Corporate Sustainability Reporting Directive (CSRD)
- Category: European Union Carbon Market Glossary
The implementation of the Corporate Sustainability Reporting Directive (CSRD) inevitably will be high on the regulatory and business agendas for some time.
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26 March 2024 2023 Corporate Reporting Enforcement and Regulatory Activities Report, ESMA32-193237008-8269
7 February 2024
22 December 2023
The main goal of the draft Guidelines is to ensure that national competent authorities carry out their supervision of listed companies’ sustainability information under the CSRD, the ESRS and Article 8 of the Taxonomy Regulation in a converged manner.
17 October 2023
The Commission adopts the European Sustainability Reporting Standards Questions and Answers on the Adoption of European Sustainability Reporting Standards |
NFRD
The CSRD's equally ranking predecessor was the NFRD (Non-Financial Reporting Directive - Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups. NFRD was adopted in 2014 and amended the Accounting Directive,
Companies within the scope of the NFRD had to report in accordance with its provisions for the first time in 2018 (covering financial year 2017). The NFRD applies to large public-interest entities with an average number of employees in excess of 500, and to public-interest entities that are parent companies of a large group with an average number of employees in excess of 500 on a consolidated basis (public-interest entities are defined in the Accounting Directive as companies with securities listed in EU regulated markets, banks (whether listed or not), insurance companies (whether listed or not) and any other companies designated by Member States). The NFRD exempts subsidiaries from its reporting obligations if their parent company does the reporting for the whole group, including the subsidiaries.
Approximately 11 700 companies were subject to the reporting requirements of the NFRD (this figure takes account of how Member States transposed the Directive, not taking account of national transposition, about 2 000 companies were within the scope of the NFRD).
The NFRD required certain large companies to include a non-financial statement as part of their annual public reporting obligations. The NFRD introduced a requirement for companies to report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective) - often known as ‘double materiality’. The NFRD identified four sustainability issues (environment, social and employee issues, human rights, and bribery and corruption) and with respect to those issues it required companies to disclose information about their business model, policies (including implemented due diligence processes), outcomes, risks and risk management, and key performance indicators (KPIs) relevant to the business. It did not introduce or require the use of a non-financial reporting standard or framework, nor dod it impose detailed disclosure requirements such as lists of indicators per sector.
Legislative process for CSRD
The draft Corporate Sustainability Reporting Directive (CSRD) to amend the NFRD has been published by the European Commission on 21 April 2021 (Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting {SEC(2021) 164 final} - {SWD(2021) 150 final} - {SWD(2021) 151 final}, COM(2021) 189 final, 2021/0104 (COD)).
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On 28 November 2022 the Council gave its final approval to the CSRD and on 16 December 2022 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting has been published in the EU Official Journal.
CSRD is to be transposed by Member States into national legislation by 6 July 2024, with a phased application of CSRD and the European Sustainability Reporting Standards (ESRS) commencing on 1 January 2025.
The first undertakings will have to start publishing sustainability statements on 1 January 2025, covering the financial year 2024.
The application of the regulation will take place in four stages:
- reporting in 2025 on the financial year 2024 for companies already subject to the NFRD;
- reporting in 2026 on the financial year 2025 for large companies that are not currently subject to the NFRD;
- reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- reporting in 2029 on the financial year 2028 for third-country undertakings with net turnover above 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
Targeted improvements implemented by the CSRD
CSRD addresses shortcomings of the NFRD for both users and preparers relating to a lack of comparability, reliability and relevance of data (identified through a public consultation in 2020). The CSRD extends the scope of NFRD requirements to include all large companies, whether they are listed or not and without the previous 500-employee threshold. This change means that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies. The motives for this extension have been included in Recital 18 of the CSRD, which explains that the requirement provided for in the CSRD that also large undertakings whose securities are not admitted to trading on a regulated market in the European Union should disclose information on sustainability matters is mainly justified by concerns about the impacts and accountability of such undertakings, including through their value chain.
The Commission also proposed to extend the scope to include listed Small and Medium-Sized Enterprises (SMEs), with the exception of listed micro-enterprises. For reasons of investor protection, it is especially important that investors have access to adequate sustainability information from listed companies. If listed SMEs do not report sustainability information, they may find themselves at risk of exclusion from investment portfolios. This risk will grow as sustainability information becomes ever more important throughout the financial system.
