The EU Corporate Sustainability Reporting Directive – Draft FAQs and the European Sustainability Reporting Standards

The European Union (EU) Commission has published a draft set of frequently asked questions (FAQs) on the interpretation of certain provisions of the EU Corporate Sustainability Reporting Directive (CSRD) and the first set of European Sustainability Reporting (ESRS)¹.

The FAQs, published on 7 August 2024, come ahead of the first reporting cycle applying the new CSRD rules due in 2025 for the financial year 2024 (read more about the application of the CSRD to EU and non-EU companies and groups in our previous Client Alert). The aim of the FAQs is to assist in-scope undertakings² in the implementation of the regulatory requirements and ensure the usability and comparability of sustainability reports. The EU Commission has indicated that it may update the FAQs where appropriate.

The FAQs provide an overview of the sustainability reporting requirements introduced by the CSRD, including a detailed flowchart illustrating the process to determine whether an entity is subject to sustainability reporting requirements on an individual, consolidated and/or non-EU group basis, the relevant reporting financial year and potential exemptions. Other FAQs take into account input received from companies and are grouped according to the categories covering reportable sustainability information, assurance, key intangible resources, requirements for non-EU undertakings and the Sustainable Finance Disclosures Regulation (SFDR).

The key takeaways from the FAQs are summarised below and relate to the clarifications made regarding the requirements for, on the one hand, individual and consolidated “sustainability statements” and, on the other hand, non-EU group “sustainability reports”. Each of these has different content requirements and operate under separate regimes.

Scoping Criteria

EU Undertakings: To determine the size of the undertaking for sustainability reporting purposes, including when an undertaking evolves or ceases to meet the relevant criteria of a large undertaking or large group,³ or a small or medium-sized undertaking (SME)⁴ in a given financial year, the existing rules for financial reporting of the EU Member State in which the undertaking has its registered office are to be relied upon. In addition, if an EU Member State has not adopted national rules or guidance on the calculation of the average number of employees, undertakings may use Article 5 of Commission Recommendation of 6 May 2003 as guidance.

The requirement for an EU parent undertaking of a large group to publish a consolidated sustainability statement applies regardless of the size of the EU parent undertaking (including an intermediate or holding company of a non-EU ultimate parent company), therefore the CSRD size criteria should be applied to an EU parent undertaking on an individual and consolidated or aggregated basis with its subsidiaries regardless of where its subsidiaries are located.

Non-EU ultimate parent undertakings: The legal entity form of the non-EU ultimate parent undertaking is irrelevant for the purposes of the CSRD. If a non-EU ultimate parent undertaking falls within the scope of the CSRD, either (i) its EU subsidiary or EU branch will have to prepare, publish and make accessible a consolidated sustainability report covering the global group in accordance with ESRS for certain non-EU countries; or (ii) the non-EU ultimate parent undertaking may prepare the consolidated sustainability report, which will then be published and made accessible by the EU subsidiary or EU branch, either by filing it in an EU business register or by publishing it on its website.

To avoid double reporting by the EU subsidiaries and EU branches of the same non-EU ultimate parent undertaking, EU Member States may allow for one subsidiary or branch established or located in its territory to comply with the obligation to publish a sustainability report by providing a link to the sustainability report published by another EU subsidiary or EU branch of the non-EU ultimate parent undertaking.

Exemptions

EU subsidiary undertakings: An in-scope EU undertaking will be exempt from publishing an individual or consolidated sustainability statement if the undertaking (and its subsidiaries, if any) is included in (i) the consolidated management statement of an EU parent undertaking prepared in accordance with ESRS; or (ii) the voluntary consolidated sustainability reporting of a non-EU ultimate parent undertaking prepared in accordance with ESRS or an equivalent standard.

To avail of this exemption the management report of the EU undertaking must contain (i) the name and registered office of the parent undertaking that reports the information at group level; (ii) weblink(s) to the consolidated management statement or consolidated sustainability reporting of the parent undertaking (or a general weblink where the documents will be made available in the future); and (iii) the information that the EU undertaking is exempted from the obligation to publish an individual or consolidated sustainability statement.

This exemption does not apply to any large undertaking listed on an EU regulated market.

Non-EU ultimate parent undertakings: An in-scope non-EU ultimate parent undertaking and its EU branch or EU subsidiary are exempt from preparing a consolidated sustainability report if the non-EU ultimate parent undertaking voluntarily publishes a consolidated sustainability statement in accordance with ESRS or an equivalent standard.

Given that a consolidated sustainability report published by a non-EU ultimate parent undertaking is more limited in content, as explained further below, its publication will not provide an exemption to any in-scope EU undertakings required to publish an individual or consolidated sustainability statement.

ESRS

EU undertakings: All undertakings required to publish individual and consolidated sustainability statements must use ESRS.⁵ SMEs listed on an EU regulated market may use proportionate ESRS.

Non-EU ultimate parent undertakings: The EU Commission will adopt specific ESRS in respect of consolidated sustainability reports. The consolidated sustainability reports will be more limited in content compared to an individual or consolidated sustainability statement as, for example, they will not require information on resilience, opportunities, and risks, since the intention above all is to focus the sustainability report on sustainability impacts.

Value Chain Reporting

Transitional period: The transitional provisions under ESRS limiting the value chain information that in-scope undertakings have to report and/or collect from actors in their value chain apply for the first three financial years of application.

