Ultimate Guide to the EU CSRD and Carbon Credits for Businesses

As the European Union (EU) strives to become the first climate-neutral continent, it is implementing a wide array of policies to promote sustainable practices. A pivotal piece of this strategy is the EU Corporate Sustainability Reporting Directive (EU CSRD), which took effect on January 5, 2023. Replacing the Non-Financial Reporting Directive (NFRD), the CSRD requires more detailed reporting across multiple Environmental, Social, and Governance (ESG) topics, and it will also apply to more companies. The purpose of this ESG regulation is to equip investors and other stakeholders with the information they need to assess corporate impacts on society and the environment. Additionally, it allows them to understand financial risks and opportunities associated with sustainability issues. These expanded reporting requirements underscore the EU’s commitment to fostering corporate accountability, align with global climate goals, and meet investor demands for responsible business practices. To help businesses prepare, this guide will explore the nuances of the CSRD, key elements for CSRD reporting, and the CSRD timeline. It will also cover how companies can leverage carbon credits to meet CSRD requirements.

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Understanding the EU Corporate Sustainability Reporting Directive (EU CSRD)

What is the CRSD?

The CSRD is an EU ESG regulation enacted to strengthen the quality and scope of corporate sustainability reporting. Building on the foundation of the EU NFRD, the CSRD expands the number of EU companies that will need to comply from nearly 12,000 to 50,000. It will also affect more than 10,000 non-EU companies. Scheduled to take effect from the fiscal year 2024 for some companies, it imposes more rigorous reporting requirements.

Why was the CSRD enacted? What are the goals?

The CSRD is part of the European Green Deal, a set of policies that aim to transform the EU into a competitive, just, and climate-neutral economy by 2050. It addresses a crucial gap in NFRD reporting requirements by expanding the scope of ESG disclosures and including a larger array of companies.

The goals of the Corporate Sustainability Reporting Directive are to:

1. Improve transparency: By requiring detailed disclosures, the directive ensures that stakeholders, including investors, consumers, and policymakers, have access to reliable information to assess a company’s impact on society and the environment.
2. Promote sustainable investment: The CSRD facilitates the flow of capital toward more sustainable enterprises by making the environmental efforts of companies clear and quantifiable.
3. Foster responsible business practices: It encourages companies to integrate ESG considerations into their core business strategies and align their operations with broader sustainability goals.

By setting high standards for corporate responsibility, the CSRD also supports the EU’s transition to a sustainable economy and bolsters global environmental efforts.

What are the CSRD requirements for reporting?

The CSRD mandates that companies report on their ESG impacts, risks, and opportunities. While the content and deadlines will vary by company, CSRD requirements introduce several critical reporting enhancements. These enhancements, highlighted below, aim to standardize and elevate the quality of sustainability reporting across all affected entities.

1. Detailed ESG reporting aligned with ESRS

Companies must provide extensive disclosures on ESG issues affecting their operations and their impact on the environment and society. Reports need to conform to the European Sustainability Reporting Standards (ESRS) to ensure uniformity and comparability across different entities. The information should also include both qualitative and quantitative data on how the company is identifying, addressing, and accounting for areas such as:

• Environmental: greenhouse gas (GHG) emissions, energy use, and resource consumption.
• Social: Workplace diversity, health and safety standards, and human rights within supply chains.
• Governance: Sustainability governance and other governance topics such as ethical business practices, anti-corruption measures, and diversity in board structure.

2. Double materiality

Assessment of both impacts of ESG issues on the company’s financial performance (“outside-in”) and the company’s impacts on society and the environment (“inside-out”) is necessary.

3. Integration into annual reporting

ESG disclosures need to be incorporated into annual financial and management reports to provide a holistic view of corporate performance and sustainability impact.

4. Digital tagging

To boost transparency and accessibility, companies are required to digitally tag their reports in a format compatible with the European Single Access Point (ESAP).

5. Mandatory assurance

Reports must be verified annually by a third-party, accredited audit firm to ensure the data is complete and accurate.

The CSRD also mandates industry-specific disclosures, although the implementation of this reporting has been delayed. And, similar to other ESG regulations, companies must follow a “comply or explain” approach, which means either complying with the CSRD requirements or explaining any deviation from them.

Which companies are affected by the Corporate Sustainability Reporting Directive?

The CSRD is mandatory for in-scope companies, which include the following:

• Large companies: All large companies operating in the EU, whether listed or not, that meet two of these criteria: more than 250 employees, a balance sheet total exceeding EUR 20 million, or net turnover of more than EUR 40 million.
• Listed SMEs: Small and medium enterprises (SMEs) listed on EU regulated markets, except micro-enterprises. However, they can opt in for simplified reporting standards to ease the compliance burden.
• Non-EU companies: Non-EU companies that meet the “EU Turnover Test” (have at least one qualifying EU subsidiary or branch in the EU and a net turnover exceeding EUR 150 million).