The CSRD envisions for the first time the introduction of a general EU-wide audit (assurance) requirement for reported sustainability information. The EU Member States are, however, allowed to open up the market for sustainability assurance services to so-called ‘independent assurance services providers'. This means that Member States could choose to allow firms other than the usual auditors of financial information to assure sustainability information.
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The new sustainability reporting rules apply to all large companies and to all companies listed on regulated markets except listed micro undertakings. These companies are also responsible for assessing the information applicable to their subsidiaries.
The rules also apply to listed SMEs, taking into account their specific characteristics. An opt-out will be possible for listed SMEs during a transitional period, exempting them from the application of the directive until 2028.
For non-European companies, the requirement to provide a sustainability report applies to all companies generating a net turnover of EUR 150 million in the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds. These companies must provide a report on their environmental, social and governance (ESG) impacts, as defined in this directive.
The European Financial Reporting Advisory Group (EFRAG) is responsible for developing draft European standards. The European Commission is granted the power to adopt the final version of the standards as a delegated act, following consultations with EU member states and a number of European bodies.
The CSRD amends the Accounting Directive, the Transparency Directive, the Audit Regulation (Regulation (EU) No 537/2014) and the Audit Directive (Directive 2006/43/EC) to introduce a more comprehensive reporting, supervision and assurance regime for sustainability reporting compared to that envisaged by the NFRD.
To sum-up key modifications, the CSRD:
- extends the reporting scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises),
- requires the audit (assurance) of reported information,
- introduces more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards or ESRS (Commission Delegated Regulation (EU) 2023/2772),
- foresees a proportionate reporting regime for small and medium sized entities,
- requires companies to digitally “tag” the reported information, so it is machine readable and feeds into the European Single Access Point (ESAP), and
- requires ESMA to develop guidelines directed at enforcers to promote convergent supervision of sustainability information.
Information to be disclosed under the CSRD
The CSRD introduces more detailed reporting requirements and ensures that large companies and listed SMEs are required to report on sustainability matters such as environmental rights, social rights, human rights and governance factors. The definition of the term ‘sustainability matters’ in the CSDR incorporates the definition of the term ‘sustainability factors’ laid down in Sustainable Finance Disclosure Regulation (SFDR). The reporting requirements are without prejudice to national reporting obligations.
Articles 19a(1) and 29a(1) of the Accounting Directive require undertakings to disclose information about five reporting areas: business model; policies, including due diligence processes implemented; the outcome of those policies; risks and risk management; and key performance indicators relevant to the business. In addition to the reporting areas identified in Articles 19a(1) and 29a(1) of Directive 2013/34/EU, undertakings should be required to disclose information about their business strategy and the resilience of the business model and strategy in relation to risks related to sustainability matters. They should also be required to disclose any plans they may have to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with the objectives of limiting global warming to 1,5 °C in line with the Paris Agreement and achieving climate neutrality by 2050, as established in Regulation (EU) 2021/1119, with no or limited overshoot.
Directive 2013/34/EU as amended by the CSDR Article 19a (1) - (3)
Sustainability reporting
1. Large undertakings, and small and medium-sized undertakings, except micro undertakings, which are public-interest entities as defined in point (a) of point (1) of Article 2 shall include in the management report information necessary to understand the undertaking’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the undertaking’s development, performance and position.
The information referred to in the first subparagraph shall be clearly identifiable within the management report, through a dedicated section of the management report.
