We now live in a time in history where accountability is primary to how consumers see brands. It is no longer acceptable for businesses to just chase profits. They are now expected to prove they are looking after the planet and its people. For managers operating within the complex global textile and fashion industry, this shift is critical. It focuses heavily on everything from where materials are sourced to how workers in the supply chain are treated.
You can call the European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) a regulatory manifestation of this shift in accountability expectations. It aims to standardise and enhance the quality of sustainability disclosures across the continent. It will also support the EU’s overarching goal of reducing climate risk and achieving climate-neutrality by 2050 (European Green Deal).
Prior rules, like the Non-Financial Reporting Directive (NFRD), were found to lack consistent and comparable data, negatively impacting sustainability investments and increasing data costs for stakeholders.
The CSRD’s goal is to provide clarity so that investors and other stakeholders can better evaluate EU companies’ sustainability performance, improve transparency and accountability, and simplify comparisons across businesses. In addition to this, the improved climate disclosures mandated by the CSRD support the EU’s overarching objective of reducing climate risk and achieving the European Green Deal’s climate-neutrality target by 2050.
WHAT IS THE CSRD?
The CSRD is an EU legislation that mandates companies disclose their environmental and social impacts, as well as how their environment, social, and governance (ESG) actions affect their financial health. It replaces the NFRD and significantly expands its scope and requirements.
Key mandatory disclosure components brought by the CSRD and its underlying standards include:
1. The Principle of Double Materiality
The CSRD fundamentally requires reporting based on the principle of double materiality. This framework helps determine which sustainability topics a company must include in its report.
A double materiality assessment (DMA) involves evaluating two interconnected perspectives:
• Impact Materiality (Inside-Out View): This assesses the impact of the company’s own operations on environmental, social, and governance (ESG) issues, such as human rights, worker conditions, and the environment. This perspective looks from the company outward onto society and the planet.
• Example: How does your factory’s wastewater pollute local marine resources, or how does your sourcing policy affect the human rights of workers in your value chain?
• Financial Materiality (Outside-In View): This assesses how external sustainability issues, such as climate change, risks, and opportunities, impact the company’s financial performance, cash flows, or business model. This perspective looks from the outside environment inward toward the company’s finances.
• Example: How does increasing water scarcity due to climate change affect the cost and availability of cotton, or how might new carbon taxes influence your operational costs and revenue?
By requiring both views, the DMA provides a solid foundation for CSRD compliance and the overall sustainability strategy, ensuring reporting focuses on the most material issues.
2. The Inclusion of Prospective Information
The CSRD mandates the inclusion of prospective information i.e. companies must focus on forward planning.
Required prospective information includes:
• Resilience of Business Model: Companies must document the risks posed by sustainability matters, such as climate change, and detail the resilience of their business model to these risks.
• Strategy and Management: Disclosures must cover the company’s strategy, including how the undertaking’s business model interacts with its material impacts, risks, and opportunities, and the strategy for addressing them.
3. Information Detailing the Upstream and Downstream Value Chain
CSRD reporting requires disclosure of information regarding the entire upstream and downstream value chain. This means tracing social and environmental risks upstream to raw material producers and downstream to disposal.
• Scope: Companies must disclose their due diligence processes for identifying and mitigating social and environmental impacts that occur throughout their value chains and supply chains.
• Reporting Challenge: For many organisations, particularly those with complex global operations, lacking visibility into their suppliers’ sustainability practices presents a significant challenge to achieving full transparency and compliance for value chain reporting.
4. The Concept of Sustainability Due Diligence
The CSRD requires the concept of sustainability due diligence.
• Policies and Due Diligence: Companies must outline specific policies related to several sustainability matters and describe the due diligence process for tracking and enforcing these policies. These sustainability matters include, but are not limited to, environmental protection, human rights, anti-corruption, anti-bribery, and the treatment of employees.
