliged to prepare a sustainability report will rise from 500 to nearly 15,000. Furthermore, according to the EU Commission, auditors will be in charge of the required external reviews of the sustainability reports of the affected firms.

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