What CSRD Is and Why It Was Introduced
CSRD was adopted in December 2022 and entered into force in January 2023 with a phased implementation timeline. It was introduced to address fundamental weaknesses in the non-financial reporting landscape: disclosure was too inconsistent to be comparable, too unverified to be reliable, and covered too small a proportion of the economy to give investors and other stakeholders a meaningful picture of corporate sustainability performance.
The Directive operates through the European Sustainability Reporting Standards, developed by the European Financial Reporting Advisory Group and adopted by the European Commission as delegated acts. These standards specify not only what must be disclosed but how disclosures should be structured and the processes required to determine what is material to report.
Who Is In Scope
Wave 1: Already Reporting
Wave 1 covers large public-interest entities with more than 500 employees, including listed companies, large banks, and large insurance companies already subject to the Non-Financial Reporting Directive. These organisations were required to report under CSRD for the first time on their 2024 financial year, with reports published in 2025.
Wave 2: Delayed to 2027
Wave 2 was originally intended to cover all other large EU companies, meeting at least two of three criteria: more than 250 employees, net turnover above 40 million euros, or balance sheet above 20 million euros. These were originally to report on their 2025 financial year.
The EU's Omnibus simplification package, published by the European Commission in February 2025, proposed a two-year delay for Wave 2 companies, pushing mandatory reporting to the 2027 financial year at the earliest. This proposal requires agreement through the normal EU legislative process and was subject to ongoing negotiation at the time of writing. Wave 2 companies should monitor the European Commission's CSRD page for confirmed implementation timelines.
Wave 3 and Listed SMEs
Wave 3 for listed SMEs was proposed to become voluntary rather than mandatory under the Omnibus package. Non-EU companies with significant EU operations, specifically net EU turnover above 150 million euros combined with an EU subsidiary or branch meeting defined thresholds, remain in scope.
What Needs to Be Reported
Cross-Cutting Standards
ESRS 1 sets out the general principles governing CSRD report preparation, including the overarching requirements for the double materiality assessment that determines which topics must be disclosed. ESRS 2 covers general disclosure requirements applying across all topic areas: governance of sustainability matters, strategy and business model, the materiality assessment process, and metrics and targets.
Environmental Standards
The climate change standards, covering both mitigation and adaptation, draw heavily on the TCFD framework and require disclosure of Scope 1, 2, and 3 greenhouse gas emissions alongside a credible transition plan. Other environmental standards cover pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy.
Social and Governance Standards
Social standards cover the organisation's own workforce, workers in the value chain, affected communities, and consumers and end-users. Governance topics are primarily addressed through ESRS 2 rather than standalone governance standards.
Double Materiality: The Central Assessment
What It Requires
CSRD requires a double materiality assessment before companies determine what to report. This assessment evaluates sustainability topics from two perspectives simultaneously.
Financial materiality asks whether a sustainability issue affects the organisation's own financial position, performance, cash flows, or cost of capital, either currently or in the foreseeable future. This is broadly equivalent to the investor-focused concept of materiality used in financial reporting.
Impact materiality asks whether the organisation's activities have a significant impact on the environment or on people, positively or negatively, regardless of whether that impact feeds back into the organisation's financial position. This is the less familiar dimension for most organisations.
A sustainability topic is material under CSRD if it is material from either perspective. This means the scope of mandatory disclosure is potentially wider than financial materiality alone would identify.
Conducting the Assessment
The double materiality assessment is not a one-off exercise. It must be reviewed and updated as circumstances change, and both the methodology and outputs must be disclosed as part of the CSRD report. The assessment involves identifying the full landscape of potentially material topics, evaluating financial and impact materiality for each, reaching conclusions about what is material, and documenting the process in sufficient detail for external verification.
For most organisations, the impact materiality component is the more demanding of the two, because it requires assessing the organisation's effects on the outside world rather than only the effects of the outside world on the organisation. Engaging meaningfully with affected stakeholders is a requirement of the process, not an optional enhancement.
Assurance Requirements
CSRD introduces mandatory external assurance for sustainability disclosures, starting with limited assurance. Limited assurance provides a lower level of confidence than the reasonable assurance applied to financial statements, but still represents an independent external check on whether disclosures are materially consistent with the applicable standards.
The intention is for the assurance requirement to progress to reasonable assurance over time as appropriate standards are developed. This trajectory has significant practical implications: organisations that have not previously subjected their ESG data to external scrutiny need to invest in data quality and governance to a standard that will satisfy audit-level review. Building audit-ready sustainability data takes considerable time and cannot be accomplished close to a reporting deadline.
The Omnibus Simplifications
The February 2025 Omnibus package proposed several changes to reduce the burden of CSRD:
The two-year delay for Wave 2 companies described above. A reduction in the number of ESRS data points required for in-scope companies, specifically addressing the concern that the original standards required too many data points for organisations to manage practically. A narrowing of the value chain data collection obligations, which had been identified as the most operationally demanding aspect of the original CSRD requirements. And the making voluntary of the SME reporting standard.
These proposals are not yet final. Wave 1 companies remain subject to the original requirements. Wave 2 companies are advised to continue preparation even while the delay is being finalised, since the data infrastructure, governance processes, and systems needed for credible CSRD reporting take considerable time to build.
Practical Preparation
The Double Materiality Assessment First
Conducting a genuine double materiality assessment early, before deciding what to report on, is the legally required analytical foundation and practically determines the scope of all subsequent work. Many organisations have found this assessment more resource-intensive than expected, particularly the impact materiality component involving stakeholder engagement and supply chain impact analysis.
Emissions Data Infrastructure
Building data infrastructure for Scope 1, 2, and 3 greenhouse gas emissions is typically the single largest data challenge, particularly for Scope 3 where value chain data from suppliers must be collected. This work takes time and cannot be compressed close to a reporting deadline.
Early Assurance Engagement
Engaging external assurance providers early, to understand what data quality and governance standards they will expect, allows organisations to identify and address gaps before they become last-minute problems.
Cross-Functional Programme
Treating CSRD preparation as a cross-functional programme, involving finance, risk, legal, operations, procurement, and HR alongside sustainability teams, reflects the reality that the data required sits across the whole organisation rather than being owned by any single function.
References and Further Reading
