Column 2025.01.21

What is the CSRD(Corporate Sustainability Reporting Directive)? What Japanese companies need to do and milestones

In recent years, as sustainability initiatives at companies have become more important, the new legal regulation "CSRD(Corporate Sustainability Reporting Directive)" introduced by the European Union (EU) has been attracting attention. Japanese companies activity in the EU will also be subject to the CSRD if they meet certain conditions, so they will need to take measures in the future. This article explains the overview of the CSRD , which companies are subject to it, and the specific disclosure Contents and response process.

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What is CSRD?

The CSRD(Corporate Sustainability Reporting Directive) is an EU directive that requires companies to disclose sustainability information. It expands on the existing NFRD (Non-Financial Reporting Directive) and requires more detailed and comprehensive reporting. The specific Contents of this directive consists of four reporting areas and three topics. Disclosure requirements are defined in the ESRS (European Sustainability Reporting Standards), and require detailed reporting across the areas of environmental (E), social (S), and governance (G) that companies should address. *1)

What is ESRS?

ESRS (European Sustainability Reporting Standards) is a set of standards that stipulate the disclosure requirements for sustainability information that companies subject to CSRD, which was institutionalized as part of the EU's Grindel, must comply with when Create reports. *2)

ESRS(European Sustainability Reporting Standards)Specific disclosure requirements by

Under the CSRD guidelines, companies are required to disclose detailed information in the following areas:

Four reporting areas

1. Governance
2. Strategy
3. Managing impacts, risks and opportunities
4. Metrics and Goals

Three Topics

1. Environment (E):Climate change, pollution, water and marine resources, biodiversity, resource use and circular economy
2. Society (S):Our employees, value chain workers, Community, consumers and end users
3. Governance (G):Corporate Ethics

The disclosure process will be carried out through a "double materiality assessment" and "gap analysis," among other steps, with the aim of improving corporate transparency and sustainability.

Target companies of CSRD and start date of application (only requirements related to Japanese companies are listed)

Eligibility for the CSRD is determined based on the following criteria:

Area classification	subject	conditions	Start date of application
Within the EU *Japanese subsidiaries, etc.	Large Enterprise	Companies that meet two or more of the following requirements: (1) Total assets exceeding 25 million euros (2) Sales exceeding 50 million euros (3) Over 250 employees	From April 2025 (Fiscal year ending March 2026)
Within the EU *Japanese subsidiaries, etc.	Listed small and medium-sized enterprises	Listed companies excluding micro-enterprises (meeting two or more of the following requirements) (1) Total assets of 350,000 euros or less (2) Sales revenue of 700,000 euros or less (3) 10 or fewer employees	From April 2026 (Fiscal year ending March 2027)
Outside the EU	Subsidiaries and affiliates in the EU Companies with branches	An EU subsidiary that has sales within the EU exceeding 150 million euros for two consecutive periods and is a large corporation, Companies with EU branches with a turnover of over 40 million euros	From April 2028 (Fiscal year ending March 2029)

As a result, even Japanese companies operating within the EU will be subject to the CSRD if they meet certain conditions, so they must take immediate action. *3)

Disclosure process

1. Understanding the system overview

To begin the CSRD disclosure process, first determine:

Check what applies
Check whether your company is eligible for CSRD(size, industry, region, etc.).
Confirm whether exemption from consolidation exists and the year of application
Clarify the scope and schedule of application within the corporate group.
Understanding the requirements of ESRS 1 (General Requirements) / ESRS 2 (General Disclosures)
Get a general overview of sustainability disclosures.

2. Simple Gap Analysis

Simple Gap Analysis Based on ESRS 2 (General Disclosures)
Review your existing sustainability disclosure data and identify gaps in your CSRD Contents.
The main objective here is to provide an overview of the overall disclosure requirements.

3. Double materiality assessment

Identifying important items using ESRS 1 (general requirements)
We assess both "financial materiality" and "environmental and social materiality" to identify sustainability topics that are important to our company.
Detailed understanding of disclosure requirements
Based on the items identified, understand the detailed requirements of ESRS.

4. Detailed Gap Analysis

Use thematic materials
Conduct a more detailed analysis of the key topics identified in the double materiality assessment.
For example: climate change, water resource management, social impacts etc.
Identifying the missing parts
Identify gaps in your current data collection processes and reporting mechanisms.

5. Formulating a response roadmap

Create action plans based on thematic materials
Develop an action plan (roadmap) for meeting disclosure requirements, including:
- Assignment of responsible department
  Clarify the department responsible for each topic.
- Settings implementation time
  Prioritize short, medium and long term.
- Securing resources
  Arrangements for necessary personnel, systems and external expertise.

For Japanese companies, a particular Issue will be understanding and responding to the unique requirements of European regulations.

summary

CSRD is not just a regulatory response, but has the potential to improve corporate value and strengthen international competitiveness. As information disclosure with an awareness of ESG investment and reducing shareholder capital costs expands, transparent disclosure of sustainability information is essential to gain the trust of investors and business partners.

Companies should use their response to CSRD as an opportunity to restructure their sustainability strategies and increase their competitiveness in the global marketplace.

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<Reference source>
*1) Source: European Commission "Corporate sustainability reporting": https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
*2) Source: European Commission “The Commission adopts the European Sustainability Reporting Standards”: https://finance.ec.europa.eu/news/commission-adopts-european-sustainability-reporting-standards-2023-07-31_en
*3) Source: European Commission "Directive (EU) 2022/2464 of the European Parliament and of the Council" (2022/12/14): https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464#:~:text=2.MemberStatesshallapply,3(1)ofthatDirective.