#DeloitteESGNow — Frequently Asked Questions About the E.U. Corporate Sustainability Reporting Directive
This Heads Up has been updated to reflect
(1) the revised scope thresholds in the CSRD, which went into
effect December 21, 2023, and (2) updates from the European
Financial Reporting Advisory Group regarding the statuses of
various sets of European Sustainability Reporting Standards as
well as the publication of draft implementation guidance.
Background
On July 31, 2023, the European Commission adopted the
European Sustainability Reporting
Standards1 (ESRS or “the standards”), which were published in the Official Journal
of the European Union in December 2023. Drafted by the European
Financial Reporting Advisory Group (EFRAG), the standards provide supplementary
guidance for companies within the scope of the E.U. Corporate Sustainability Reporting
Directive (CSRD).2 The adoption of the CSRD, along with the supporting ESRS, is intended to
increase the breadth of nonfinancial information reported by companies and to
ensure that the information reported is consistent, relevant, comparable,
reliable, and easy to access.
The Council of the European Union adopted the CSRD in November
2022 in support of the European Green Deal (Green Deal) — a
package of initiatives to cut greenhouse gas (GHG) emissions, direct investment
toward sustainability, invest in research and innovation, and preserve Europe’s
natural environment. By enabling investors to better evaluate risks and
investment impacts pertaining to sustainability, the CSRD is expected to
mobilize private finance in support of the Green Deal. Overall, the CSRD aims to
hold companies more accountable for their environmental and social impacts and
to accelerate the E.U.’s transition to a fully sustainable and inclusive
economic and financial system.
While the CSRD is a European directive, the CSRD requirements also apply to many
non-E.U. companies. This publication addresses some frequently asked
questions related to the application of the CSRD to companies based in the
United States.
Questions and Answers
Question 1
How does the CSRD affect U.S. companies?
Answer
The scope of the CSRD is wide reaching and has the potential to
affect many U.S.-based companies with activities in the European Union. The CSRD
applies to:
- Large undertakings or large groups3 based in the European Union (i.e., E.U. companies that are parents themselves, including E.U. holding companies and E.U. intermediate entities). These include both companies listed on an E.U.-regulated market and companies not listed,4 as well as subsidiaries of U.S. parent companies. Such an undertaking/group is defined as one that meets at least two of the following criteria5 in two consecutive financial years on its balance sheet date:
- Small and medium-sized undertakings (SMEs) or small and
medium-sized groups8 based in the European Union (i.e., E.U. companies that are parents
themselves, including E.U. holding companies or E.U. intermediate
entities) that are subsidiaries of U.S.-based companies with debt or
equity securities listed on a regulated market in the European Union,
other than micro undertakings. Such an undertaking/group is defined as
one that meets at least two of the following criteria9 in two consecutive financial years on its balance sheet date:
- Small undertakings/groups that have (1) no greater than €5 million balance sheet total (approximately USD 5.5 million as of December 31, 2023), (2) no greater than €10 million net turnover (approximately USD 11 million as of December 31, 2023), and (3) no greater than 50 employees, on average,10 during the financial year.
- Medium-sized undertakings/groups that have (1) no greater than €25 million balance sheet total (approximately USD 28 million as of December 31, 2023), (2) no greater than €50 million net turnover (approximately USD 55 million as of December 31, 2023), and (3) no greater than 250 employees, on average,11 during the financial year.
- Micro undertakings that have (1) no greater than €450,000 balance sheet total (approximately USD 497,000 as of December 31, 2023), (2) no greater than €900,000 net turnover (approximately USD 993,000 as of December 31, 2023), and (3) no greater than 10 employees, on average, during the financial year.
- U.S.-based companies that generate a net turnover12 of more than €150 million in the European Union in each of the
last two financial years and have any of the following:
-
At least one large subsidiary.
-
An SME subsidiary listed on an E.U.-regulated market.
-
A branch with more than €40 million net turnover.13
-
In addition to companies directly within the scope of the CSRD
for reporting purposes, other companies operating upstream or downstream may be
affected by its requirements. This is because the CSRD requires companies to
disclose material environmental, social, and governance (ESG) impacts, as well
as risks and opportunities connected with their upstream and downstream value
chains. Therefore, companies that are not within the scope of the CSRD
themselves may be affected through their customer and supplier relationships.
