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The European Union's Corporate Sustainability Reporting Directive (CSR),adopted at the end of 2022, and the July 2023 implementation standards (European Sustainability Reporting Standards (ESRS)) significantly expand sustainability reporting requirements while ensuring information transparency and accountability. As these requirements phase in, companies should expect impacts on their EU operations and their global supply chain.

This directive implements mandatory standards for EU sustainability reporting. Applying uniformity and requiring comprehensive and detailed disclosures on a broad spectrum of sustainability topics will allow comparability between companies and help guarantee the disclosure of all relevant information. 

Companies must integrate their sustainability reporting into their management reports. Eliminating the option to release separate sustainability reports will enhance the information's accessibility, corporate context, and digital transparency.

Initially, ESRS applies only to EU-incorporated companies that will be reporting for fiscal years starting on or after January 1, 2024. However, beginning in 2028, non-EU companies with a significant EU presence (based on thresholds for EU revenue and assets) must also report, and those multinational organizations' reports must reflect global operations for all non-EU companies in their group. [Note that including operations in other jurisdictions will be even more complicated by differences in the scope and coverage of sustainability reporting requirements of different areas, such as those implemented by the US SEC, the State of California, and the UK.]

The EU directive applies comprehensive information requirements by entities including large companies, listed small and medium-sized companies, and major insurance companies and banks. The CSR directive requires these entities to report comprehensive information about how environmental, social, human rights and governance factors impact the company's operations. Reports must also detail how the businesses are impacting sustainability, referred to as "double materiality." That information must include detailed accounts of their critical sustainability aspects, impacts, risks, policies, and due diligence processes. 

The directive implements a rigorous framework for sustainability assurance by requiring third-party audits of all reported sustainability data.Initially, the use ofauditors is to provide limited assurance on the credibility of sustainability reporting data, which will increase after 2028 to reasonable assurance. This assurance framework will be coupled with expanded oversight by national authorities. Opening the sustainability assurance market beyond statutory auditors will foster healthy competition in evaluating sustainability reports and establish a broader base of expertise.

This directive fits into the EU's sustainable finance agenda, designed to push corporate entities into action on environmental, social, and governance issues. However, this directive will also empower investors and stakeholders by providing access to reliable and comparable sustainability data, which they can use to hold companies accountable and to support informed investment that furthers sustainable choices. 

We can expect that the EU's approach to corporate sustainability reporting will drive global corporate transparency, accountability, and sustainable reporting practices. As companies address these rigorous standards, they must adopt the tools and metrics to reflect their entire organization's sustainability impacts better and to explain how their business operations are adapting.