2. The information referred to in paragraph 1 shall contain:
(a) a brief description of the undertaking’s business model and strategy, including:
(i) the resilience of the undertaking’s business model and strategy in relation to risks related to sustainability matters;
(ii) the opportunities for the undertaking related to sustainability matters;
(iii) the plans of the undertaking, including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1,5 °C in line with the Paris Agreement under the United Nations Framework Convention on Climate Change adopted on 12 December 2015 (the ‘Paris Agreement’) and the objective of achieving climate neutrality by 2050 as established in Regulation (EU) 2021/1119 of the European Parliament and of the Council, and, where relevant, the exposure of the undertaking to coal-, oil- and gas-related activities;
(iv) how the undertaking’s business model and strategy take account of the interests of the undertaking’s stakeholders and of the impacts of the undertaking on sustainability matters;
(v) how the undertaking’s strategy has been implemented with regard to sustainability matters;
(b) a description of the time-bound targets related to sustainability matters set by the undertaking, including, where appropriate, absolute greenhouse gas emission reduction targets at least for 2030 and 2050, a description of the progress the undertaking has made towards achieving those targets, and a statement of whether the undertaking’s targets related to environmental factors are based on conclusive scientific evidence;
(c) a description of the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills in relation to fulfilling that role or the access such bodies have to such expertise and skills;
(d) a description of the undertaking’s policies in relation to sustainability matters;
(e) information about the existence of incentive schemes linked to sustainability matters which are offered to members of the administrative, management and supervisory bodies;
(f) a description of:
(i) the due diligence process implemented by the undertaking with regard to sustainability matters, and, where applicable, in line with Union requirements on undertakings to conduct a due diligence process;
(ii) the principal actual or potential adverse impacts connected with the undertaking’s own operations and with its value chain, including its products and services, its business relationships and its supply chain, actions taken to identify and monitor those impacts, and other adverse impacts which the undertaking is required to identify pursuant to other Union requirements on undertakings to conduct a due diligence process;
(iii) any actions taken by the undertaking to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts, and the result of such actions;
(g) a description of the principal risks to the undertaking related to sustainability matters, including a description of the undertaking’s principal dependencies on those matters, and how the undertaking manages those risks;
(h) indicators relevant to the disclosures referred to in points (a) to (g).
Undertakings shall report the process carried out to identify the information that they have included in the management report in accordance with paragraph 1 of this Article. The information listed in the first subparagraph of this paragraph shall include information related to short-, medium- and long-term time horizons, as applicable.
3. Where applicable, the information referred to in paragraphs 1 and 2 shall contain information about the undertaking’s own operations and about its value chain, including its products and services, its business relationships and its supply chain.
For the first three years of the application of the measures to be adopted by the Member States in accordance with Article 5(2) of Directive (EU) 2022/2464 of the European Parliament and of the Council (*9), and in the event that not all the necessary information regarding its value chain is available, the undertaking shall explain the efforts made to obtain the necessary information about its value chain, the reasons why not all of the necessary information could be obtained, and its plans to obtain the necessary information in the future.
Where applicable, the information referred to in paragraphs 1 and 2 shall also contain references to, and additional explanations of, the other information included in the management report in accordance with Article 19, and the amounts reported in the annual financial statements.
Member States may allow information relating to impending developments or matters in the course of negotiation to be omitted in exceptional cases where, in the duly justified opinion of the members of the administrative, management and supervisory bodies, acting within the competences assigned to them by national law and having collective responsibility for that opinion, the disclosure of such information would be seriously prejudicial to the commercial position of the undertaking, provided that such omission does not prevent a fair and balanced understanding of the undertaking’s development, performance and position, and the impact of its activity.
Under the EU Taxonomy Regulation the same companies that are subject to NFRD – and the additional companies brought under the scope of the CSRD, include in their non-financial statement information on how and to what extent their activities are associated with environmentally sustainable economic activities.
Article 8 of the Taxonomy Regulation sets out specific reporting obligations that shall be fulfilled by disclosing detailed information on the degree of taxonomy eligibility and alignment of an entity's economic activities.
This information shall be provided within an entity's non-financial statement and therefore the taxonomy reporting generally falls under the remit of the national authorities responsible with the supervision of the non-financial statement.
The reporting standards of the CSDR also include indicators that correspond to the indicators contained in the SFDR. The indicators for this are specified in a separate Commission Delegated Act.
Companies have to report these indicators alongside other sustainability information mandated by the CSRD. The reporting standards developed under the CSRD fully take into account these indicators and build on the 'substantial contribution' and ‘do-no-significant-harm' criteria of the taxonomy.
Information disclosed in accordance with Article 8 of the Taxonomy Regulation about the taxonomy KPIs: amount of capital expenditure (CapEx) or operating expenditure (OpEx) associated with taxonomy-aligned activities can support financial and investment plans.