For example, a private supplier to a public company that is subject to the CSRD
may be asked to provide emissions data to its customer so that the customer can
make the appropriate Scope 3 GHG disclosures, if material. The European Union
recognizes that companies may need time to set up processes and controls for
collecting this data and therefore has included a three-year grace period in the
CSRD (see paragraph 33 of the CSRD) specifically for value chain disclosures.
During the grace period, companies may omit such data and instead disclose their
efforts to obtain this information, the reasons for its omission, and future
plans to obtain the data.
Question 2
When will U.S. companies be affected by the CSRD, and what if a company is on an
off-calendar reporting timeline?
Answer
The CSRD will be applied in four
stages. For the first in-scope year, 2024, only large U.S. companies that are
listed on an E.U.-regulated market and have more than 500 employees will be
subject to the CSRD. Starting in 2025, all U.S. companies that are large and
listed on an E.U.-regulated market will be within the scope of the CSRD, and
additional U.S. companies can be brought into scope if they have a large
E.U.-based subsidiary (regardless of whether they are listed on an
E.U.-regulated market; see Question 1 for the definition of a large undertaking/group). The
timeline below describes the requirements introduced at each stage from the
perspective of a U.S.-based company.
The CSRD should be applied for financial years starting on or after January 1,
2024. Therefore, a company that is subject to the first-stage requirements and
has a non-calendar-year-end such as June 30 would be required to report under
the CSRD for the fiscal period ending June 30, 2025 (i.e., reporting in late
2025). See the Appendix for some CSRD reporting timeline
examples.
The ESRS require companies to disclose one year of comparative
information for all disclosed quantitative metrics and monetary amounts, as well
as comparative information for narrative disclosures “[w]hen relevant to an
understanding of the current period’s sustainability
statement” (ESRS 1.7.1). However, ESRS 1.10.3 provides
an exemption to facilitate first-time application of the standard. Companies may
omit disclosure of comparative information required by ESRS 1.7.1 for the first
year of reporting. This exemption also applies to first-year reporting of
phased-in disclosure requirements. See Question 3 for more information on
ESRS.
For further information, see Deloitte’s January 9, 2023,
Heads
Up and The Corporate Sustainability Reporting
Directive — Latest
Insights.
Question 3
What is EFRAG, and what are the nature and timing of the ESRS that it is
developing?
Answer
Appointed as a technical adviser to the European Commission (EC)
under the CSRD, EFRAG is an independent body tasked with developing the ESRS,
which describe the information that companies within the scope of the CSRD will
be required to disclose. There are multiple sets of standards in various stages
of completion, as outlined below:
-
Finalized standards — The ESRS were adopted by the EC in July 2023 and became law on December 22, 2023, after being published in the official journal of the European Union. The first set of standards is sector-agnostic and includes 12 ESRS that cover the full range of sustainability matters specified in the CSRD. The standards are composed of 2 cross-cutting standards and 10 topical standards covering ESG topics. Each standard contains its own disclosure requirements and data points. All companies must comply with the general requirements of ESRS 1 and the general disclosure requirements of ESRS 2 regardless of materiality. After doing so, a company should then conduct a materiality assessment for the 10 topical standards to determine which are material to the company. If a topical standard is deemed material, the company must report on the disclosure requirements of that standard.14 However, some disclosure requirements will remain voluntary regardless of the outcome of a materiality assessment and are designated as such. The standards contain roughly 80 disclosure requirements, pertaining to both quantitative and qualitative information, as well as hundreds of data points, which can also refer to a narrative sub-element of a disclosure requirement. The EC will allow certain phase-in options for all companies and additional phase-in options for companies with fewer than 750 employees. The graphics below show a breakout of the first set of 12 ESRS, a summary of which topics are mandatory and which are subject to materiality assessment, and the phase-in options available to all companies as well as those available to companies with fewer than 750 employees.StandardRequirements That Are Applicable if the Topic/Disclosure Requirement Is Deemed MaterialFor Companies With Fewer Than 750 EmployeesFor Companies With Over 750 EmployeesRequired in Year 1?Required in Year 2?Required in Year 1?ESRS SBM1Breakdown of total revenue by significant ESRS sectorYes*Yes*Yes*ESRS 2 SBM3Material impacts, risks, and opportunities, and their interaction with strategy