What is CSRD? The EU Sustainability Reporting Directive Explained

The Corporate Sustainability Reporting Directive (CSRD) is EU legislation requiring large companies operating in the European Union to disclose detailed sustainability information as part of their annual reporting. Adopted in 2022 and replacing the Non-Financial Reporting Directive (NFRD), it represents the most significant expansion of corporate carbon disclosure obligations in EU history. For carbon market participants, CSRD matters not only as a compliance framework but as a demand signal: the companies now required to disclose their emissions trajectories are the same companies building carbon credit strategies to address them.

From NFRD to CSRD: What Changed

The NFRD applied to roughly 11,700 large public interest entities. CSRD was designed to expand that to approximately 50,000 companies, bringing in large non-listed firms, listed SMEs, and non-EU parent companies with significant EU revenue.

The scope has since shifted. The Omnibus I Directive, published in February 2026 and entering into force on 19 March 2026, narrows the CSRD threshold considerably, concentrating obligations on companies with more than 1,000 employees and over €450 million in annual turnover. Member states have 12 months to transpose the Directive into national law. The Omnibus also extends reporting timelines for Wave 2 and Wave 3 companies by two years.

Despite the scope reduction, the substantive requirements for in-scope companies remain demanding. Reporting must follow the European Sustainability Reporting Standards (ESRS), developed by EFRAG. Those standards are covered in detail in Part 2 of this series.

Double Materiality: The Core Concept

The principle that distinguishes CSRD from prior frameworks is double materiality. Companies must assess sustainability from two directions: how their business is affected by environmental and social risks (financial materiality), and how their business affects the environment and society (impact materiality). This dual lens significantly expands the scope of disclosure compared to frameworks like TCFD, which focused primarily on financial risk.

Double materiality is not a binary determination. It requires a structured assessment process, and the results shape which topics must be disclosed. Critically, even under the Omnibus simplifications, the double materiality requirement remains intact.

Carbon Credits Under CSRD: Separate Disclosure, No Netting

For carbon market professionals, one of the most consequential CSRD provisions sits within ESRS E1-7. Companies must disclose gross emissions across Scope 3 Emissions and Scopes 1 and 2, using the GHG Protocol as the methodological foundation, and must report those figures separately from any carbon credits purchased. Carbon credits cannot be netted against the emissions inventory.

Credit purchases must be disclosed with quality indicators: whether they represent reductions or removals, whether they derive from nature-based or engineered solutions, and whether they align with recognized quality standards. The directive explicitly references emerging ICVCM guidance as a reference point for credit quality.

This separation matters beyond compliance. It prevents companies from obscuring their actual emissions trajectory behind credit purchases, and it raises the bar for what responsible carbon credit use looks like in a regulated disclosure environment. For buyers building long-term credit portfolios, audit readiness under CSRD is now a procurement consideration, not only a communications one.

Reporting Is Already Underway

Wave 1 companies, those previously subject to the NFRD with more than 500 employees, are reporting for financial year 2024, with reports due in 2025. These first CSRD-compliant disclosures, covering Scope 1, 2, and 3 emissions alongside carbon credit portfolios, are setting practical precedents for how the market interprets the standards.

The Omnibus has also simplified the ESRS itself, reducing mandatory data points by approximately 60 percent from the original framework. However, core obligations including double materiality assessment, Scope 3 disclosure, and separate carbon credit reporting remain in place.

Key Takeaway

CSRD establishes a mandatory, audited sustainability reporting regime with direct implications for carbon markets. Its requirement to disclose gross emissions and carbon credits separately creates a new layer of transparency around how companies manage their decarbonization commitments. For credit buyers and project developers, understanding CSRD obligations is increasingly part of the commercial conversation.