Dispelling the notion that everyone in Europe is on vacation in August, last Thursday, the European Commission released a draft notice containing 90 FAQs addressing various aspects of compliance with the Corporate Sustainability Reporting Directive. In this post, we discuss many of the FAQs, with a focus on those of the most interest to U.S.-based multinationals. Among others, these include several FAQs addressing non-EU parent consolidated reporting.
The FAQs are intended to clarify the interpretation of some aspects of the CSRD and, to a lesser extent, the first set of European Sustainability Reporting Standards adopted in connection with the CSRD. The FAQs are not intended to introduce additional requirements. The European Commission has indicated it may further update the FAQs.
Separately, EFRAG has continued to release ESRS Q&A explanations in response to questions submitted to EFRAG. The most recent set of 23 explanations was released on July 26. To date, EFRAG has released 93 explanations. EFRAG also has released materiality assessment and value chain guidance, as discussed in our posts here and here). EFRAG is the technical adviser to the European Commission that developed the draft ESRS. Its mission is to serve the European public interest in both financial and sustainability reporting by developing and promoting European views in the field of corporate reporting.
Scoping analysis
- Use of current vs. prior financial reporting year. The financial year to be used for CSRD scoping is determined by the existing financial reporting rules in the member state where the undertaking has its registered office. These rules were adopted in connection with the transposition of the pre-existing Accounting Directive, rather than as part of the CSRD. (FAQ 1)
- Change in undertaking category. The FAQs address whether, if an undertaking evolves during the course of a given financial year to meet the criteria for inclusion in a different category of undertaking (e.g., the entity becomes a large undertaking), it is required to start reporting under the rules applicable to the new category for that same financial year or only after the criteria have been met for two consecutive financial years. The FAQs indicate that the rules set out in the national measures transposing the pre-existing Accounting Directive will apply. (FAQ 2)
- Calculating number of employees. If member states have adopted national rules or provided relevant guidance, that is to be used. In the absence of national rules or guidance, undertakings may use Article 5 of Commission Recommendation of May 6, 2003 concerning the definition of micro, small and medium-sized enterprises as guidance regarding the measurement of staff headcount, as a proxy of an average number of employees. (FAQ 3)
- UCITS, AIFs and managers. Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) are exempt from reporting under the CSRD. However, undertakings that manage these vehicles that otherwise meet the thresholds for CSRD reporting are not exempt. (FAQs 11 and 12)
Parent-level reporting; subsidiary exemptions
- Consolidation of EU subsidiaries in non-EU parent report.A multinational group based outside the European Union (a third-country undertaking) can consolidate reporting at the non-EU parent level in accordance with the ESRS applicable to EU entities, in which case the subsidiary EU undertakings generally would be exempt from reporting. In this scenario, the non-EU parent would be reporting as if it were an EU parent undertaking of a large group (reporting under Article 29a of the CSRD, rather than reporting as a third-country undertaking under Article 40a). Many third-country undertakings that ultimately will have a CSRD reporting obligation at the parent level have concluded that this approach is preferable for various reasons. If the parent undertaking is established in a third country, its consolidated sustainability reporting and the assurance opinion must be published in accordance with the law of the member state governing the subsidiary undertaking. In addition, disclosures required by Article 8 of the Taxonomy Regulation (covering the activities carried out by the EU subsidiary undertaking) must be included either in the management report of the subsidiary undertaking or in the consolidated sustainability report of the third-country parent undertaking. (FAQs 19, 44, 47 and 48)
- Reporting boundary. If a third-country parent undertaking reports under Article 29a, the consolidated sustainability statement must include all its subsidiary undertakings, regardless of where the registered offices of the subsidiary undertakings are located. (FAQ 87)
- Unavailability of parent consolidated report when the subsidiary's management report is published. The consolidated management report/consolidated sustainability reporting of the parent undertaking does not have to already be published when the subsidiary publishes its own management report for the subsidiary exemption to be available. (FAQ 20)
- Entities not required to prepare a management report. An undertaking required to report sustainability information but that is not required to prepare and publish an individual or a consolidated management report may publish the sustainability statement in a separate document. This principle also applies to the consolidated sustainability reporting of a third-country parent undertaking in lieu of its subsidiaries. The separate document that includes the sustainability statement must comply with the electronic reporting format requirements of the Accounting Directive. (FAQs 25 and 86)
- Publication language. The member state whose national law governs an EU subsidiary undertaking may require that the consolidated report that includes the subsidiary undertaking be published in a language accepted by the subsidiary's member state. (FAQ 21) If a member state requires that a translation be provided, it should either be certified or include a statement indicating it was not certified. (FAQ 19) The sustainability report prepared by a third-country parent undertaking under Article 40a must comply with the language requirements of the member state whose national law governs the EU subsidiary or branch that has the publication requirement. (FAQ 49)
Value chain reporting
- Reasonable efforts. The concept
of “reasonable effort” is used to determine when an
undertaking must report an estimate of value chain information
instead of reporting information collected from actors in its value
chain. Reasonable effort should take into consideration the
undertaking's specific facts and circumstances and the