and business model (paragraph 48(e) anticipated financial effects)Only reporting qualitative disclosures is possible for the first 3 years if it is impracticable to prepare quantitative disclosuresOnly reporting qualitative disclosures is possible for the first 3 years if it is impracticable to prepare quantitative disclosuresOnly reporting qualitative disclosures is possible for the first 3 years if it is impracticable to prepare quantitative disclosuresESRS E1Data points on Scope 3 and total GHG emissions (E1-6)NoYesYesESRS E1Anticipated financial effects from material physical and transition risks, and potential climate-related opportunities (E1-9)NoOnly reporting qualitative disclosures is possible for the first 3 years if it is impracticable to prepare quantitative disclosuresOnly reporting qualitative disclosures is possible for the first 3 years if it is impracticable to prepare quantitative disclosuresESRS E2/E3/E4/E5Anticipated financial effects and related impacts, risks, and opportunities from the topic (E2-6**, E3-5, E4-6, E5-6)NoQualitative disclosures possible for the first 3 yearsQualitative disclosures possible for the first 3 yearsESRS E4Biodiversity and ecosystemsNoNoYesESRS S1All disclosures regarding own workforceNoYesYesESRS S1Some detailed information on own workforce (e.g., S1-7, S1-8, S1-11, S1-12, S1-14, and S1-15)NoYesNoESRS S2All disclosure requirements related to workers in the value chainNoNoYesESRS S3All disclosure requirements related to affected communitiesNoNoYesESRS S4All disclosure requirements related to consumers and end-usersNoNoYes* When the EC finalizes the disclosures required for specific sectors in which undertakings operate, undertakings will be required under ESRS 2 to provide a breakdown of total revenue by significant ESRS sector and a list of additional significant ESRS sectors. This change will occur no later than June 30, 2024.** Undertakings may comply with ESRS E2-6 by providing only qualitative disclosures for the first three years, except when such disclosures pertain to the information required by paragraph 40(b) on the operating capital expenditures that occurred in conjunction with major incidents and deposits.
- Sector-specific standards — According to the CSRD, EFRAG expects to publish a second set of reporting standards, which will be sector-specific. The sectors are as follows: oil and gas; coal, quarries, and mining; road transport; agriculture, farming, and fisheries; motor vehicles; energy production and utilities; food and beverages; and textiles, accessories, footwear, and jewelry. In October 2023, the EC published a proposal to delay the adoption of the sector-specific standards from the originally planned date in 2024 to 2026.15
- Non-EU standards — These standards are being developed and may be applied to the enterprise-wide reporting obligation for fiscal year 2028 (see Question 2 for more information). In October 2023, the EC published a proposal to delay its adoption of non-E.U. standards from the originally planned date in 2024 to 2026.16 While the standards’ adoption date has been delayed by two years, the reporting requirements for non-E.U. entities are still scheduled to be effective for financial years starting on or after January 1, 2028.
- Additional future standards — In January 2024, EFRAG published exposure drafts of (1) ESRS for listed SMEs (“ESRS LSME” Exposure Draft (ED)) and (2) voluntary sustainability reporting standards for nonlisted SMEs (“VSME ED”). The ESRS LSME ED will be issued as a delegated act and will be effective on January 1, 2026; however, listed SMEs may elect to opt out for an additional two years. The voluntary reporting standards for nonlisted SMEs will aid nonlisted micro, small, and medium-sized enterprises in responding to inquiries and requests for sustainability information that they receive from their business partners. The exposure drafts are open for public comment until May 21, 2024.
In addition, the EC has indicated that it will allow non-E.U.
companies within the scope of the CSRD, such as U.S. parent companies, to use
sustainability standards equivalent to the ESRS. For additional discussion of
standards that may be deemed equivalent, see Question 6.
For more information, see ESRS 1, including
Appendix C.
Question 4
How is the CSRD related to the European Sustainable Finance
Strategy, as well as other regulations and standards, such as the Non-Financial
Reporting Directive, EU Taxonomy for Sustainable Activities, the Sustainable
Finance Disclosures Regulation (SFDR), the Corporate Sustainability Due
Diligence Directive, and the EU Green Bond Standard?
Answer
Below is a brief summary of the
relationship of the CSRD to those regulations and standards:
-
European Sustainable Finance Action Plan — In recent years, the European Union has formed multiple initiatives to connect finance and sustainability through the 2018 Action Plan on Sustainable Finance; the Green Deal, which includes the EC’s renewed sustainable finance strategy; and the Sustainable Finance Package. The graphic below illustrates the timeline of the developments in recent years.
