CSRD Phase 2: Sustainability Reporting Guidelines for SMEs

The Corporate Sustainability Reporting Directive (CSRD) represents a pivotal shift in the European Union's approach to corporate transparency regarding sustainability. Moving beyond its predecessor, the Non-Financial Reporting Directive (NFRD), the CSRD mandates more granular, standardized, and auditable sustainability disclosures. As businesses prepare for the upcoming phases of implementation, particular attention must be paid to CSRD Phase 2, which introduces reporting obligations for a broader spectrum of entities, primarily listed Small and Medium-sized Enterprises (SMEs) and other large companies, starting with financial year 2025 (reporting in 2026). This article provides a detailed examination of these requirements, the foundational concepts, and practical compliance steps for B2B stakeholders.

Introduction

The CSRD is designed to standardize sustainability reporting across the EU, ensuring that investors and other stakeholders have access to reliable and comparable information on companies' environmental, social, and governance (ESG) impacts and risks. Its phased implementation strategy allows for a gradual integration of these demanding requirements. Phase 2 marks a significant expansion, bringing a new wave of companies into the scope, necessitating a proactive and strategic approach to compliance. For B2B suppliers and partners, understanding and preparing for these requirements is not just a matter of compliance, but increasingly a prerequisite for market access and competitive advantage.

Who Must Comply Under Phase 2? Understanding the Scope and Thresholds

CSRD Phase 2 primarily targets two key categories of undertakings for reporting on financial year 2025, with reports due in 2026:

1. Large Companies not yet subject to the CSRD: This includes large undertakings (as defined by the Accounting Directive) that were not previously covered by the NFRD. A company is considered "large" if it exceeds at least two of the following three inflation-adjusted criteria for two consecutive financial years:
   • Balance sheet total: > €25 million
   • Net turnover: > €50 million
   • Average number of employees during the financial year: > 250
2. Listed Small and Medium-sized Enterprises (SMEs): This category includes SMEs with securities listed on an EU-regulated market, excluding micro-undertakings. Listed micro-undertakings (meeting at least two of: balance sheet total ≤ €450k, net turnover ≤ €900k, average employees ≤ 10) are explicitly exempt.

The EU accounting thresholds are regularly reviewed and adjusted for inflation. For the 2026 reporting period, the inflation-adjusted EU accounting thresholds that define company size categories are critical for determining CSRD applicability:

• Micro-undertakings:
  • Balance sheet total: ≤ €450,000
  • Net turnover: ≤ €900,000
  • Average number of employees: ≤ 10
• Small undertakings:
  • Balance sheet total: > €450,000 and ≤ €5,000,000
  • Net turnover: > €900,000 and ≤ €10,000,000
  • Average number of employees: > 10 and ≤ 50
• Medium undertakings:
  • Balance sheet total: > €5,000,000 and ≤ €25,000,000
  • Net turnover: > €10,000,000 and ≤ €50,000,000
  • Average number of employees: > 50 and ≤ 250
• Large undertakings:
  • Balance sheet total: > €25,000,000
  • Net turnover: > €50,000,000
  • Average number of employees: > 250

It is crucial for entities to accurately assess their size category based on these updated thresholds to determine their reporting obligations and timeline.

The Core Principle: Double Materiality

At the heart of CSRD reporting, and fundamental to the European Sustainability Reporting Standards (ESRS), is the concept of Double Materiality. This principle mandates that companies report on sustainability matters from two distinct, yet interconnected, perspectives: impact materiality and financial materiality.

Impact Materiality

Impact materiality focuses on the undertaking's impacts on people and the environment. This perspective requires companies to assess and disclose information about their actual and potential, positive and negative impacts related to environmental, social, and governance matters. This includes:

• Environmental Impacts: Emissions (GHG, air, water), waste generation, water usage, biodiversity loss, pollution, and resource depletion across the value chain.
• Social Impacts: Labor practices, working conditions, human rights (including in the supply chain), gender equality, diversity and inclusion, customer health and safety, and community relations.
• Governance Impacts: Corporate culture, anti-corruption and bribery, lobbying activities, and tax transparency.

A sustainability matter is impact material if it represents a significant actual or potential impact, either positive or negative, of the undertaking on people or the environment. This assessment considers the scale, scope, and irremediable character of the impact.

Financial Materiality

Financial materiality (also known as "financial fact materiality" or "outside-in" perspective) focuses on how sustainability matters affect the undertaking's financial value creation. This requires companies to identify and report on sustainability-related risks and opportunities that could significantly influence their cash flows, financial performance, access to finance, or cost of capital over the short, medium, or long term. Examples include:

• Risks: Physical risks from climate change (e.g., damage to assets, supply chain disruption), transition risks (e.g., policy changes, technological shifts, market demand changes leading to stranded assets), reputational risks, litigation risks, and increased operational costs due to resource scarcity.
• Opportunities: Development of sustainable products or services, enhanced resource efficiency, access to green finance, improved brand reputation, and attracting top talent.