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Taxonomy Regulation, Article 8 Transparency of undertakings in non-financial statements 1. Any undertaking which is subject to an obligation to publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of this Regulation. 2. In particular, non-financial undertakings shall disclose the following: (a) the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; and (b) the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9. 3. If an undertaking publishes non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU in a separate report in accordance with Article 19a(4) or Article 29a(4) of that Directive, the information referred to in paragraphs 1 and 2 of this Article shall be published in that separate report. 4. The Commission shall adopt a delegated act in accordance with Article 23 to supplement paragraphs 1 and 2 of this Article to specify the content and presentation of the information to be disclosed pursuant to those paragraphs, including the methodology to be used in order to comply with them, taking into account the specificities of both financial and non-financial undertakings and the technical screening criteria established pursuant to this Regulation. The Commission shall adopt that delegated act by 1 June 2021. |
Undertakings are also required to disclose:
- whether and how their business model and strategy take account of the interests of stakeholders;
- any opportunities for the undertaking arising from sustainability matters;
- the implementation of the aspects of the business strategy which affect, or are affected by, sustainability matters;
- any sustainability targets set by the undertaking and the progress made towards achieving them;
- the role of the board and management with regard to sustainability matters;
- the principal actual and potential adverse impacts connected with the undertaking’s activities; and
- how the undertaking has identified the information that they report on.
Undertakings that fall within the scope of the reporting obligations of CSRD will have to communicate any time-bound targets on sustainability matters they might have, as well as any plans they might have to ensure that their business model and strategy are compatible with the transition to a sustainable economy and to limiting global warming to 1.5°C.
Transition plan
For example, where necessary, undertakings can use the taxonomy criteria to plan stepwise alignment with the taxonomy: as a first time-bound target, to transition beyond performance levels defined by the do-no-significant-harm criteria, and as a second time-bound target to align with substantial contribution criteria, explained in an activity-based transition plan.
ESMA document of 26 March 2024 „2023 Corporate Reporting Enforcement and Regulatory Activities Report” (ESMA32-193237008-8269) contains a review of regulatory compliance in this regard. In the said report ESMA notes that, taking into account analysed data, 55% of issuers disclosed a climate-related transition plan. European enforcers also assessed whether at a minimum the plans disclosed included information that could enable an understanding of the issuer's past, current, and future mitigation efforts to ensure that its strategy and business model(s) are compatible with the transition to a sustainable economy. Transition plans should also typically include emission reduction targets.
ESMA observes that, while the EU requirements applicable to the reporting period 2022 did not explicitly single out the transition plan disclosures, the lack thereof may be an indication of greenwashing risk and therefore a possible threat to investor protection. This is particularly the case when, for example, the non-financial statements vaguely indicated certain ambitions to become "climate-neutral" or "net-zero" or similar wording, without supporting this statement with disclosures that indicate specific actions to pursue this ambition or without explaining the means put in place to achieve those objectives, most notably by distinguishing between emission reductions and the use of other means such as carbon credits or GHG removals and the related credibility and integrity of these.
Some plans were also published with a number of omissions of some of the key elements of a transition plan, such as the description of the actions and the timeline for their implementation, the indication of the progress made on implementing those actions and meeting pre-set targets, the resources necessary to pursue the plan as well as the challenges and uncertainties surrounding the plan.
For further remarks on transition plans see: Taxonomy Regulation.
Exemption regime for consolidated financial statements and consolidated management reports
As regards consolidated groups CSRD requires subsidiary undertakings to include in their management report the name and registered office of the parent undertaking that is reporting sustainability information at group level, the weblinks to the consolidated management report of their parent undertaking and a reference in their management report to the fact that they are exempted from sustainability reporting.
Article 23 of Directive 2013/34/EU exempts parent undertakings from the obligation to prepare consolidated financial statements and a consolidated management report where parent undertakings are subsidiary undertakings of another parent undertaking that complies with that obligation.
Nevertheless, the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. An undertaking can therefore be exempted from consolidated financial reporting requirements but not from consolidated sustainability reporting requirements where its ultimate parent undertaking prepares consolidated financial statements and consolidated management reports in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country, but does not carry out consolidated sustainability reporting in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country.
European Sustainability Reporting Standards (ESRS)
The Accounting Directive (2013/34/EU) as amended by the CSRD requires large companies and listed small and medium-sized companies (SMEs), as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the company's impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company's development, performance and position.