-
Non-Financial Reporting Directive (NFRD) — The NFRD was adopted in 2014 and requires large public-interest companies that have more than 500 employees and are listed within the European Union to provide nonfinancial disclosures related to ESG matters along with their annual financial reports.The CSRD replaces and expands the existing requirements of the NFRD and extends the scope of companies required to disclose sustainability information from approximately 11,700 to 50,000 companies in the European Union, with another 3,000 or more U.S.-based companies estimated to be affected. Ultimately, the scope of the CSRD may be affected by how each E.U. member state transposes it into law.
-
EU Taxonomy for Sustainable Activities — The EU Taxonomy for Sustainable Activities, also known as the “EU Taxonomy,” is a classification system that establishes a list of environmentally sustainable economic activities that are consistent with the six environmental objectives pursued in the European Union as well as minimum social and human rights safeguards. The EU Taxonomy provides entities, investors, and policymakers with appropriate definitions and criteria (including science-based technical criteria) with which to identify economic activities that can be considered environmentally sustainable. While aiming to create security for investors and protect private investors from greenwashing, the EU Taxonomy also (1) helps companies become more climate-friendly, (2) mitigates market fragmentation, and (3) promotes a shift in investments to where they are most needed. The EU Taxonomy allows entities to comply with the EU Taxonomy Regulation,17 which establishes six environmental objectives — climate change mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.The CSRD ties into Article 8 of the EU Taxonomy Regulation by requiring companies to report various key performance indicators, which vary on the basis of the nature of the entity, with respect to all six environmental objectives. For example, a company within the scope of the CSRD will be required to report its turnover, capital expenses, and operational expenses with respect to all six environmental objectives. As shown in the chart above and explained in Question 10, once an entity is within the scope of the CSRD, its sustainability reporting, including the EU Taxonomy information, will be subject to mandatory limited assurance.
- Sustainable Finance Disclosures Regulation (SFDR) — The SFDR requires certain financial market participants and advisors to provide transparency in sustainability reporting on (1) the ESG qualities of the financial products that are offered to their clients as part of existing precontractual and periodic disclosure obligations, and subsequently reflected on their Web sites, and (2) how they incorporate sustainability matters into their investment decisions. These requirements, which are in addition to those of the CSRD, apply to financial market participants that offer investment products in the European Union, financial advisors who guide E.U. consumers, and non-E.U. financial institutions operating in the European Union or transacting with E.U.-based clients.
- Corporate Sustainability Due Diligence Directive (CSDDD) — Currently in development, the CSDDD is a future E.U. directive that would introduce required due diligence steps that companies must follow regarding human rights and environmental impacts. The directive would require companies to identify and remediate any negative human rights and environmental impacts within their own operations as well as those of their subsidiaries and up and down their value chains. The goal of the CSDDD is to encourage sustainable and responsible corporate behavior and operations. While these requirements would be in addition to those of the CSRD, there may be a number of synergies between the two directives, such as on the disclosure of value chain impacts and transition plans and the requirement to have a climate transition plan aligned with the Paris Agreement.
- European Green Bond Standard — The European Green Bond Standard was published in the Official Journal of the European Union on November 30, 2023. It is a voluntary standard to help scale up and raise the environmental ambitions of the green bond market. Applying this standard would allow issuers to demonstrate that they are funding legitimate green projects aligned with the EU Taxonomy. The EU Green Bond Standard sets out requirements that would enable companies to claim that they are issuing an “EU green bond,” a label that is expected to be sought by the financial sector, which aims to invest in sustainable investments. Entities that do not follow the EU Green Bond Standard would not be entitled to claim that they are issuing “green bonds.” The requirements of the EU Green Bond Standard include references to the EU Taxonomy.
See Deloitte’s December 2022
iGAAP in
Focus and The Corporate Sustainability
Reporting Directive — Latest
Insights for further
details.
Question 5
How does the CSRD compare with the SEC’s proposed climate disclosure
requirements?
Answer
The CSRD
will require disclosure and assurance on a much broader suite of ESG topics
than would the SEC’s proposed rule on climate-related disclosures. The
CSRD will include requirements for non-climate-related environmental topics and
various social topics, while the SEC’s proposed rule18 on climate-related disclosures would only mandate disclosures specific to
climate impacts and risk. The table below highlights the main differences
between the SEC’s proposed regulation and the CSRD.
