The European Corporate Sustainability Reporting Directive (CSRD), published in the EU Official Journal in December 2022, obliges thousands of European companies to report non-financial information in accordance with European Sustainability Reporting Standards (ESRS). The first application period began on 1 January 2024 for large listed companies with more than 500 employees.
Who Must Report and When
The CSRD significantly expands the universe of obligated companies compared to the previous NFRD. Large unlisted companies with more than 250 employees or 40 million euros in turnover must start reporting for fiscal year 2025, with report publication in 2026. SMEs listed on regulated markets have until fiscal year 2026.
It is important to note that the directive also has an indirect effect on SMEs not directly obligated: if they form part of the value chain of a large CSRD-obligated company, they may receive information requests about their environmental footprint, labor conditions or governance practices. Proactive preparation, even when not obligatory, can become a competitive advantage when maintaining contracts with large clients.
The ESRS Standards
The ESRS cover environmental matters (E1-E5, with particular emphasis on climate change under E1), social issues (S1-S4) and governance (G1). Double materiality — the company’s impact on the world and the world’s risk to the company — is the central concept of the preliminary analysis.
Environmental standards include climate change (E1), pollution (E2), water and marine resources (E3), biodiversity and ecosystems (E4) and resource use and circular economy (E5). The E1 standard is the most demanding and requires disclosure of scope 1, 2 and 3 emissions, as well as alignment with the objectives of the Paris Agreement. Social standards cover the company’s own workforce (S1), workers in the value chain (S2), affected communities (S3) and end consumers and users (S4).
Double materiality analysis: the starting point
The double materiality analysis is the unavoidable first step of any CSRD preparation process. It involves identifying which sustainability issues are material from a dual perspective: impact materiality (how the company affects the environment and society) and financial materiality (how ESG factors affect the company’s financial position).
This analysis is not a bureaucratic exercise but a strategic reflection on the business model and its interdependencies with the environment. It involves consulting relevant stakeholder groups (employees, clients, investors, local communities), reviewing sector-specific risks and mapping the impacts of business activity along the value chain.
The results of the analysis determine which ESRS standards are applicable to the company (not all are mandatory if not material) and therefore which indicators must be collected and disclosed.
How to prepare: a four-stage action plan
Companies that will need to report in 2025 or 2026 have limited time to build the necessary data systems, internal processes and governance structures. The first step is conducting the double materiality analysis, followed by a gap analysis between currently available information and ESRS requirements.
The second stage is building data collection systems. Many companies discover at this stage that they lack automated systems to collect indicators such as energy consumption by facility, scope 3 emissions from the supply chain, training hours per employee or security incidents. Implementing these systems from scratch may require investment in software, training and changes to operational processes.
The third stage is integrating sustainability reporting into corporate governance. The CSRD requires the sustainability report to be part of the management report (not a separate document) and to be subject to limited external assurance by an auditor. The board of directors has explicit responsibilities for approving and overseeing sustainability information.
The fourth stage is verification and continuous improvement. The first report will rarely be perfect; companies that prepare in advance can undertake voluntary reporting prior to the mandatory obligation to practice and improve their systems before external assurance is required.
Implications for investors and financing
CSRD reporting is not merely a regulatory obligation — it also has direct implications for access to financing. European banks are integrating ESG criteria into their credit risk models. The EU Taxonomy Regulation obliges issuers of financial instruments to declare what percentage of their investments are “aligned” with the green taxonomy. Companies with low ESG scores or deficient sustainability reporting face higher financing costs and a reduced universe of institutional investors.
Green bond and sustainability-linked loan markets in Spain and Europe have grown significantly in recent years. Companies that can demonstrate a credible, verified ESG strategy — backed by CSRD-compliant reporting — are better positioned to access these instruments at competitive rates. Conversely, companies with high transition risk (heavy carbon footprint, poor labor practices, weak governance) may find that the cost of capital increases as lenders embed ESG screening into their standard credit assessment processes.
Common pitfalls to avoid
Several patterns emerge consistently among companies that struggle with CSRD preparation. The first is treating it as a compliance exercise rather than a strategic one — assigning it exclusively to the legal or sustainability team without senior management ownership. The CSRD assigns explicit board responsibility for the sustainability report, so governance engagement from the outset is non-negotiable.
The second pitfall is underestimating data complexity. Companies often discover that basic indicators — total energy consumption, employee turnover rate by gender, supplier audit coverage — are either not collected systematically or held across multiple disconnected systems. A data architecture review, coordinated with IT and operations, is typically required before any meaningful reporting can begin.
The third pitfall is ignoring the supply chain dimension. ESRS standards, particularly on scope 3 emissions and value chain labor conditions, require information that companies must request from their suppliers. Building the supplier engagement process takes time and may require contract adjustments with key vendors.
At BMC we accompany clients on the path to CSRD compliance. See our ESG and sustainability services.