This information must be reported in accordance with European Sustainability Reporting Standards (ESRS), to be adopted by the Commission by means of delegated acts, specifying the content and, where relevant, the structure to be used to present that information. This information must include information related to short-, medium- and long-term time horizons, as applicable, and it must contain:
- a brief description of the undertaking's business model and strategy;
- a description of the time-bound sustainability matters set by the undertaking;
- a description of administrative, management and supervisory bodies with regard to sustainability matters, and relevant expertise and skills or access to them;
- a description of the undertaking's policies in relation to sustainability matters;
- information about the existence of incentive schemes linked to sustainability matters;
- a description of the due diligence process implemented by the undertaking with regard to sustainability matters;
- the principal actual or potential adverse impacts connected with the undertaking's own operations and with its value chain;
- any actions taken by the undertaking in relation to actual or potential adverse impacts, and the result of such actions;
- a description of the principal risks to the undertaking related to sustainability matters;
- indicators relevant to the required disclosures.
Where applicable, it must contain information about the undertaking’s own operations and about its value chain, including its products and services, its business relationships and its supply chain.
Hence, the ESRS under the CSRD will enable companies to communicate sustainability information in a standardised way to a variety of lenders, investors and other stakeholders.
The feedback period regarding the relevant Commission Delegated Regulation started on 9 June 2023.
A first set of ESRS was adopted by the Commission on 31 July 2023 (Commission Delegated Regulation supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards (C(2023) 5303 final).
On 22 December 2023 Commission Delegated 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 has been published in the EU Official Journal.
The ESRS in this first set are sector-agnostic, meaning that they apply to all undertakings under the scope of the CSRD, regardless of which sector or sectors the undertaking operates in.
The delegated act is based on Article 29b(1), first subparagraph, of the Accounting Directive. It specifies the ESRS undertakings must use to carry out their sustainability reporting in accordance with Articles 19a and 29a of the Accounting Directive. The said delegated act is accompanied by the following Annexes:
1. Annex I, which includes cross-cutting standards and standards on environmental, social and governance matters:
- Cross-cutting
ESRS 1 General requirements (sets general principles to be applied when reporting according toESRS and does not itself set specific disclosure requirements)
ESRS 2 General disclosures (specifies essential information to be disclosed irrespective of which sustainability matter is being considered)
- Environmental
ESRS El Climate change
ESRS E2 Pollution
ESRS E3 Water and marine resources
ESRS E4 Biodiversity and ecosvstems
ESRS E5 Resource use and circular economy
- Social
ESRS S1 Own workforce
ESRS S2 Workers in the value chain
ESRS S3 Affected communities
ESRS S4 Consumers and end-users
- Governance
ESRS G1 Business conduct.
2. Annex II, which includes the list of Acronyms and the Glossary with the definitions to be used for the purposes of carrying out sustainability reporting in accordance with ESRS.
The delegated act applies from 1 January 2024 to the undertakings that were already subject to the non-financial reporting requirements introduced by the Non-Financial Reporting Directive. Its application will be phased-in for other categories of undertakings based on the phased approach set out in Article 5 CSRD:
- from financial years starting on or after 1 January 2024:
- large undertakings that are Public Interest Entities (PIEs) exceeding on their balance sheet dates the average number of 500 employees during the financial year;
- PIEs that are parent undertakings of a large group exceeding on its balance sheet dates, on a consolidated basis, the average number of 500 employees during the financial year;
- from financial years starting on or after 1 January 2025:
- large undertakings other than large undertakings that are Public Interest Entities (PIEs) exceeding on their balance sheet dates the average number of 500 employees during the financial year;
- parent undertakings of a large group other than PIEs that are parent undertakings of a large group exceeding on its balance sheet dates, on a consolidated basis, the average number of 500 employees during the financial year;
- from financial years starting on or after 1 January 2026 (with the option of voluntarily opting out for financial years 2026 and 2027):
- small and medium-sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings;
- small and non-complex institutions, provided they are large undertakings or that they are small and medium sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings;
- to captive insurance undertakings and captive reinsurance undertakings, provided that they are large undertakings or that they are small and medium sized undertakings with securities listed on the EU regulated markets, excluding micro-undertakings.