conditions of the external environment in which it operates. What
constitutes reasonable effort is therefore likely to vary from
undertaking to undertaking. The FAQ indicates that it is expected
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 over time. In all cases, the
undertaking should consider whether the use of estimates is likely
to affect the quality of the reported information (enhances the
quality or alternatively is not appropriately reliable). The FAQ
indicates that, when determining reasonable effort, the following
criteria could offer useful guidance, alone or in combination:
- The size and resources of the reporting undertaking in relation the scale and complexity of its value chain;
- The technical readiness of the reporting undertaking to collect value chain information;
- The availability of tools to access and share value-chain information;
- The size and resources of the actor in the value chain;
- The technical readiness of the actor in the value chain;
- Level of influence and buying power; and
- Connected to the level of influence, the proximity of the actor in the value chain. (FAQ 29)
- Transitional period. The transitional period for value chain information applies for the first three financial years during which the reporting requirements apply to an undertaking. The FAQ cites as an example an undertaking that is in scope for the 2024 financial year. That undertaking may use the transitional period for value chain reporting for the 2024, 2025 and 2026 financial years. (FAQ 31)
Taxonomy reporting
- EU undertakings. In-scope reporting EU entities must include Article 8 Taxonomy Regulation disclosures in their sustainability statements. (FAQs 32 and 34)
- Non-EU parent reporting. A third-country parent undertaking reporting under Article 40a does not have a Taxonomy Regulation disclosure obligation. (FAQ 46) A third-country parent undertaking that chooses to publish a consolidated sustainability statement under Article 29a also is not required to report under the Taxonomy Regulation at the consolidated parent level. However, for the EU subsidiaries of the third-country parent to be exempted from their sustainability reporting requirements, Taxonomy Regulation disclosures covering the activities carried out by those EU subsidiaries must be included in their own management report or in the consolidated sustainability reporting of the third-country parent undertaking. (FAQ 47)
Other report logistics
- Language requirements. EU undertakings must publish the sustainability statement included in their management report in a language specified by the laws of the applicable member state. (FAQ 35)
- Digital tagging. The sustainability statement within the management report must comply with the EU's digital taxonomy requirements once adopted. (FAQs 36 and 38) Undertakings that have to include a sustainability statement in their management report also will be required to digitally tag their Taxonomy Regulation disclosures once the digital taxonomy requirements are adopted. (FAQs 37 and 38)
- Publication deadline. Article 30 of the Accounting Directive specifies the rules for the publication of the management report (which includes the sustainability statement, where relevant). This must occur within twelve months of the financial year end, as provided for by each member state. (FAQ 39)
Assurance
- Scope. The assurance opinion is based on a limited assurance engagement regarding compliance of the sustainability statement with the sustainability reporting requirements in the Accounting Directive, including compliance of sustainability reporting with the ESRS and the process carried out by the undertaking to identify the information reported pursuant to those ESRS (i.e., the double materiality assessment process and compliance with the electronic reporting format requirements) and the Taxonomy Regulation reporting requirements. The assurance provider is expected to perform procedures that enable it to conclude that no matter has come to its attention to cause it to believe that the information included in the sustainability statement is not fairly presented in all material respects in accordance with ESRS and that it is not compliant with the digital tagging and Taxonomy Regulation reporting requirements. The conclusion concerning fair presentation in all material respects in accordance with ESRS entails an opinion on whether the undertaking's sustainability statement, including the process to identify the information reported (i.e., the double materiality assessment process), is compliant with ESRS and whether the outcome of the process has resulted in the disclosure of all material sustainability-related impacts, risks and opportunities of the undertaking in accordance with ESRS. (FAQ 70)
- Assurance standards. Member states may apply national auditing standards, procedures or requirements as long as the European Commission has not adopted an international auditing standard covering the same subject matter. Given the qualitative characteristics of information required under ESRS 1 (relevance and faithful representation as well as comparability, verifiability and understandability) and to avoid fragmentation and ensure that practices are as consistent as possible, pending the adoption of EU assurance standards, the Commission has requested the Committee of European Auditing Oversight Bodies (CEAOB) to develop in 2024 non-binding guidelines for statutory auditors and other assurance services providers. (FAQ 75)
- Voluntary reasonable assurance. Since a reasonable assurance engagement provides for a higher level of assurance than a limited assurance engagement, the CSRD does not prevent an undertaking from deciding voluntarily to ask for an opinion based on reasonable assurance on all or part of its sustainability reporting. This decision would be for the undertaking and not for the assurance provider. (FAQ 76)
Sustainable Finance Disclosure Regulation
- Principal adverse impacts. A financial market participant may assume that an indicator reported as non-material by a CSRD reporter does not contribute to the corresponding indicator of principal adverse impacts in the context of the SFDR. In other words, the value of that investment does not need to be included in the numerator of the given SFDR principal adverse impact indicator. Under ESRS 1 paragraph 35, when an undertaking considers a specific datapoint derived from the SFDR to not be material, it must explicitly state that in its CSRD reporting. (FAQ 90)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.