A sustainability matter is financially material if it gives rise to significant financial risks or opportunities that affect or are reasonably expected to affect the undertaking's development, performance, and position.

Interconnection

The Double Materiality assessment is not about choosing one perspective over the other; it's about integrating both. A sustainability issue can be material from an impact perspective, a financial perspective, or both. For example, high carbon emissions are an impact materiality concern (negative impact on the environment) and a financial materiality concern (potential carbon taxes, regulatory fines, reputational damage, transition risk). Companies are expected to conduct a robust, documented double materiality assessment to identify the sustainability topics that are pertinent to their business and stakeholders, thereby shaping their ESRS reporting.

Navigating ESRS Compliance

The European Sustainability Reporting Standards (ESRS) are the detailed framework developed by EFRAG (European Financial Reporting Advisory Group) that dictates what and how companies should report under the CSRD. Compliance requires a systematic approach:

1. Understand the ESRS Structure

The ESRS are structured into cross-cutting standards, topical standards (Environmental, Social, Governance), and future sector-specific standards:

• ESRS 1 (General Requirements): Lays out the general principles for preparing sustainability statements.
• ESRS 2 (General Disclosures): Specifies the mandatory disclosures covering governance, strategy, impact, risk and opportunity management, and metrics and targets.
• Topical Standards (E1-E5, S1-S4, G1): These cover specific sustainability areas (e.g., E1 Climate Change, S1 Own Workforce, G1 Business Conduct). Companies only report on topical standards deemed material through their double materiality assessment.

2. Conduct a Robust Double Materiality Assessment

This is the cornerstone of ESRS compliance.

• Identification: Identify potential sustainability matters relevant to the business context, industry, and stakeholders.
• Assessment of Impacts: Evaluate actual and potential, positive and negative impacts on people and the environment.
• Assessment of Risks & Opportunities: Evaluate actual and potential financial risks and opportunities arising from sustainability matters.
• Prioritization: Prioritize material topics based on the significance of impacts, risks, and opportunities, involving internal and external stakeholders.
• Documentation: Maintain thorough documentation of the entire assessment process, including methodologies, data sources, and stakeholder engagement.

3. Data Collection and Management

Meeting ESRS requirements demands comprehensive and accurate data.

• Gap Analysis: Identify existing data collection processes and systems, and pinpoint gaps against ESRS requirements.
• System Integration: Implement or upgrade IT systems to capture, store, and manage a wide range of sustainability data (e.g., energy consumption, waste generation, employee demographics, human rights due diligence).
• Value Chain Engagement: Data collection extends beyond the company's direct operations, encompassing upstream and downstream value chain impacts, requiring robust engagement with suppliers and customers.
• Internal Controls: Establish strong internal controls and data governance procedures to ensure data accuracy, completeness, and reliability.

4. Reporting and Assurance

• Sustainability Statement Preparation: Prepare the sustainability statement as a distinct section within the management report, following the structure and disclosure requirements of the material ESRS standards.
• Digital Tagging: The information must be prepared in XHTML format and digitally tagged in accordance with the EFRAG Taxonomy, enabling machine readability.
• External Assurance: The sustainability statement must be subject to limited assurance by an independent auditor (with a future transition to reasonable assurance), adding credibility and reliability to the disclosed information.

5. Governance and Strategy Integration

• Board Oversight: Ensure that the board of directors and management have a clear understanding of sustainability risks and opportunities and integrate them into the company’s strategy and governance.
• Training and Capacity Building: Provide training for relevant personnel across departments to build capacity in sustainability reporting and data management.

Compliance Timeline and Thresholds Summary

The following table summarizes the key CSRD reporting schedules, including the 2026 inflation-adjusted thresholds, for various company categories:

| Company Category | 2026 Balance Sheet Total (€) | 2026 Net Turnover (€) | 2026 Average Employees | CSRD Reporting Start (Financial Year) | | :--------------- | :--------------------------- | :-------------------- | :--------------------- | :---------------------------------- | | Phase 1 (Reporting in 2025 for FY2024) | | | | | | Public-Interest Entities (PIEs) already under NFRD (Large undertakings) | > €25M | > €50M | > 250 | FY 2024 | | Phase 2 (Reporting in 2026 for FY2025) | | | | | | Other Large Undertakings (not previously under NFRD) | > €25M | > €50M | > 250 | FY 2025 | | Listed SMEs (excluding micro-undertakings) | > €5M (Small) | > €10M (Small) | > 50 (Small) | FY 2025 (with opt-out until FY2028) | | Phase 3 (Reporting in 2027 for FY2026) | | | | | | Non-EU companies with significant EU operations | Net turnover > €150M in EU (and one EU branch/subsidiary > €40M turnover) | - | - | FY 2026 |

Note: A company is generally considered 'large' if it exceeds at least two of the three balance sheet, net turnover, or employee thresholds for two consecutive financial years. Listed SMEs have an opt-out possibility for reporting until financial year 2028.

