On 7 August 2024, the European Commission (Commission) published a set of frequently asked questions (FAQs) on the interpretation of certain provisions of the EU Corporate Sustainability Reporting Directive (CSRD). The FAQs aim to facilitate compliance and ensure the usability and comparability of reported sustainability information.
The publication also provides a general overview of reporting requirements under CSRD and includes a flowchart and a timeline for the scope and application dates of sustainability reporting requirements.
Structure of the Document
The FAQs clarify a broad variety of topics, including:
- scope of reporting requirements and corresponding application dates;
- possible exemptions from reporting requirements;
- assurance considerations;
- details on the first set of European Sustainability Reporting Standards (ESRS); and,
- digital tagging requirements.
Understanding Article 40a Reporting
The introduction of reporting requirements for third-country companies is a significant aspect of the CSRD. Under Article 40a of the Accounting Directive (Article 40a), certain companies with ultimate parent companies in a third country but with a substantial presence in the EU will need to issue sustainability reports in relation to the entire global group, including third-country group companies with no EU business.
The FAQs clarify further particular aspects of Article 40a reporting.
What are the obligations for the EU subsidiary or the EU branch under Article 40a?
If a third-country undertaking falls within the scope of Article 40a, then one of its EU subsidiaries that would be within the scope of the CSRD in its own right, or a large EU branch, will have to publish and make accessible a sustainability report on behalf of its third-country parent undertaking.
The FAQs state that the third-country parent may prepare the report, which will then be published and made accessible by the EU subsidiary or branch, either by filing it in an EU business register or by publishing it on its website. Alternatively, the FAQs indicate that the EU subsidiary or branch may prepare, publish, and make accessible the report on behalf of its third-country parent undertaking. Companies should refer to Member State implementing rules for the precise publication requirements in each jurisdiction, which may require filings with the respective business register in any event.
What happens if the EU subsidiary or branch does not collect all the necessary information for preparing the sustainability report?
If the third-country ultimate parent company does not provide the necessary information for its EU subsidiary or branch to report on behalf of the global group, the subsidiary or branch must publish a sustainability report with all accessible information and issue a statement indicating the parent's failure to provide the necessary information.
Does each EU subsidiary or EU branch have to publish a sustainability report under Article 40a?
Article 40a requires that at least one sustainability report be disclosed by one subsidiary or branch in each Member State. To avoid double reporting by the subsidiaries and branches of the same third-country undertaking, Member States may allow for one subsidiary or branch established or located in its territory to comply with the obligation in Article 40a by providing a link to the sustainability report published by another Union subsidiary or branch of the third-country undertaking.
What reporting standards should be used in the context of Article 40a reporting?
The sustainability report to be prepared in relation to global groups under Article 40a is more limited in scope than the CSRD reporting that EU companies are subject to under Article 19a or 29a of the CSRD. The FAQ clarifies that certain information required under the Article 19a or 29a report would not be required under a 40a report, specifically on “resilience, opportunities and risks, since the intention above all is to focus the sustainability report on sustainability impacts.”
This suggests that Article 40a reporting is likely to be focused on “impact materiality”, which is one of the two aspects of “double materiality” that forms the basis of Article 19a or 29a reports. Notably, to the extent that a third-country parent voluntarily issues a global CSRD report in accordance with the Article 29a standards, the FAQs confirm that the group will be exempted from the requirement to issue a separate Article 40a report.
Takeaways From the FAQs
Exemption Rules
- Subsidiaries may be exempted from reporting if their parent undertakings report at a consolidated level.
- SMEs with securities admitted to trading on an EU regulated market that voluntarily publish a consolidated sustainability statement under Article 29a are exempt from preparing an individual sustainability statement under Article 19a, provided the consolidated statement complies with ESRS.
- Large undertakings with securities admitted to trading on an EU regulated market cannot avail of the exemptions under Articles 19a(9) and 29a(8) and must report sustainability information.
ESRS
- All undertakings falling within the scope of Articles 19a and 29a of the Accounting Directive must use the ESRS as the basis of their report.
- SMEs with transferable securities admitted to trading on an EU regulated market may use proportionate ESRS.
- The Commission will adopt specific ESRS concerning third-country undertakings subject to Article 40a.
Value Chain
- Undertakings must make reasonable efforts to obtain value chain information and may use estimates if necessary. The FAQs include a list of criteria to assist in determining whether reasonable efforts have been made.
- The transitional period for value chain reporting applies for the first three financial years of application.
Article 8 Taxonomy Regulation Disclosures
- Undertakings in scope of Articles 19a or 29a must include Article 8 Taxonomy Regulation disclosures in their sustainability statements, including undertakings located in a third country with securities admitted trading on EU regulated markets that are within the scope of CSRD reporting via the transparency Directive.
- Undertakings in Scope of Article 40a are not required to include Article 8 Taxonomy disclosures.
Language and Format Requirements
- The sustainability statement must be published in a language specified by the laws of the relevant Member State.
- The management report must be prepared in XHTML format and marked up with a digital taxonomy once the delegated regulation specifying the format has been adopted.
Publication and Supervision
- The management report, including the sustainability statement, must be published within 12 months of the balance sheet date, unless a shorter time is specified under national law.
- National authorities are responsible for supervising compliance with sustainability reporting requirements.
The full FAQs are available here.
Latham & Watkins will continue to monitor the release of further FAQ documents relating to the CSRD and ESG reporting requirements globally.