What is the CSRD timeline? When do companies have to start reporting?

The CSRD will be phased in starting with the 2024 fiscal year. (Note that the first three groups also include non-EU companies that meet the criteria.)

• January 1, 2024, for companies already subject to the NFRD (first reports due in 2025)
• January 1, 2025, for large companies that were not subject to the NFRD (first reports due in 2026)
• January 1, 2026, for listed SMEs, small and non-complex credit institutions and captive insurance undertakings (first reports due in 2027)
• January 1, 2028, for non-EU companies that meet the “EU Turnover Test” (first reports due in 2029).

The strategic role of carbon credits in CSRD compliance

How carbon credits facilitate CSRD adherence

The CSRD mandates detailed disclosures of companies’ environmental efforts, including the use of carbon credits. These credits are instrumental for companies aiming to mitigate their GHG emissions on the way to net zero, address residual emissions, or make positive climate contributions. The directive requires that the use of carbon credits be reported separately to ensure transparency and prevent the misrepresentation of actual emission levels and reduction progress.

Key CSRD requirements for reporting carbon credits

Companies must disclose their use of carbon credits for GHG removals and mitigation projects under ESRS Disclosure Requirement (DR) E1-7. This includes disclosures for both insettingⁱ and carbon credits purchased for offsetting. Here’s a breakdown of the CSRD requirements related to the latter:

Carbon credit details

Detailed disclosures on the quantity, type, location, and quality standards of carbon credits are required. This includes:

• Amount of carbon credits: The total amount of carbon credits purchased (in metric tons of CO2e) that are verified against recognized standards and canceled during the reporting period. Planned (future) cancellations and their contractual basis must also be disclosed.
• Percentage breakdown: Disclosures must include the following (as a % of the total carbon credits reported):
  
  • Share of carbon credits from reduction versus removal projects
  • Types of carbon sinks (biogenic/nature-based or tech-based)
  • Share of carbon credits adhering to each recognized quality standard
  • Share of carbon credits issued from projects in the EU
  • Share of carbon credits qualifying as a corresponding adjustment under Article 6 of the Paris Agreement.

Separate reporting

GHG emissions (E1-6) and GHG emission reduction targets (E1-4) must be reported separately from carbon credit disclosures (E1-7). This separation ensures that the use of carbon credits does not obscure actual emission levels or progress toward reduction targets. Additionally, carbon credits from insettingⁱ should be distinctly reported from those purchased for offsetting to avoid double counting.

Role in achieving net zero

The role carbon credits play in broader sustainability strategies should be clearly articulated, particularly in how they contribute to achieving net zero goals. Plans for neutralizing a specific percentage of residual emissions using carbon credits should also be outlined.

Role in GHG neutrality claims

Companies making public GHG neutrality claims involving carbon credits must ensure these claims:

• Are supported by GHG emissions reduction targets as mandated
• Do not hinder the achievement of reduction or net zero targets
• Demonstrate the credibility and integrity of the carbon credits by referencing recognized quality standards

Additional guidance on implementing the ESRS standards and an ESRS navigation tool is available from the European Financial Reporting Advisory Group (EFRAG).

Using carbon credits to comply with the CSRD: 5 easy steps

In a recent study by Workiva, 83% of companies said that collecting accurate data for CSRD reporting requirements will be a challenge. Initial reports are due in 2025, so companies need to act swiftly. Here are some steps that businesses can take to get ready:

1. Understand the requirements

Companies should familiarize themselves with the CSRD reporting requirements and determine which requirements are applicable.

2. Establish ESG reporting processes, infrastructure, and expertise

The new rules will require companies to treat ESG reporting the same as financial reporting. To prepare, companies should:

• Allocate adequate budget: For planning purposes, EFRAG suggests allocating a budget of 0.004% to 0.008% of revenue for reporting and a budget of 0.13% to 0.026% of revenue for annual auditing.
• Hire a team or engage external consultants that can develop and manage a reporting process to support CSRD requirements. Cloverly’s network of carbon accounting partners is a good place to start.
• Gather accurate data: Robust systems must be in place to collect and manage data that accurately reflect sustainability practices.
• Engage a third-party auditor: CSRD reports must be audited by an independent third-party to ensure accuracy.

3. Adopt a high-integrity climate approach

The common steps shown below for a high-integrity climate journey have been distilled from over 30 leading frameworks and standards. Critically, when companies reduce emissions and use carbon credits in parallel, they decarbonize faster than their peers and contribute significantly to global progress toward the Paris Agreement goals. This sets them apart as climate leaders while helping them stay ahead of evolving regulations.