It is important to note that, as described in the graphic above, the CSRD will
require assurance over all sustainability information whereas the SEC’s
proposed rule would only require assurance over Scope 1 and Scope 2 GHG
emissions.
For more information about double materiality and its impact on the CSRD
requirements, see Question 9. For further discussion of the
CSRD assurance requirements, see Question 10.
See Deloitte’s January 9, 2023, Heads Up for further
details.
Question 6
Will non-E.U. companies be permitted to use other standards instead of the ESRS?
Which sustainability reporting standards are most likely to be deemed
“equivalent” to ESRS for use by non-E.U. companies? Is the proposed SEC climate
disclosure rule expected to be eligible for equivalence?
Answer
Although the EC has indicated that it will allow in-scope non-E.U. companies
(such as U.S. parent companies) to use sustainability standards equivalent to
the ESRS, it has not yet decided which standards will be deemed equivalent.
(Note that equivalent standards will only be available at the non-E.U. parent
company level; any reporting done at an E.U.-company level must use ESRS.) If
the EC decides that another country’s sustainability reporting standards are not
equivalent, it may nonetheless allow companies to continue using such standards
during an appropriate transition period, thus providing reasonable time for them
to prepare to report in accordance with ESRS or an approved equivalent standard.
When the appropriate transition period comes to an end, the companies would be
required to report in accordance with ESRS or an approved equivalent standard.
It is important to note that the disclosure requirements of the ESRS are
extensive, with roughly 80 requirements covering both quantitative and
qualitative disclosures, and go well beyond the requirements of the SEC’s
proposed rule on climate-related disclosures. As of now, it is not known whether
the SEC’s proposed rule, when finalized, will be an eligible ESRS-equivalent
standard.
See the CSRD, paragraph 25,
and EU Transparency Directive
(2004/109/EC), Article 23, paragraph
4, as amended by the CSRD, for more information.
Question 7
Will E.U. subsidiaries within the scope of the CSRD still be required to report
separately if the U.S. parent company publishes consolidated reporting in
accordance with ESRS?
Answer
If a U.S. multinational company has a subsidiary based in the European Union that
is within the scope of the CSRD, the subsidiary may be exempt from reporting
separately when it (and any subsidiary undertakings it may have) is included in
the consolidated parent company’s reporting prepared in accordance with ESRS. In
this case, an exempted subsidiary will be required to disclose certain
information about the use of the exemption.
The exemption is not allowed for large subsidiaries that are listed on an
E.U.-regulated market. Therefore, U.S. parent companies that are within the
scope of the CSRD for enterprise-level reporting starting in 2028 and have a
large subsidiary listed on an E.U.-regulated market will need to report at the
consolidated U.S. parent-company level while continuing to separately report
sustainability information in the management report for the large subsidiary
listed on an E.U.-regulated market. See Question 2 for more information
on enterprise-level reporting considerations.
For further details, see the
CSRD, paragraphs 25
and 26, and EU Accounting Directive
(2013/34/EU), Articles 19a, 29a, and
48i, paragraph 4, as amended by the CSRD.
Question 8
What are the reporting options for U.S. companies with E.U.-based
subsidiaries?
Answer
The CSRD provides three
different reporting options for non-E.U. parent companies with E.U.-based
subsidiaries — one global reporting route and two E.U. reporting routes — to
ensure that all entities within the scope of the CSRD ultimately report the
required information. The global reporting route allows a U.S. (i.e., non-E.U.)
parent company to report in accordance with the CSRD for itself and for all of
its subsidiaries (i.e., one report covering the entire consolidated company from
the perspective of the parent). The E.U. reporting route provides two additional
options. The first, which is available until 2029, allows the largest E.U.
subsidiary to produce a consolidated report containing information for all E.U.
subsidiaries within the scope of the CSRD. This option is not for the
enterprise-wide consolidated report; rather, this “artificial consolidation” is
only allowed if the E.U. subsidiaries are not held by an E.U. holding
company. The second option allows each E.U. subsidiary within the scope of the
CSRD to issue a separate sustainability report. The graphic below provides
further information.
For further information, see
EU Accounting Directive
(2013/34/EU), Articles 40a–40c, and
Article 48i as amended by the CSRD, as well as
Deloitte’s January 9, 2023, Heads
Up.