Listed SMEs will have the option of meeting their reporting requirements under the CSRD by reporting according to separate, proportionate standards that the Commission will adopt by end June 2024.
It is noteworthy that besides the sustainability reporting requirements for large undertakings and listed SMEs set out in Articles 19a and 29a of the Accounting Directive, the Accounting Directive as amended by the CSRD also requires the branches or subsidiaries of certain non-EU companies to report certain sustainability information (Article 40a). The reporting obligation on these branches and subsidiary will apply as from financial year 2028 and the information to be reported will be specified in separate standards not covered by this delegated act.
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A sustainable finance framework that works on the ground (COM/2023/317 final) observes that the standardisation of sustainability information to be reported by companies is a key element of the legal framework. The standards will provide the guidance companies need when determining what data to report and how to ensure that the information they supply is material to them and useful for the financial institutions.
Sustainability reporting is also expected to enhance undertakings’ access to financial capital and identification and management of own risks and opportunities, helping to increase competitive advantage by contributing to the transition.
The standards will focus on the financing-relevant information needed by financial institutions and will also constitute a limit for the information which ESRS can require large undertakings to disclose from SMEs in their value chains. This is an important safeguard specified in the CSRD to limit the indirect effects on SMEs of value chain reporting requirements imposed on large undertakings. Non-listed SMEs, which are not in the scope of the Directive, may nevertheless face increased information requests from larger companies in their value chains and from financial institutions. The Commission acknowledges the challenge that non-listed SMEs may face in this regard due to their size and more limited resources. The Commission therefore encourages large corporates and financial intermediaries to apply the principle of proportionality when engaging with SMEs and to exercise restraint when requesting information from SME value chain partners.
In future years the Commission is expected to adopt additional delegated acts for additional sets of standards. The CSRD requires the Commission to adopt by June 2024: sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.
On 17 October 2023 European Commission adopted the Proposal for a Decision of the European Parliament and of the Council amending Directive 2013/34/EU as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings (COM(2023) 596 final).
Materiality assessment
ESRS 2 is mandatory for all companies under the CSRD scope.All the other standards and the individual disclosure requirements and datapoints within them are subject to a materiality assessment. This means that the company will report only relevantinformation and may omit the information in question that is not relevant (“material”) for its business model and activity.
As the Wuropean Commission explains in the document of 31 July 2023 "Questions and Answers on the Adoption of European Sustainability Reporting Standards" disclosure requirements subject to materiality are not voluntary. The information in question must be disclosed if it is material, and the undertaking's materiality assessment process is subject to external assurance in accordance with the provisions of the Accounting Directive.
The standards require undertakings to perform a robust materiality assessment to ensure that all sustainability information necessary to meet the objectives and requirements of the Accounting Directive will be disclosed.
If a company concludes that climate change is not a material topic and therefore does not report in accordance with that standard, it has to provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change.This requirement reflects the fact that climate change has wide-ranging and systemic impacts across the economy.
If a company concludes that a datapoint deriving from the SFDR, the BMR or the CRR is not material,it will have to explicitly state that the datapoint in question is “not material” rather than just reporting no information.
In addition, companies will have to provide a table with all such datapoints, indicating where they are to be found in its sustainability statement or stating “not material” asappropriate.
Financial market participants and financial advisers may assume that any indicator reported as non-material by an investee company does not contribute to the corresponding indicator of principal adverse impacts in the context of the SFDR disclosures.
Alignment of the ESRS with global standards
The European Commission’s document of 31 July 2023 „Questions and Answers on the Adoption of European Sustainability Reporting Standards” underlines that the Commission has worked to ensure a very high level of alignment between ESRS and the standards of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI).
The very high degree of alignment between ESRS and the two ISSB standards aim to prevent that companies required to report in accordance with ESRS and that wish to also comply with ISSB standards, would have to report separately under ISSB standards. With the adoption of the ESRS, the EU goes further than any other major jurisdiction to date in terms of integrating the ISSB standards into its own legal framework. The approach of integrating ISSB disclosure requirements into ESRS is also fully in line with the ambition of the recent IOSCO decision to endorse ISSB sustainability-related disclosure standards.