• While related, the CS3D now applies only to mega-corporations (>5,000 employees, €1.5B turnover). Most companies reporting under CSRD will not be subject to CS3D
• Governance Integration: Due diligence processes are mandatory disclosures under the ESRS, specifically within ESRS 2: General Disclosures, and help identify material impacts, risks, and opportunities related to sustainability. This concept is closely related to the upcoming Corporate Sustainability Due Diligence Directive (CS3D), which aims to foster sustainable and responsible corporate behavior throughout global value chains.
5. Third-Party Auditing of Disclosures for Accuracy and Completeness
The CSRD mandates that the sustainability information included in the report must be verified by a third party.
• Assurance Requirement: All disclosures are subject to mandatory verification, requiring external auditors to review company reports.
• Limited Assurance: Initially, compliance requires the auditor to provide limited assurance. Limited assurance generally means the verification is based mainly on the organisation’s own statements. Assurance costs for this phase are estimated to be about 20% to 30% of average financial assurance costs.
• Future Shift to Reasonable Assurance: The Directive includes an option to move toward a reasonable assurance standard at a later stage, following an assessment. The European Commission is required to adopt reasonable assurance standards by 1 October 2028, following an assessment of feasibility. This shift is expected to increase both the time and resources needed for compliance.
This assurance requirement adds to the cost and time burden for undertakings and requires them to work closely with external auditors. To prepare for this, companies must document their reporting processes meticulously and maintain clear audit trails.
The sustainability information must be included within a separate section of the company’s management report.
WHO MUST FOLLOW CSRD
An estimated 50,000 companies in Europe will be obliged to report under the CSRD. The requirements apply to European entities as well as qualifying non-EU parent companies.
Criteria for Affected Companies
The CSRD applies to large companies (whether listed or not) and listed companies (excluding listed micro-companies).
| Company Type | Criteria (2026 Rules) |
|---|---|
| EU-based Large Undertakings | Must meet BOTH criteria: • Average of 1,000+ employees • Net turnover of more than €450 Million |
| Non-EU Undertakings | Must meet BOTH criteria: • Annual EU revenue of at least €450M (Group Level) • Have an EU subsidiary or branch with at least €200M net turnover |
| Listed SMEs | Removed from mandatory scope (Voluntary reporting only) |
CSRD IMPLEMENTATION TIMELINE
CSRD compliance is being phased in from 2024 through 2029. Companies must ensure their reporting period aligns with the reporting period used for their financial statements.
| Financial Year Starts | Who Must Report | First Report Submission Due |
|---|---|---|
| 1 January 2024 | Large public-interest entities (NFRD) | 2025 (reporting on 2024 data) |
| 1 January 2025 | Large Undertakings (>1,000 employees / >€450M turnover). *Member States may exempt companies with 250-1,000 employees for FY 2025 & 2026. | 2026 (reporting on 2025 data) |
| 1 January 2026 | Listed SMEs | REMOVED from mandatory scope (Voluntary only) |
| 1 January 2028 | Non-EU Parent Companies (meeting the new €450M / €200M thresholds) | 2029 (reporting on 2028 data) |
THE ESRS RULEBOOK
To ensure standardisation, the CSRD requires mandatory reporting in accordance with the European Sustainability Reporting Standards (ESRS). The ESRS were developed by the European Financial Reporting Advisory Group (EFRAG) and outline the specific metrics and disclosure requirements companies must follow. Cross-cutting standards (ESRS 1 and 2) are mandatory for all organisations, while other topical standards are mandatory if deemed material through the DMA.