Question 9
How is double materiality defined under the CSRD and ESRS?
Answer
Double materiality is a concept that provides criteria for
determining whether sustainability information is required to be disclosed. The
CSRD describes double materiality as the requirement to “report both on the
impacts of the activities of the undertaking on people and the environment
[impact materiality], and on how sustainability matters affect the undertaking
[financial materiality].” As further defined in ESRS 1, Section 3.4, impact
materiality refers to positive and negative sustainability-related impacts
connected with an undertaking’s business. Section 3.4 states that “[a] sustainability matter is material from an impact
perspective when it pertains to the undertaking’s material actual or potential,
positive or negative impacts on people or the environment over the
short-, medium- or long-term. Impacts include those connected with the
undertaking’s own operations and upstream and downstream value chain, including
through its products and services, as well as through its business
relationships.”
Financial materiality refers to sustainability-related matters that could present
financial risks or opportunities for an undertaking. ESRS 1, Section 3.5,
explains that “[a] sustainability matter is material from a financial
perspective if it triggers or could reasonably be expected to trigger material
financial effects on the undertaking.”
These two concepts can be
interrelated, such as when an undertaking’s impact on the environment generates
a financial risk. Sustainability information meets the criteria of double
materiality if it is material from the impact perspective, the financial
perspective, or both perspectives. The graphic below illustrates the two
dimensions of double materiality: financial materiality and impact
materiality.
See ESRS 1, including
Appendix A, for further information on double
materiality and application requirements.
For additional information, also see
EFRAG’s draft materiality assessment
implementation guidance. While not
final or authoritative, the guidance includes a
description of the reporting requirements related to the
materiality assessment process. Similarly, EFRAG
released draft value chain implementation
guidance that includes discussions
of the reporting requirements on the value chain. The
draft guidance was exposed for public comment in
December 2023; the comment period closed on February 2,
2024.
Question 10
Which disclosures will be subject to assurance, and what level
of assurance is required?
Answer
As specified in paragraph 60 of the CSRD, all companies within its scope are
required to seek limited assurance over “the compliance of the sustainability
reporting with [the E.U.] sustainability reporting standards, the process
carried out by the undertaking to identify the information reported pursuant to
the sustainability reporting standards and compliance with the requirement to
[electronically tag the] sustainability reporting” in accordance with the
electronic reporting format specified in Article 3 of Commission Delegated
Regulation (EU) 2019/815. Limited assurance is required for all of the CSRD’s
implementation phases, meaning that entities within the scope of the CSRD must
obtain limited assurance in their first year of reporting. The assurance
provider should also assess whether the undertaking’s reporting complies with
the reporting requirements of Article 8 of the EU Taxonomy Regulation. The EC
will perform an assessment to determine whether moving from limited to
reasonable assurance is feasible for both auditors and companies. After this
assessment, the EC will adopt assurance standards for (1) limited assurance no
later than October 1, 2026, and (2) reasonable assurance no later than October
1, 2028. Under the CSRD, this assurance may be provided by the company’s
statutory auditor. The assurance provider will present an assurance report
containing a conclusion about whether the company has disclosed its
sustainability information in accordance with the criteria noted above.
For more information, see the
CSRD, paragraphs
60, 61, and 62, and EU Audit Directive
(2006/43/EC), Articles 26a, 27a, and
28a, as amended by the CSRD.
Question 11
What are the consequences of noncompliance with the CSRD?
Answer
The EC has not directly stated what the impacts of noncompliance
with the CSRD will be. However, on the basis of precedent with the NFRD, which
has different requirements and enforcement mechanisms for each E.U. member
state, it is likely that the EC will once again leave enforcement and compliance
up to each E.U. member state. This notion is further supported by CSRD Article 5(1), which notes that “Member
States shall bring into force the laws, regulations and administrative
provisions necessary to comply with Articles 1 to 3 of this directive by 6 July
2024.”
For further details, see the
NFRD, paragraphs 10
and 16.
Question 12
What are the next steps in the CSRD regulatory adoption process for member
states?
Answer
The CSRD entered into force on January 5, 2023, after being
published in the Official Journal of the European Union in December 2022.