Reasonable efforts: Notwithstanding the transitional provisions, in-scope undertakings should apply “reasonable effort” to collect the information they need in order to comply with ESRS from actors in their value chains. Reasonable effort should be determined taking into consideration the specific facts and circumstances of the undertaking as well as the conditions of the external environment in which it operates. What constitutes reasonable effort is therefore likely to vary from undertaking to undertaking. The FAQs include a list of criteria to assist in determining whether reasonable efforts have been made, notably the size and resources, the technical readiness and the proximity of the actor in the value chain are among the criteria that can be used to establish what constitutes “reasonable effort”. 

Use of estimates: If in-scope undertakings cannot obtain all necessary value chain information after having made reasonable efforts to do so, ESRS require in-scope undertakings to use estimates. While the FAQs do not specifically address concerns regarding the use of estimates, undertakings are directed to consider whether their use is likely to affect the quality of the reported information. The FAQs acknowledge that undertakings will more frequently have recourse to the use of estimates in the first years of application and that the use of estimates will become less common as the ability of undertakings and the actors in their value chains to share sustainability information improves over time.

Article 8 Taxonomy Regulation Disclosures

EU undertakings: EU undertakings required to publish individual and consolidated sustainability statements must include Article 8 Taxonomy Regulation disclosures in their sustainability statements. Where a non-EU ultimate parent undertaking voluntarily publishes a consolidated sustainability statement but does not include Article 8 Taxonomy Regulation disclosures covering its EU subsidiary’s activities, the EU subsidiary will still be required to include these disclosures in its management report.

Non-EU ultimate parent undertakings: Non-EU ultimate parent undertakings required to publish sustainability reports do not have to include Article 8 Taxonomy Regulation disclosures. If a non-EU ultimate parent undertaking chooses to voluntarily publish a consolidated sustainability statement it is also not required to report Article 8 Taxonomy Regulation disclosures however, as referred to above, if the non-EU ultimate parent undertaking has EU subsidiaries these EU subsidiaries will still be required to include Article 8 Taxonomy Regulation disclosures in its management report.

Format, Language and Publication

Format: Management reports should be prepared in XHTML format and the sustainability statement in the management report should be marked-up in accordance with the digital taxonomy to be prepared by the European Securities and Markets Authority (ESMA) and adopted by the EU Commission at a later date⁶. However, until the adoption of ESMA’s digital taxonomy, undertakings are not required to mark-up the sustainability statement and are also not required to prepare the management report in XHTML.

There is no specific format for the preparation of the sustainability report. However, EU subsidiaries and EU branches are required to submit the sustainability report in a data extractable format together with the relevant accompanying metadata.

Language: The language used to publish the sustainability statement or sustainability report must be a language specified by the laws of the relevant EU Member State.

Deadline for publication: The management report, including the sustainability statement and assurance opinion/report, or the sustainability report must be published within 12 months of the balance sheet date of the financial year for which the report is drawn up, unless a shorter timeframe is specified by the laws of the relevant EU Member State.  

Comment

The clarifications provided in the FAQs highlight the large volume of environmental, social and governance (ESG) data sets that in-scope corporate groups will be required to collect and report on in order to discharge the CSRD reporting requirements of their EU and, in many cases, their non-EU undertakings.

While most corporate groups may find that their CSRD reporting obligations are not triggered until 2026 (for the financial year 2025) the FAQs are a helpful tool for early engagement by corporate groups that are trying to understand their CSRD reporting options and establish adequate data collection and reporting processes ahead of their first reporting cycle, regardless of when that may be.

^{1 The European Financial Reporting Advisory Group (EFRAG), as technical adviser to the Commission for the development of the ESRS under the CSRD, has separately published technical implementation guidance on materiality assessment, value-chain reporting and the list of datapoints contained in ESRS and has established an online Q&A Platform through which undertakings and other stakeholders can submit technical questions on ESRS.}

^{2 For these purposes an “undertaking” is an entity with limited liability, such as public and private limited liability companies and partnerships and limited partnerships whose fully liable members are public or private limited liability companies or whose members are not private or public limited companies but in fact have limited liability for the partnership's obligations.}

^{3 A large undertaking or large group for these purposes is one that exceeds the limits of at least two out of the three of the following criteria:}

1. ^{Net turnover of €50 million.}
2. ^{Balance sheet total assets of €25 million.}
3. ^{250 employees.}

^{4 An SME for these purposes is one that does not exceed the limits of at least two out of the three criteria for a large undertaking and is not a micro undertaking. A micro undertaking for these purposes is one that does not exceed at least two out of the three of the following criteria:}

1. ^{Net turnover of €900,000.}
2. ^{Balance sheet total assets of €450,000.}
3. ^{10 employees.}

^{5 Read more about the first set of sector-agnostic ESRS adopted by the EU Commission on 31 July 2023 and the sector-specific ESRS to be adopted by the Commission by 30 June 2026 in our previous Client Alert.}

^{6 On 30 August 2024, EFRAG published its XBRL digital taxonomies for ESRS Set 1 and Article 8 Taxonomy Regulation disclosures. These digital taxonomies will be the basis on which ESMA will develop the Regulatory Technical Standards for the mark-up of ESRS sustainability statements to be adopted by the EU Commission. While it is not mandatory to mark-up ESRS sustainability statements until the EU Commission adopts ESMA’s Regulatory Technical Standards, EFRAG encourages in-scope undertakings to utilise its digital taxonomies on a voluntarily basis pending the publication and adoption of the Regulatory Technical Standards. Given the publication of EFRAG’s digital taxonomies, we would expect that the Regulatory Technical Standards will be adopted in time for the second sustainability reporting cycle in 2026 for the financial year 2025.}