In May 2024, the IFRS Foundation and the European Financial Reporting Advisory Group (EFRAG) published interoperability guidance for the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) standards. This guidance is designed to help organizations reporting under both frameworks streamline their disclosure processes and improve transparency.
As ESG regulations evolve, businesses face growing demands for high-quality, comparable sustainability information. Understanding how CSRD and ISSB standards align—and where they differ—is critical for companies navigating this complex landscape.
What is the CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) regulation that significantly expands sustainability reporting obligations for companies operating in or substantially engaged with the EU market. It was introduced to enhance corporate transparency and ensure that businesses provide detailed, consistent, and comparable sustainability information. The directive replaces and builds upon the Non-Financial Reporting Directive (NFRD), broadening its scope to include more companies and requiring standardized ESG disclosures.
CSRD mandates that in-scope companies report on environmental, social, and governance (ESG) matters using the European Sustainability Reporting Standards (ESRS), a comprehensive framework developed by EFRAG. First reports are due as early as 2025. The ESRS aligns with existing global reporting initiatives but sets forth specific requirements tailored to EU regulatory objectives. Companies subject to CSRD must disclose how sustainability factors impact their operations and financial performance while also detailing their contributions to broader societal and environmental goals. The directive’s emphasis on double materiality—requiring firms to report both financially material risks and their impact on people and the planet—sets it apart from other frameworks focused solely on investor-relevant information.
CSRD applies to a wide range of companies, including large EU-based entities, publicly listed small and medium enterprises (SMEs), and non-EU companies with significant operations in the EU. Compliance with CSRD is legally mandated, and failure to meet reporting obligations can result in penalties, reinforcing the EU’s commitment to corporate accountability in sustainability practices.
Key features of the CSRD:
- Broad applicability: Covers EU-based companies and non-EU entities with substantial operations in the EU.
- Double materiality: Requires disclosure of both financial materiality (impact on the company’s financial position) and impact materiality (the company’s effect on the environment and society).
- Comprehensive scope: Mandates detailed ESG reporting beyond climate, including biodiversity, circular economy, and social factors.
- Legal enforcement: Companies must comply or face penalties.
What is the ISSB?
The International Sustainability Standards Board (ISSB) develops global sustainability reporting standards under the IFRS Foundation. Formed in 2021 during the UN Climate Change Conference (COP26), the ISSB was created to address the growing need for a globally consistent sustainability disclosure framework that enhances transparency for investors and other capital market participants. The ISSB builds upon the framework of the Task Force on Climate-related Financial Disclosures (TCFD), ensuring that its reporting standards are aligned with investor expectations for climate-related risks and opportunities.
What makes ISSB unique is its focus on investor-centric sustainability reporting, providing companies with a structured approach to disclosing financially material sustainability-related risks and opportunities. Unlike broader ESG reporting frameworks that address multiple stakeholder needs, ISSB prioritizes disclosures that are relevant to capital markets, helping businesses communicate how sustainability factors impact their financial performance.
The ISSB’s IFRS Sustainability Disclosure Standards, including IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), establish a global baseline for sustainability reporting. This approach ensures consistency and comparability across jurisdictions, facilitating better decision-making for investors and financial institutions.
Key features of the ISSB:
- Global reach: Designed for international application, with individual jurisdictions determining adoption.
- Single materiality: Focuses on sustainability-related financial disclosures relevant to investors.
- IFRS alignment: Built on the IFRS Sustainability Disclosure Standards, including IFRS S1 (general requirements) and IFRS S2 (climate-related disclosures).
- Market-driven adoption: Voluntary for many jurisdictions but increasingly influential in shaping reporting requirements worldwide.
Key differences between CSRD and ISSB
While CSRD and ISSB standards share the goal of improving ESG reporting quality, they differ in scope and approach. Although the interoperability guidance demonstrates meaningful alignment between the two frameworks, important distinctions remain. Notably, CSRD’s European Sustainability Reporting Standards (ESRS) comprehensively address all ESG topics, including environmental, social, and governance factors.
In contrast, ISSB’s standards currently focus primarily on climate-related disclosures through IFRS S2. As CSRD reporting requirements continue to develop, additional changes may emerge, potentially influencing how organizations align their reporting strategies to meet both frameworks’ expectations.
| Area | CSRD | ISSB |
| Scope and applicability | Mandatory for companies meeting EU thresholds, including large listed and non-listed companies, as well as certain non-EU firms. | Voluntary in most jurisdictions, with adoption determined by national regulators. |
| Materiality approach | Uses double materiality, requiring companies to report both how sustainability issues affect them and their impact on the environment and society. | Uses single materiality, focusing only on financially material sustainability risks and opportunities. |
| Regulatory mandate | Legally binding for in-scope companies in the EU. | Voluntary but expected to be widely adopted by investors and regulators worldwide. |
| Standards and reporting requirements | Requires compliance with ESRS, which cover a broad range of ESG topics. | Currently focused on climate-related disclosures under IFRS S2, with future expansion expected. |
The need for interoperability: aligning CSRD and ISSB
To ease reporting burdens, the IFRS Foundation and EFRAG released the ESRS-ISSB Interoperability Guidance, highlighting key areas of alignment:
- The definition of financial materiality in ESRS aligns with the IFRS S1 definition of materiality.