The rules introduced by the NFRD will remain in force until the rules of the
CSRD are applicable. Under the CSRD, Article 5, member states will have until
July 6, 2024, to transpose the CSRD into their national laws and bring into
force regulations and administrative provisions necessary for compliance. We
encourage companies to monitor relevant member-state transposition until the
CSRD is fully transposed.
See the EU’s Corporate Sustainability Reporting
overview for more information.
Question 13
What are some initial steps that companies can take to start preparing for CSRD
compliance?
Answer
First, companies should conduct a boundary assessment to see
whether they fall under the scope of the CSRD. We encourage consultation with
legal counsel to conduct this assessment. If companies do fall under its scope,
it is important to determine the timeline of reporting and to prepare
accordingly.
Two key elements of the CSRD are its double materiality lens,
which requires reporting on material impacts, risks, and opportunities relevant
to investors and other stakeholders, and its requirement to have limited
assurance over all disclosed sustainability information. If a topic is material,
it needs to be disclosed; and if a topic is disclosed, it needs to be assured.
Therefore, companies within the scope of the CSRD should prioritize conducting a
double materiality assessment by (1) considering both financial and impact
materiality (see Question
9) and (2) evaluating and strengthening their processes and
controls over their sustainability information so they can be “assurance ready”
(see Question 10).
The graphic below outlines some additional initial steps that companies can take
to start preparing for compliance with CSRD requirements over and above climate
and GHG information.
Preparing for CSRD Compliance — Important Steps
The table below assumes an
inaugural reporting year of 2026 for FY 2025 data.
For more information, see Deloitte’s
January 9, 2023, Heads
Up.
Appendix
Outlined below are a variety of scenarios in which a U.S. company and its
subsidiaries may find itself within the scope of the CSRD. The table offers several
circumstances, criteria, and analysis but does not outline every possible scenario
in which a U.S. company may be affected.
|
Scenario 1
|
Scenario 2
|
Scenario 3
| |
|---|---|---|---|
|
Company overview
|
U.S. group
|
U.S. group
|
U.S. group
|
|
Company profile and CSRD criteria
|
The company generated €160M net turnover in
the European Union in each of the last two years and had two
E.U. branches that each generated €80M net turnover in the
preceding financial year.
|
The company generated €160M net turnover in
the European Union in each of the last two years and has one
large unlisted E.U. subsidiary.
|
The company generated €160M net turnover in
the European Union in each of the last two years and has one
large subsidiary listed on an E.U.-regulated market.
|
|
Timeline and CSRD reporting requirements
|
The U.S. group, including E.U. and non-E.U.
operations, would be within the scope of the CSRD beginning
financial year 2028, for reporting in 2029, because it
generated more than €150M net turnover in the European Union
at the consolidated level in the last two years and has at
least one branch in the European Union that generated net
turnover there in excess of €40M in the preceding year.
|
On a standalone basis, the large E.U. subsidiary would be
within the scope of the CSRD beginning financial year 2025,
for reporting in 2026, unless included in the U.S. group’s
consolidated management report prepared in accordance with
ESRS (or equivalent standards). The U.S. group, including
E.U. and non-E.U. operations, will be within the scope of
the CSRD beginning financial year 2028, for reporting in
2029.
|
The large listed E.U. subsidiary would be within the scope of
the CSRD beginning financial year 2025 (or financial year
2024 if the subsidiary has over 500 employees). The U.S.
group, including E.U. and non-E.U. operations, would be
within the scope of the CSRD beginning financial year 2028
for reporting in 2029. Unlike scenario 2, the large
subsidiary would not be exempt from subsidiary reporting if
it is included in the U.S. group’s consolidated management
report prepared in accordance with ESRS (or equivalent)
because it is a large listed subsidiary.
|
Contacts
For information about Deloitte’s
service offerings related to ESG matters, please contact:
|
|
Eric Knachel
Audit &
Assurance Partner
Deloitte &
Touche LLP
+1 203 761 3625
|
|
Kristen Sullivan
Audit &
Assurance Partner
Deloitte &
Touche LLP
+1 203 708
4593
|
|
|
Allie Bruflodt
Audit &
Assurance Senior Manager
Deloitte &
Touche LLP
+1 612 397
4172
|
|
Sara Raquel Macferran
Audit &
Assurance Senior Manager
Deloitte &
Touche LLP
+1 813 294
0912
|
|
|
Ragan Powell
Audit &
Assurance Senior Manager
Deloitte &
Touche LLP
+1 469 417
2356
|
|
Mike Shonce
Audit &
Assurance Senior Manager
Deloitte &
Touche LLP
+1 313 394
5694
|
|
|
Ashley Frambach Baker
Audit &
Assurance Manager
Deloitte &
Touche LLP
+1 650 245
9345
|
|
Kyle Boyce
Audit &
Assurance Senior
Deloitte &
Touche LLP
+1 415 783
4092
|
Footnotes
1
Regulation (EU) 2023/2772 of 31 July 2023 Supplementing
Directive 2013/34/EU of the European Parliament and of the Council as
Regards Sustainability Reporting Standards.