ESRS Data Schema Example: Carbon Emission Reporting (ESRS E1)

For illustrative purposes, below is a simplified JSON schema reflecting a portion of the data structure that might be used for reporting carbon emissions under ESRS E1 (Climate Change), specifically focusing on Scope 1, 2, and 3 GHG emissions. This demonstrates the level of detail and standardization required.

{
  "$schema": "http://json-schema.org/draft-07/schema#",
  "title": "ESRS E1_GHG_Emissions_Reporting",
  "description": "Schema for reporting Greenhouse Gas (GHG) emissions in accordance with ESRS E1 Climate Change.",
  "type": "object",
  "properties": {
    "reportingPeriod": {
      "type": "object",
      "description": "Period for which the emissions are being reported.",
      "properties": {
        "startDate": { "type": "string", "format": "date", "description": "Start date of the reporting period (YYYY-MM-DD)." },
        "endDate": { "type": "string", "format": "date", "description": "End date of the reporting period (YYYY-MM-DD)." }
      },
      "required": ["startDate", "endDate"]
    },
    "currencyUnit": {
      "type": "string",
      "description": "Currency unit for any associated financial metrics, e.g., EUR, USD.",
      "enum": ["EUR", "USD", "GBP"]
    },
    "ghgEmissions": {
      "type": "object",
      "description": "Detailed breakdown of Greenhouse Gas emissions.",
      "properties": {
        "scope1": {
          "type": "object",
          "description": "Direct GHG emissions.",
          "properties": {
            "totalTonsCO2e": { "type": "number", "minimum": 0, "description": "Total Scope 1 emissions in metric tons CO2 equivalent." },
            "biogenicTonsCO2e": { "type": "number", "minimum": 0, "description": "Biogenic Scope 1 emissions in metric tons CO2 equivalent." },
            "methodology": { "type": "string", "description": "Methodology used for Scope 1 calculation (e.g., GHG Protocol, specific national standards)." }
          },
          "required": ["totalTonsCO2e", "methodology"]
        },
        "scope2": {
          "type": "object",
          "description": "Indirect GHG emissions from purchased energy.",
          "properties": {
            "marketBasedTonsCO2e": { "type": "number", "minimum": 0, "description": "Market-based Scope 2 emissions in metric tons CO2 equivalent." },
            "locationBasedTonsCO2e": { "type": "number", "minimum": 0, "description": "Location-based Scope 2 emissions in metric tons CO2 equivalent." },
            "methodology": { "type": "string", "description": "Methodology used for Scope 2 calculation." }
          },
          "required": ["marketBasedTonsCO2e", "locationBasedTonsCO2e", "methodology"]
        },
        "scope3": {
          "type": "object",
          "description": "Other indirect GHG emissions from the value chain.",
          "properties": {
            "totalTonsCO2e": { "type": "number", "minimum": 0, "description": "Total Scope 3 emissions in metric tons CO2 equivalent." },
            "categories": {
              "type": "array",
              "description": "Breakdown by GHG Protocol Scope 3 categories.",
              "items": {
                "type": "object",
                "properties": {
                  "categoryNumber": { "type": "integer", "minimum": 1, "maximum": 15, "description": "GHG Protocol Scope 3 category number." },
                  "categoryName": { "type": "string", "description": "Name of the Scope 3 category (e.g., 'Purchased goods and services')." },
                  "emissionsTonsCO2e": { "type": "number", "minimum": 0, "description": "Emissions for this specific Scope 3 category." }
                },
                "required": ["categoryNumber", "categoryName", "emissionsTonsCO2e"]
              }
            },
            "methodology": { "type": "string", "description": "Methodology used for Scope 3 calculation (e.g., spend-based, average data, supplier-specific data)." },
            "dataQuality": { "type": "string", "description": "Assessment of data quality for Scope 3 (e.g., high, medium, low).", "enum": ["high", "medium", "low"] }
          },
          "required": ["totalTonsCO2e", "methodology"]
        }
      },
      "required": ["scope1", "scope2", "scope3"]
    },
    "assuranceStatus": {
      "type": "string",
      "description": "Status of external assurance for the reported GHG emissions.",
      "enum": ["limited_assurance", "reasonable_assurance", "not_assured"]
    },
    "assuranceProvider": {
      "type": "string",
      "description": "Name of the assurance provider, if applicable."
    }
  },
  "required": ["reportingPeriod", "ghgEmissions", "assuranceStatus"]
}

Conclusion

CSRD Phase 2 represents a significant milestone in the EU's journey towards a more sustainable and transparent economy. For listed SMEs and large companies not previously covered by NFRD, the obligation to report on sustainability performance using ESRS and the principle of Double Materiality beginning in financial year 2025 is an imperative. Proactive engagement with these complex requirements—from understanding the inflation-adjusted thresholds and conducting robust materiality assessments to implementing sophisticated data management systems and preparing for external assurance—is paramount. Companies that embrace this challenge not only mitigate compliance risks but also position themselves as leaders in the transition to a sustainable future, enhancing their reputation, attracting investment, and fostering stronger B2B partnerships built on transparency and shared values.