- Common defined terms exist between the two frameworks.
- A high degree of alignment exists in climate-related disclosures, with almost all ISSB climate disclosure requirements included in ESRS.
Understanding the interoperability of CSRD and ISSB
The interoperability guidance details how companies can report efficiently under both frameworks:
1. Aligning general reporting requirements
The Interoperability Guidance publication clarifies how ESRS and ISSB standards align in terms of materiality, presentation, and disclosure requirements for sustainability topics beyond climate. Both frameworks share foundational principles that ensure consistency and comparability, but their applications differ. CSRD, through ESRS, mandates a broader set of disclosures that extend across all ESG dimensions, whereas ISSB’s standards primarily focus on financially material sustainability disclosures. Companies reporting under both frameworks should recognize that while interoperability reduces redundancy, CSRD’s requirements remain more detailed and extensive, particularly for non-climate ESG factors.
2. Common climate-related disclosures in ESRS and ISSB
The guidance provides a structured comparison of climate-related disclosure requirements, highlighting where ESRS and ISSB standards align and where they diverge. A detailed table maps specific paragraphs in IFRS S2 to their corresponding ESRS requirements, ensuring companies understand areas of full interoperability.
This comparison shows that nearly all ISSB climate-related disclosures are reflected in ESRS, with some additional data points required under CSRD. By leveraging this interoperability, companies can streamline their climate reporting processes while ensuring compliance with both frameworks.
3. ESRS to IFRS S2: What companies reporting under ESRS need to know
For organizations that start with ESRS compliance and seek alignment with IFRS S2, the guidance offers a clear roadmap. While ESRS and IFRS S2 share substantial common ground, companies must carefully navigate specific differences in reporting requirements.
Key areas requiring attention include transition plans, scenario analysis, and industry-based metrics, where ESRS reporting demands a more comprehensive approach. By proactively addressing these nuances, organizations can ensure that their climate disclosures align with both frameworks without unnecessary duplication.
4. IFRS S2 to ESRS: What companies reporting under ISSB need to know
Companies already reporting under IFRS S2 and expanding to comply with ESRS must integrate additional disclosure elements. ESRS E1 imposes requirements beyond ISSB’s framework, including detailed reporting on greenhouse gas (GHG) disaggregation, capital deployment, carbon credits, and financed emissions.
Businesses making this transition should assess these expanded obligations early to avoid compliance gaps. The interoperability guidance provides insights into these differences, helping companies ensure full compliance with ESRS while maintaining alignment with ISSB’s global standards.
How CSRD and ISSB frameworks support interoperability in sustainability reporting
As organizations seek to comply with both CSRD and ISSB frameworks, interoperability plays a crucial role in simplifying reporting requirements and ensuring alignment across jurisdictions. The interoperability between these frameworks provides a structured approach for businesses to disclose sustainability information in a way that meets both regulatory and investor expectations. While CSRD mandates broader disclosures across all ESG topics, ISSB’s investor-focused approach ensures financial markets receive clear and comparable sustainability data. Together, these frameworks promote consistent, transparent, and decision-useful reporting.
Common reporting principles
Both CSRD and ISSB emphasize transparency, consistency, and comparability in sustainability reporting. These principles enable businesses to disclose information in a structured manner, reducing duplication and improving the reliability of reported data. By adhering to common disclosure standards, organizations can ensure that sustainability information is accessible and decision-useful for stakeholders across multiple jurisdictions.
Materiality alignment
A key aspect of interoperability is the alignment of materiality concepts. While ISSB focuses on financial materiality—ensuring that sustainability disclosures provide relevant information for investors—CSRD incorporates double materiality. This means companies reporting under CSRD must assess both the financial implications of sustainability issues on their business and their impact on society and the environment. The interoperability between these frameworks allows organizations to address both perspectives efficiently, ensuring comprehensive and stakeholder-relevant disclosures.
Climate disclosure harmonization
Climate-related reporting is a critical area of alignment between CSRD and ISSB. ISSB’s IFRS S2 climate disclosure standard closely aligns with CSRD’s ESRS E1, ensuring that businesses can report climate-related risks and opportunities in a consistent manner. The interoperability guidance highlights areas where these frameworks overlap, enabling companies to use a harmonized approach in their climate-related disclosures. By aligning reporting practices, organizations can enhance transparency and comparability, facilitating better decision-making for investors, regulators, and other stakeholders.
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