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Implications of CSRD: What the Final Standards Mean for Investors and Issuers

Posted on October 25, 2023

Arthur Carabia
Arthur Carabia
Director, ESG Policy Research

On July 31, 2023, the European Commission published the European Sustainability Reporting Standards (ESRS), the criteria to implement the recently adopted Corporate Sustainability Reporting Directive (CSRD). These standards are meant to help investors and other stakeholders evaluate the sustainability performance of companies, as part of the European Green Deal, the EU’s set of policy initiatives aimed at a green transition in the region and climate neutrality by 2050.1 These standards are now being scrutinized by the European Parliament and the European Council because of their potential administrative burden, resource requirements and reporting complexity.2 Although unlikely, there is a possibility that these two institutions could reject the delegated act (as-is, but they may not amend it).

This article delves into the elements of the standards, their focus on impact, and the timeline for their roll out. It also explores what having richer and more accessible sustainability information from issuers could mean for investors and the broader sustainable finance market.

About the CSRD and Its Standards

The CSRD, which came into force in January 2023, is a directive from the commission which strengthens the rules around corporate reporting of environmental and social information. Expanding on the Non-Financial Reporting Directive (NFRD), CSRD will apply to a broader set of companies, including non-listed entities and small to medium-sized enterprises. Companies subject to the CSRD will have to report according to ESRS. The ESRS outlines the quantitative and qualitative information issuers operating in the EU need to disclose across a wide range of environmental, social and governance topics (Table 1). Under the ESRS, the information companies disclose is subject to a double materiality assessment, which refers to the risks that material external environmental and societal issues pose to an issuer’s financial performance, as well as the impact an issuer’s operations and products have on society and the environment.

Table 1. Overview of the European Sustainability Reporting Standards 

Overview European Sustainability Reporting Standards

Source: European Sustainability Reporting Standards. For informational purposes only.

Companies reporting under the CSRD are required to provide limited assurance3 of compliance with the reporting obligations of CSRD (and ESRS) as well as with EU Taxonomy Regulation disclosures. The commission estimates that from 2024 onwards, the new directive and standards will impact 50,000 companies.

By broadening the scope of companies and topics covered compared to NFRD, introducing a limited assurance regime and making extra-financial information readily available and easily accessible via the European Single Access point,4 CSRD should largely improve the quality and quantity of sustainability-related information available to investors. It will support the capacity of investors to manage and mitigate sustainability risks and impacts as per regulatory and/or contractual requirements and to build products aligned with the preferences of their end clients. On the flip side, these standards also mean that many investment firms will themselves be subject to the requirement to disclose information according to CSRD.

Impact Materiality: The Heart of CSRD and Its Standards

The European Financial Reporting Advisory Group (EFRAG) is expected to provide more guidance on the ESRS. What we can already say at this stage is that the standards recommend that issuers conduct an impact materiality assessment and a financial materiality assessment. The standards say, “In general, the starting point is the assessment of impacts, although there may also be material risks and opportunities [linked to financial materiality] that are not related to the undertaking’s impacts.”5 The assessment of impact materiality should focus on both the positive and negative impacts of business activities and consider the severity of these impacts on a broad range of stakeholders (not only investors) and across the value chain (upstream and/or downstream).

All the environmental, social, and governance standards shown in Table 2 and related data points are subject to a double materiality assessment, including scope 1, 2, and 3 greenhouse gas emissions. However, it’s worth noting that if a company concludes that climate change is not a material topic, it must provide a detailed explanation of the conclusions of its materiality assessment.

Investors were hoping the CSRD data points that companies are required to disclose would align with their own impact reporting obligations (i.e., principal adverse impact indicators) under the Sustainable Finance Disclosure Regulation (SFDR). Although similar, under CSRD the environmental, social and governance data points are also subject to double materiality assessments, resulting in a data gap for investor use. To alleviate implementation challenges, the ESRS requires issuers to explicitly mention when the data point in question is “not material,” allowing investors, in turn, to assume that the investee company does not contribute to the corresponding indicator of principal adverse impacts in the context of their own SFDR disclosures.

Table 2. Select Topics Covered Under the European Sustainability Reporting Standards

Select topics covered under ESRS

Source: European Sustainability Reporting Standards. For informational purposes only.

Phasing In of ESRS and Some Exceptions

The application of the ESRS regulation will take place in four stages:

Phase 1: From January 1, 2024, for large public-interest companies (with over 500 employees) already subject to the existing Non-Financial Reporting Directive (NFRD), with reports due in 2025.

Phase 2: From January 1, 2025, for large companies that are not presently subject to the NFRD (with more than 250 employees and/or EUR50 million in turnover and/or EUR25 million in total assets), with reports due in 2026.

Phase 3: From January 1, 2026, for listed small (with more than 50 employees and/or EUR10 million in net turnover and/or EUR5 million in total assets) and medium enterprises (less than 250 employees and/or less than EUR50 million in net turnover and/or less than EUR25 million in total assets) and other undertakings, with reports due in 2027. These companies can also opt-out of reporting for up to two years.

Phase 4: From January 1, 2028, for non-EU companies with substantial activity in the EU (defined as a turnover of more than EUR150 million in the EU and that have in the EU either a branch with a net turnover exceeding EUR40 million or a subsidiary that is a large company), with reports due in 2029.

It is important to note the ESRS include additional exceptions to further support companies reporting to the standards. In the first year they apply the standards, companies with fewer than 750 employees may omit: scope 3 GHG emissions data and the disclosure requirements specified in the standard on own workforce (ESRS S1). In the first two years, companies with fewer than 750 employees can omit the disclosure requirements on biodiversity (ESRS E4) and on value-chain workers (S2), affected communities (S3), and consumers and end-users (S4).

In the first three years that they apply the standards, all companies may omit the following information: anticipated financial effects related to environmental issues (climate, pollution, water, biodiversity, and resource use). Certain data points related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance) may also be omitted in the first reporting year. 

Discover How We Can Help

To support investors and issuers in meeting their new reporting obligations, Morningstar Sustainalytics offers a suite of products. Visit the pages linked below or get in touch to learn more.

*updated November 7, 2023 with additional details on how ESRS will be phased in.

* updated January 26, 2024 with corrections to details of Phase 3 of the ESRS roll out.  



  1. The European Green Deal is a package of policy initiatives which aims to set the EU on the path to a green transition, with the ultimate goal of reaching climate neutrality by 2050. Read more at:,a%20modern%20and%20competitive%20economy.
  2. European Parliament. Motion for a Resolution on the Commission delegated regulation of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards. October 11, 2023.
  3. According to Accountancy Europe: “Assurance level relates to the work effort… In a limited assurance engagement, practitioners obtain less assurance on the quality of the information because of less or different work undertaken than in a reasonable assurance engagement where they conduct more and deeper work. In both cases, the practitioner needs to sufficiently understand the company to assess the risk of material misstatement. It is about assessing the risk for the information to be sufficiently incorrect that it may impact the economic decisions of the information users.” For more details see “Sustainability Assurance Under CSRD: Key Matters to Respond to the Upcoming CSRD Requirements.” 
  4. European Single Access Point offers access to public financial and sustainability-related information about EU companies and EU investment products. To learn more visit:
  5. European Commission. 2023. Annex to the Commission Delegated Regulation – European Sustainability Reporting Standard. July 31, 2023.


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