EU ETS linkage
The content of the EU Emissions Trading System (EU ETS) has been embedded in the ESRS E1 Climate change, specifically, in ESRS E1-6 Gross scope 1 of GHG emission and the percentage of Scope 1 GHG emissions from regulated emissions trading schemes, and ESRS E1-9 Financial effects from material climate-related risks: potential liabilities linked to EU ETS (Draft European Sustainability Reporting Standards, Explanatory note of how draft ESRS take account of the initiatives and legislation listed in Article 1 (8) of the CSRD adding article 29 (b) -5 to the Accounting Directive, EFRAG, November 2022).
Directive on corporate sustainability due diligence
Published on 23 February 2022 by the European Commission Proposal for a Directive on corporate sustainability due diligence (COM(2022) 71 final, 2022/0051 (COD)) will complement the NFRD and its amendments in the form of CSRD by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain.
Enforcement
As underlined in the ESMA document of 26 March 2024 „2023 Corporate Reporting Enforcement and Regulatory Activities Report” (ESMA32-193237008-8269), while “it is the Accounting Directive that places an obligation on certain issuers to publish nonfinancial information, it is the transposition into national law of both the Accounting Directive and the Transparency Directive that gives national competent authorities the powers to enforce this information.
The link between the two pieces of legislation is established by the fact that the Accounting Directive generally requires the non-financial statement to be included in the management report, and the management report is required by the Transparency Directive, thus making it subject to the powers given to national competent authorities therein”.
ESMA Public Statement of 25 October 2023 (European common enforcement priorities for 2023 annual financial reports, ESMA32-193237008-1793) accentuates the following regulatory point of interest:
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Priorities related to IFRS financial statements Section 1 |
Priorities related to non-financial statements Section 2 |
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Climate and other environmental matters |
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• Impact on the financial statements |
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• Article 8 of the Taxonomy Regulation |
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• Targets, actions and progress |
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• Scope 3 emissions |
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The above ESMA document of 26 March 2024 presents the review of regulatory compliance as regards disclosures relating to Article 8 of the Taxonomy Regulation. ESMA recalled that financial year 2022 had been the first year of reporting of alignment information regarding the climate mitigation and adaptation objectives for the non-financial undertakings in scope. To provide timely feedback to the market, ESMA and enforcers carried out a fact-finding exercise on the reporting under the Disclosures Delegated Act (Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation), whose results were published in October 2023.
The study covered 54 non-financial issuers mainly active in four sectors covered by the Taxonomy Climate Delegated Act. 14 additional issuers were also considered by enforcers in relation to this priority. Enforcers took nine enforcement actions in relation to issuers’ disclosures relating to Article 8 of the Taxonomy Regulation, or the lack thereof, in 2022 non-financial statements, all by requiring a correction in the future non-financial statement. The corrections in the future non-financial statements relate, among other topics, to inconsistencies or errors in CapEx and in OpEx alignment KPI calculations, not correctly providing quantitative information in the mandatory template, and a lack of information on relevant methodologies. Some enforcers, instead of taking enforcement actions, issued recommendations to issuers or carried out reviews assessing the application of the Taxonomy Regulation across issuers, with findings released to market participants as part of educational efforts.
Impairment of non-financial assets arising from climate-related matters
The above ESMA Public Statement of 25 October 2023 indicates that issuers should consider risks arising from climate-related matters (either physical or transition risks) when assessing if indications exist that non-financial assets may be impaired.
ESMA notes that cash flow projections in value in use measurements should be based on reasonable and supportable assumptions representing management’s best estimate of the range of economic conditions (related to climate matters) that will exist over the remaining useful life of the asset (paragraph 33 of IAS 36 Impairment of assets).
When a parameter linked to climate-related matters is identified as a key assumption, ESMA expects issuers to disclose, unless impracticable,
(i) the quantified assumptions used (e.g. the current and forecasted prices used - e.g. CO2 prices, timing and amounts of replacement of certain assets) and
(ii) the basis of such quantifications, (i.e. internal or external estimates – noting that a greater weight should be given to external evidence).
Where applicable, ESMA expects issuers to provide information when climate-related matters impact:
(i) the business plan assumptions used when estimating the recoverable amount of assets,
(ii) the period considered beyond the business plan and if and how cash flows are impacted in this context, and/or
(iii) the financial assumptions used, such as the discount rate and the growth rate.
