By Tom Willman, Regulatory Lead at Clarity AI
The beginning of 2025 has already seen a flurry of political activity related to sustainable finance regulation. The debate in Brussels has been dominated by the upcoming proposal for an “Omnibus” regulation, which some are seeing as an opportunity to reduce the reporting burden for EU companies. Meanwhile, across the pond, the U.S. President continues to signal his intention to rollback the US climate agenda, including the announced withdrawal from the Paris Climate Agreement.
Against these headlines, it may have escaped the notice of some that 2025 also marks the first wave of company reports that will be published under the EU’s Corporate Sustainability Reporting Directive (CSRD).
While the introduction of Omnibus has raised questions about potential amendments to reporting requirements, including for mid-cap companies, the case for sustainability remains clear. For Nordic businesses, which have traditionally performed well on various ESG metrics, CSRD is more than a regulatory requirement—it presents an opportunity to strengthen their sustainability credentials and gain a competitive edge.
A new era: From NFRD to CSRD
CSRD builds on the Non-Financial Reporting Directive (NFRD) but introduces transformative changes in both scope and depth. Initially, CSRD applies to large public interest entities with more than 500 employees. In practice, this includes large companies listed in EU-regulated markets, large banks (listed and unlisted) and large insurance companies. The European Commission’s impact assessment from 2021 estimated that around 2,000 companies will fall under these requirements, though more recent Clarity AI estimates put this figure closer to 3,000. These companies will have to begin reporting this year on their 2024 fiscal year.
Over time, CSRD will progressively impact nearly 50,000 EU companies and 10,000 non-EU companies, significantly expanding the regulation’s reach versus the NFRD.
Beyond the expansion in scope, CSRD also demands a deeper and more detailed level of reporting. While the NFRD required companies to report broadly on environmental and social matters, including their taxonomy alignment, entities within the scope of CSRD must now report in line with the European Sustainability Reporting Standards (ESRS). These standards introduce a systematic approach to disclosing governance, strategy, risks, and opportunities.
The concept of double materiality is at the heart of CSRD and sets it apart from other reporting regulations globally. Companies must report not only on how sustainability issues affect their financial performance, but also on their impact on people and the planet. This dual lens fundamentally shifts sustainability reporting from being an internal exercise to one that examines a company’s broader role in the global value chain.
CSRD: What’s new?
The introduction of double materiality ensures that companies analyze their sustainability impacts, risks and opportunities comprehensively, providing a clearer picture of any challenges and opportunities.
This regulation also requires companies to extend their reporting beyond their internal operations to encompass their entire value chain. For businesses, this means assessing both upstream suppliers and downstream stakeholders, including customers and, for financial institutions, financial counterparties. This expanded scope is a significant leap from NFRD, positioning CSRD as one of the most ambitious sustainability reporting regulations globally.
The ESRS framework supports this by offering detailed guidance for reporting. It includes two cross-cutting standards (ESR1 and ESR2) that apply to all companies, as well as ten thematic standards for specific ESG topics. Companies must undertake a double materiality assessment across their entire value chain to determine which thematic standards are relevant to them, with one small caveat around climate change. For climate-related disclosures, companies must provide a detailed explanation if they deem the topic immaterial.
A thorn in the side for business?
While CSRD promises to enhance transparency and accountability, it also introduces significant challenges for companies. Conducting double materiality assessments can be a complex and resource-intensive task, particularly for businesses operating across fragmented global supply chains. With more than 1,000 disclosure points across the ESRS, adherence may require significant effort and investment.
The value chain element adds an additional layer of complexity. Companies must gather data from suppliers and customers, often involving hundreds or even thousands of entities. Financial institutions face even greater challenges, as they are required to account for the sustainability of their financial counterparties, including loan books and investments portfolios. Collecting, verifying, and integrating data from these sources into a meaningful report presents a significant challenge.
There is also uneven progress across the EU in implementing CSRD. While Nordic countries such as Sweden, Denmark, and Finland are leading the way in transposing the directive into national law, other member states lag behind. In September 2024, the European Commission issued formal notices to 17 member states for failing to fully implement the Directive. This uneven regulatory landscape creates additional complications for companies operating across multiple jurisdictions.
The Nordic advantage
For Nordic companies, CSRD presents both challenges and opportunities. The region has long been recognized as a global leader in sustainability, with strong environmental policies, advanced social frameworks, and high standards of corporate governance. Sweden, Denmark, and Finland consistently rank at the top of global sustainability indexes, such as the Environmental Performance Index (EPI).
However, the Nordic advantage is not without its challenges. Complications around double materiality and assessment of the value chain may be acute in the region. For instance, many of the region’s economies are heavily reliant on industries with complex global value chains, such as forestry, energy, and shipping. These sectors may face significant difficulties in conducting double materiality assessments, which require a detailed understanding of global operations and interactions with diverse stakeholders.
For financial institutions, EFRAG’s advice is clear that they will need to examine their investment and lending counterparties as part of the value chain assessment. But many are still awaiting EFRAG’s detailed financial sector guidance to further support their implementation of the CSRD. For instance, how far down the chain should institutions trace the sustainability performance of their counterparties? And how can they identify material risks, opportunities and impacts across these companies?
Despite these challenges, CSRD offers Nordic companies a unique opportunity to reinforce their position as sustainability leaders. Swift and thorough compliance with the directive could enhance their reputations as reliable and forward-thinking partners, particularly for global investors and trading partners who prioritize sustainability.
2025: a pivotal year
2025 is more than the start of CSRD compliance—it’s a defining moment for businesses to chart their sustainability course for the future. While there are some political headwinds, the global demand for transparency and accountability over sustainability is likely to remain strong. Investors, stakeholders, and consumers will continue to expect companies to take meaningful action on sustainability.
For Nordic businesses, CSRD is an opportunity to showcase their commitment to sustainability on the global stage. Moving beyond compliance to actively leverage the wealth of data generated under CSRD can help companies make better investment decisions, engage meaningfully with stakeholders, and create long-term value.