The first set of ESRS is structured across cross-cutting, environmental, social, and governance standards.
| Standard Category | Title/Topic | Scope |
| Cross-Cutting Standards | ESRS 1: General Requirements / ESRS 2: General Disclosures | Mandatory principles, governance, strategy, and materiality assessment disclosures |
| Environmental | ESRS E1: Climate change | Disclosure on climate-related impacts, risks, and opportunities |
| ESRS E2: Pollution | Disclosure on pollution-related matters | |
| ESRS E3: Water and marine resources | Disclosure on water-related matters | |
| ESRS E4: Biodiversity and ecosystems | Disclosure on biodiversity and ecosystem-related matters | |
| ESRS E5: Resource use and circular economy | Disclosure on resource use and circular economy matters | |
| Social | ESRS S1: Own workers | Disclosure on the company’s own workforce |
| ESRS S2: Workers in the value chain | Disclosure on workers within the company’s value chain | |
| ESRS S3: Affected communities | Disclosure on communities impacted by the company’s operations | |
| ESRS S4: Consumers and end-users | Disclosure on consumers and end-users of products/services | |
| Governance | ESRS G1: Business conduct | Disclosure requirements on the company’s strategy and business conduct |
HOW TO PREPARE AND IMPLEMENT
Developing a robust reporting framework is essential to ensure compliance and maximise the benefits of sustainability reporting. Companies should follow a systematic process for implementation:
1. Conduct the Double Materiality Assessment (DMA): Perform a comprehensive DMA to evaluate both impact and financial materiality, involving key stakeholders to identify the most relevant topics. This foundational step sets the agenda for the entire sustainability strategy.
2. Perform Gap Analysis: Compare your current reporting practices and data availability with the requirements specified in the CSRD and ESRS. Identify areas where existing data collection and reporting processes fall short of the new standards.
3. Develop a Data Collection Strategy: Create a comprehensive plan to address data gaps, including enhancing existing systems, establishing new data collection methods, and mapping data origin and storage.
4. Align Reporting and KPIs: Familiarise your team with the ESRS and develop specific, measurable Key Performance Indicators (KPIs) that accurately reflect your company’s performance on identified material topics.
5. Establish Governance and Oversight: Define clear roles and responsibilities, including board-level oversight, for managing the sustainability reporting process. Establish internal controls to maintain the accuracy and reliability of sustainability data.
6. Implement Data Management Systems: Invest in or upgrade systems to efficiently process, collect, and store the high volume of sustainability data. Effective data management ensures accuracy, consistency, and auditability.
7. Develop Reporting Processes and Timelines: Integrate sustainability reporting into your annual reporting cycle, ensuring the process receives the same rigor as financial reporting.
8. Prepare for Assurance: Document your reporting processes meticulously, maintain clear audit trails, and ensure the traceability of all reported data. Third-party assurance is mandatory (limited assurance initially, moving toward reasonable assurance expected by 2028).
9. Continuous Improvement: Regularly review and refine your reporting framework and maintain continual engagement with stakeholders to ensure alignment with evolving expectations and regulatory updates to the ESRS.
OTHER CRITICAL CSRD REQUIREMENTS
• Reporting Format: Sustainability reports must be submitted in the European Single Electronic Format (ESEF/XHTML) and the information must be digitally tagged using iXBRL to make it machine-readable for the European Single Access Point.
• Value Chain Reporting: Companies must disclose their due diligence processes for identifying and mitigating social and environmental impacts throughout their entire value chain (including suppliers and partners).
• Strategic Advantage: Companies that adapt quickly and use sustainability as a strategic asset can gain a competitive advantage in the market and potentially strengthen investor confidence.
• Coherence with EU Regulations: The ESRS framework is designed to facilitate interoperability with other EU laws and international standards (like ISSB, TCFD, and GRI). The CSRD requires companies to reflect the sustainability performance required by the EU Taxonomy Regulation, and the resulting disclosures feed the requirements of the Sustainable Finance Disclosure Regulation (SFDR).
Achieving CSRD compliance requires integrating sustainability into overall business strategy, making it a comprehensive undertaking rather than merely a reporting exercise. Just as a ship must be overhauled and structurally reinforced before embarking on a long, arduous voyage, organisations must proactively transform their internal systems, governance, and data infrastructure to navigate the rigorous demands of CSRD reporting.