ESMA recommendations regarding disclosures related to climate matters
ESMA Report of 25 October 2023 on Disclosures of Climate Related Matters in the Financial Statements (ESMA32-1283113657-1041) focuses on disclosures related to climate matters included in the 2022 annual financial statements of European non-financial corporate issuers - see box below.
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ESMA Report of 25 October 2023 on Disclosures of Climate Related Matters in the Financial Statements (ESMA32-1283113657-1041)
a) Depending on the sectors and significance of the environmental regulations, issuers might need to consider reassessing if the CGUs, (Cash Generating Units) or a group of CGUs that have been used historically are still appropriate considering challenges and opportunities arising from climate-related matters (such as the ones arising from changes in business models). b) Issuers should consider disclosing how climate-related matters were considered in the estimation of future cash flows, discount or growth rates (for instance, whether they expect that climate-related matters may lead to an increase of costs in the future, such as increase of costs of energy, CO2 prices, or to potential reductions of revenues). Issuers should consider explaining the growth rate in perpetual annuity or, where applicable, the discount rate used, especially when they belong to sectors or report segments highly exposed or affected by climate-related matters. c) When determining the value in use, issuers should consider, as far as practicable, providing quantified disclosures regarding key assumptions related to climate matters (e.g., CO2 prices per geography - Europe vs. outside Europe, commodities prices). To this end, issuers should consider disclosing information on how such key assumptions were determined. In this respect, greater weight shall be given to external evidence (for example, an external vs. an internal source of such key assumptions). d) Issuers may consider using multiple future scenarios when estimating the future cash flows of a CGU (i.e., when considering scenarios linked to physical risks on assets, such as the impact of +2oC, rainfall or drought projections). When this is the case, issuers should consider providing disclosures on how these assumptions/scenarios were incorporated in cash flows projections and their respective probabilities of occurrence. e) When issuers include capital expenditures arising from climate-related matters in future cash flows used in the value in use impairment test, they should consider explaining how such decisions reconcile with the provisions included in IAS 36 that forbid the inclusion of estimated cash flows expected to arise from future restructuring, improvements or enhancements to assets. f) Where relevant, issuers should consider including sensitivity analyses regarding key assumptions related to climate matters (e.g., CO2 prices, commodities prices). Whenever sensitivity scenarios deviate significantly from market-based scenarios (such as those published by IEA), issuers should consider providing explanations supporting the use of such diverging elements (e.g., why the issuer decided to use internal assumptions). In this respect, issuers may also consider disclosing sensitivity analyses and/or the headroom of CGU(s) if the issuer would have used market-based scenarios and/or assumptions. … To keep in mind a) Issuers might consider whether regulations related to climate matters give rise to constructive or present obligations and thus, to recognition of provisions or disclosure of contingent liabilities. Please also refer to IFRS Interpretation Committee (IFRS IC) discussions on negative low emissions vehicle credits. b) Where provisions related to climate matters are recognised, issuers should provide information on the measurement of such provisions (including information on sources of such assumptions – external vs internal, different geographies), especially when such provisions require estimations of future prices (such as CO2 emissions). c) Issuers are reminded that an obligation stemming from possible new laws or regulations introduced in relation to climate change (for example, new environmental and decommissioning obligations) can arise only when the legislation is enacted. As such, issuers are encouraged to continue monitoring government actions and introductions of or changes to regulations relating to climate and consider whether these may give rise to specific conditions where a provision must be recognised. d) Issuers should consider disclosing sensitivity analyses regarding key assumptions related to climate matters used on the recognition or measurement of provisions or contingent liabilities. e) Issuers should also consider disclosing the maturities expected and timing related to unwinding provisions recognised related to climate matters (in particular, when such provisions may affect long term periods – such as decommissioning provisions). … ESMA recommends that issuers (including their management, supervisory boards and audit committees) and auditors consider the illustrative examples in this report when looking at how to assess and disclose climate-related matters in IFRS financial statements. As climate risks potentially impact all areas of an organisation, issuers should consider if the procedures in place facilitate the internal interactions between its different departments. In this respect, ESMA highlights the importance of audit committees and Boards in having an enhanced supervisory role to ensure that this interaction is in place and is efficient. |