2
“Directive (EU) 2022/2464 of the European Parliament and
of the Council.”
3
Note that the criteria for a group take into
consideration all subsidiaries of an E.U. parent company,
including any subsidiaries established outside of the European
Union.
4
A company that is listed on an E.U.-regulated
market does not need to have operations within the European
Union to be brought into scope. A company that is not listed on
an E.U.-regulated market must have operations or be based within
the European Union to be brought into scope.
5
Note that the balance sheet total and net
turnover thresholds have been updated to reflect the impact of a
delegated directive
adopted by the European Commission that amended the Accounting
Directive. The amendments went into effect on December 21,
2023.
6
Article 2(5) of Directive 2013/34/EU, as
amended by the CSRD, indicates that net turnover is
defined as “the amounts derived from the sale of
products and the provision of services after deducting
sales rebates and value added tax and other taxes
directly linked to turnover; however, for insurance
undertakings referred to in point (a) of the first
subparagraph of Article 1(3) of this Directive, ‘net
turnover’ shall be defined in accordance with Article 35
and point 2 of Article 66 of Council Directive
91/674/EEC . . . ; for credit institutions referred to
in point (b) of the first subparagraph of Article 1(3)
of this Directive, ‘net turnover’ shall be defined in
accordance with point (c) of Article 43(2) of Council
Directive 86/635/EEC . . . ; and for undertakings
falling under the scope of Article 40a(1) of this
Directive, ‘net turnover’ means the revenue as defined
by or within the meaning of the financial reporting
framework on the basis of which the financial statements
of the undertaking are prepared.” We believe that the
definition of net turnover, when used for calculating
thresholds under Article 3 of Directive 2013/34/EU,
should generally be the same as that in the local
reporting framework.
7
The definition of "employee"
and how to calculate the average may vary among E.U.
member states. The applicable national law should be
followed.
8
See footnote 3.
9
See footnote 5.
10
See footnote 7.
11
See footnote 7.
12
The CSRD does not specify how net turnover
should be calculated for this requirement, but in the absence of
further clarification, we believe that it is intended to cover
net turnover from the perspective of a global consolidated group
to customers in the European Union. We believe that net turnover
is allocated according to the location of the customer at the
time of the transaction or the place in which a service was
provided, irrespective of where the supplier or service provider
is located. As discussed in footnote 6, the CSRD states that net
turnover should be calculated by using “the financial reporting
framework on the basis of which the financial statements of the
[third-country undertaking is] prepared.”
13
For further details on the scope of
the CSRD, see the CSRD, paragraphs
17–21, and EU Accounting Directive (2013/34/EU),
Articles 19a, 29a, 29c, and 40a as amended by the
CSRD. For more on the information to be disclosed,
see the CSRD, paragraph
47, and EU Accounting Directive (2013/34/EU),
Article 29b, as amended by the CSRD.
14
Entities subject to other E.U. regulations
may need to report certain disclosure requirements and data
points prescribed by other E.U. regulations that may overlap
with disclosure requirements and data points deemed
voluntary or subject to a materiality assessment by
ESRS.
15
The E.U. Parliament and Council have reached a
provisional
agreement on a two-year postponement to June
30, 2026. The provisional agreement must now be approved and
formally adopted by both institutions. The amendments will
become effective once published in the Official Journal of
the European Union.
16
See footnote 15.
17
“Regulation (EU) 2020/852 of the European
Parliament and of the Council of 18 June 2020 on the
Establishment of a Framework to Facilitate Sustainable
Investment, and Amending Regulation (EU) 2019/2088.”
18
SEC Proposed Rule Release No. 33-11042, The Enhancement and
Standardization of Climate-Related Disclosures for
Investors.