7 Key Takeaways for Canadian companies on the EU’s Corporate Sustainability Reporting Directive (CSRD) 

Over the last few years, companies have experienced more and more pressure from stakeholders to disclose sustainability- and climate-related information. A lack of standardized disclosure has increased costs and complexity – particularly for organizations reporting under multiple frameworks.  

In November 2022, the European Union (EU) sought to eliminate this complexity by passing the Corporate Sustainability Reporting Directive (CSRD). The CSRD, which replaces the Non-Financial Reporting Directive (NFRD), is a mandatory reporting program that streamlines the sustainability- and climate-related requirements for EU companies. It also aims to boost the credibility of sustainable investments by increasing the verifiability and comparability of reported data.   

Within the next two to four years, 50,000 companies of various sizes will be required to produce a sustainability report in line with CSRD as the cost of doing business in the EU. The question is: how are Canadian companies implicated in this new legislation?  

Who does CSRD apply to and how are Canadian companies affected? 

The CSRD applies to most companies operating in the EU, including SMEs. In addition, about 1,300 Canadian companies (including private companies) will be required to report because they have (1) EU operations, or (2) a debt/equity listing on an EU-regulated market. 94% of these affected Canadian companies are expected to be from the metals & mining industry. 

Even if Canadian companies are not directly subject to the CSRD, they might still be required to provide CSRD-aligned information to EU-based corporate clients, suppliers, lenders, and investors. This is because the CSRD requires companies to disclose material ESG impacts, as well as risks and opportunities, connected with their upstream and downstream value chains.   

When a company needs to report is determined by its size, and its size is determined by whether it meets the threshold in two out of the three categories, i.e., average employee count, total assets, and net turnover: 

* Includes subsidiaries of U.S. parent companies with debt or equity on a listed EU market, regardless of size. 

** Submissions are to be made within 12 months of a company’s fiscal year end. 

^SMEs can choose to defer reporting for two years until 2028. 

7 key takeaways for Canadian companies 

1. Deadlines are fast approaching: Foreign companies that were already subject to the NFRD, companies with more than 500 employees, and companies that are listed on an EU-regulated market need to start reporting in 2025 on their 2024 fiscal year. Other listed companies and ‘large’ EU subsidiaries of U.S. companies are required to report in 2026 on their 2025 fiscal year. SMEs are required to comply by 2027 for the 2026 fiscal year. By 2029, all companies above the ‘micro’ threshold are required to be fully compliant with the EU rules. These deadlines are fast approaching, so if you haven’t  started preparing yet, we’d suggest you get onto it 😊. 
2. The CSRD includes more stringent requirements than voluntary frameworks, including double materiality assessment, scope 3 emissions disclosure, and climate scenario analysis: One of the CSRD’s major requirements is a “double materiality” approach, which is not included in other sustainability disclosure frameworks. In other words, companies subject to CSRD are required to report on (1) their impacts on the environment and society, and (2) how social and environmental issues impact their financial performance (for more on double materiality, read our past blog on the subject: Double materiality: the next frontier in ESG). 

   In addition, the CSRD requires companies to conduct a full value-chain GHG inventory, including scope 3 emissions. Lastly, the CSRD requires companies to conduct climate scenario analysis (also a requirement of TCFD), which involves identifying and assessing climate-related risks and opportunities for defined time horizons.Many companies will need to build out their practices to comply with the CSRD – since, for example, 81% of Canada’s largest companies don’t financially quantify climate-related risks in their reporting; and only one-third of TSX60 companies disclosed their most material scope 3 categories in their latest reporting year. We recommend that companies that have never conducted a double materiality assessment do a CSRD-aligned one within the next year. It’s a good idea for companies with a double materiality assessment older than three years to undertake the exercise again, as up-to-date materiality assessments underpin accurate and robust reporting. 

3. Reports must undergo mandatory assurance: The CSRD requires limited assurance on all disclosed data, which indicates that the auditor did not find any issues suggesting material misstatement. The CSRD will likely expand to reasonable assurance at a later date (likely 2029), which will mean a more robust examination of companies’ data management procedures, systems and reporting. According to the Institute for Sustainable Finance (ISF), only 37% of Canadian companies in the S&P/TSX index had their 2022 emissions verified by a third party to a limited level of assurance. Consult with your auditor to understand if CSRD assurance is within the scope of services they provide. 
4. The risks of noncompliance are financial and reputational: Non-compliance with CSRD can lead to significant consequences, including fines, public reprimands, operational disruptions, and potential impacts on financing (for example, losing investor confidence and access to capital). While the exact financial penalties for non-compliance aren’t yet quantified, we predict they will be similar to those under the NFRD, where 27 EU countries were penalized for non-compliance (including up to €10 million or 5% of a company’s global annual turnover in Germany). For Canadian companies, the consequences of non-compliance can extend beyond legal sanctions to reputational impacts, given the increasing importance of ESG factors to investors, consumers, and corporate partners. This could mean losing access to entire markets.   
5. Data collection will be a huge undertaking: The CSRD data requirements are substantial and complex, and in some cases will involve gathering information across several departments located in multiple countries. This can create issues for companies that don’t have the capacity or systems in place to efficiently collect data. To get started, companies can compare their existing data collection and management against CSRD requirements to identify areas for improvement.      
6. Reported information must be in a specific digital format to ensure it’s both human- and machine-readable: The CSRD requires that companies use the European Single Electronic Format (ESEF), which provides data in both human-readable (XHTML) and machine-readable (XBRL) formats. This will make comparison, extraction, accessibility, and analysis easier. A taxonomy to guide this digital reporting is in development and is expected to be adopted by the European Commission in early 2025. In the meantime, companies can prepare for these digital reporting requirements by conducting a gap analysis and potentially selecting appropriate software and implementing XBRL-aligned methodologies.  
7. The CSRD will demand substantial change management within companies: The CSRD requirements represent new and unprecedented challenges for many companies, who will likely need to figure out how to facilitate robust, cross-functional collaboration and overhaul internal processes, systems, and procedures.  

Looking ahead 

The CSRD is a comprehensive piece of legislation with significant implications and expectations for Canadian companies. It reflects a broader trend in the ESG and sustainability regulatory landscape towards mandatory — and increasingly sophisticated and transparent — disclosures across diverse topics. It also highlights the far-reaching impact that EU regulations can have on North American business practices. Companies that delay preparation risk missing out on critical opportunities in the European market. 

Delphi is here to help with navigating this complex piece of legislation. If you need support in determining whether your company is subject to the CSRD, and/or what you need to do to comply (including a materiality assessment), please reach out to our team and we’ll help you get started. 

Adam Schwarz is a Senior Consultant and Natalie Biringer is a Senior Analyst at Delphi. Interested in more information on how your organization can reach its corporate sustainability, net-zero, and ESG goals in this new era of disclosure standards? Contact Adam at aschwarz@delphi.ca or Natalie at nbiringer@delphi.ca