European Commission publishes FAQs on the CSRD

On 7 August 2024, the European Commission published, on a dedicated webpage, a draft Commission Notice with Frequently Asked Questions (FAQs) on the interpretation of certain provisions of the Corporate Sustainability Reporting Directive (CSRD). The FAQs also include explanations relating to the European Sustainability Reporting Standards (ESRS) “where legal interpretation from the Commission has been deemed to be necessary” and the Sustainable Finance Disclosure Regulation (SFDR). 

The FAQs start with an overview of the sustainability reporting requirements introduced by the CSRD, accompanied by flowcharts on the scope and timing of the reporting requirements. This is followed by 90 explanations covering issues such as the scope of the CSRD (including requirements for third-country undertakings), application dates and exemptions, assurance of sustainability reporting, Article 8 Taxonomy Regulation disclosures, language requirements, digitalisation, publication and supervision, and interaction with the SFDR. Some of the key takeaways from the FAQs are summarised below: 

• Question 3: in the absence of national rules or guidance on the calculation of the average number of employees for the purpose of the undertaking’s categorisation under the Accounting Directive, undertakings may use Article 5 of Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises as guidance regarding the measurement of staff headcount, as a proxy for the average number of employees. 
• Questions 11 – 14: UCITS and AIFs are exempted from reporting sustainability information even if these financial products are within the scope of the Accounting Directive. However, undertakings that manage UCITS and AIFs fall under the scope of the sustainability reporting obligations if they meet the legal form and company size criteria provided by the CSRD. As regards ETFs, since these financial products are established as UCITS or AIFs the same exemption applicable to UCITS and AIFs applies. Pension funds are however, as such not covered by the exemption. 
• Question 18: an SME with securities admitted to trading on an EU regulated market that voluntarily publishes the consolidated sustainability statement referred to in Article 29a of the Accounting Directive shall be exempted from preparing and publishing the individual sustainability statement referred to in Article 19a of the Accounting Directive, provided that the consolidated sustainability statement is prepared in compliance with the ESRS.
• Question 20: where the consolidated management report or consolidated sustainability report of the parent undertaking is not yet available at the time of publication of the subsidiary undertaking’s management report, the subsidiary undertaking can refer in its management report to a general weblink at which the relevant documents will be available in the future.  
• Questions 25 and 26: an undertaking that must report sustainability information but is not required to prepare an individual or a consolidated management report may publish the individual or consolidated sustainability statement in a separate document. This principle also applies to the consolidated sustainability reporting of a third-country parent undertaking for its subsidiaries. That separate document must comply with the format and mark-up requirements set out in Article 29d of the Accounting Directive. An undertaking will need to include in the consolidated sustainability statement the financial information necessary to understand the undertaking’s impacts on sustainability matters and how sustainability matters affect the undertaking’s development, performance and position. 
• Question 29: this FAQ addresses the ESRS requirement that undertakings must use estimates if they cannot obtain all necessary value chain information after having made “reasonable efforts” to do so. The FAQ includes an extensive list of criteria to consider in helping determine “reasonable efforts”. Each of these criteria on its own could be sufficient to determine that a reasonable effort has been made, or the criteria could be applied in combination. The criteria include the size and resources of the reporting undertaking in relation to the scale and complexity of its value chain, the technical readiness of the reporting undertaking to collect value chain information (which is expected to improve over time), the availability of tools to access and share value chain information, the size and resources of the actor in the value chain, the technical readiness of the actor in the value chain, the level of influence and buying power and the ‘proximity’ of the actor in the value chain. 
• Question 38: until the adoption of the digital taxonomy undertakings are not required to mark-up their sustainability statements and prepare the management report in XHTML. 
• Question 40: this FAQ addresses supervisory compliance with CSRD requirements and reiterates that compliance with CSRD reporting obligations will be subject to the national sanctioning regime – therefore, this will need to be tracked at the Member State level. Similarly, Question 52 confirms that the penalties are a case for national regimes. 
• Question 43: where an ultimate third-country parent undertaking is caught by CSRD reporting under Article 40a of the Accounting Directive, at least one sustainability report should be disclosed by one subsidiary/branch in each Member State. However, to avoid double counting, Member States can choose to allow one subsidiary/branch in its territory to provide a link to the CSRD report published by another EU subsidiary/branch. This suggests that Article 40a of the Accounting Directive may (depending on local transposition) need to be met by multiple EU subsidiaries/branches in different Member States, each publishing the group-wide CSRD report (with multiple supervisory authorities responsible for the supervision of the publication in different Member States). This therefore adds more complexity to the reporting under Article 40a of the Accounting Directive.
• Questions 44, 47, 48 and 86: regarding the possibility of producing voluntary group-wide CSRD reports so that all the subsidiaries can benefit from the exemption from reporting, the FAQs helpfully confirm that a third-country ultimate parent undertaking can publish a voluntary group-wide CSRD report, and all its subsidiaries are permitted to rely on that. However, they also confirm that the subsidiaries can only rely on the parent’s voluntary group-wide CSRD report if it is published using ESRS adopted under Article 29b of the Accounting Directive (i.e., the currently published ESRS), and not the ESRS adopted under Article 40b of the Accounting Directive (which may be lighter-touch ESRS applicable to third-country ultimate parent undertakings). This likely means that even after 2028/2029 EU subsidiaries will not be able to rely on the ultimate parent’s CSRD report (if it is published under the ESRS adopted under Article 40b of the Accounting Directive) and so will need to continue preparing their own CSRD reports.
• Question 87: the consolidated sustainability statement of the third-country parent undertaking prepared pursuant to Article 29a of the Accounting Directive must include all its subsidiary undertakings, regardless of the location of the registered offices of such subsidiary undertakings. 
• Question 89: where an EU or third-country undertaking is subject to sustainability reporting requirements under Articles 19a or 29a of the Accounting Directive, it must include Article 8 Taxonomy Regulation disclosures in its management report.
• Question 90: this FAQ states that under SFDR financial market participants (FMPs) “may assume that any indicator reported as non-material by an investee company applying ESRS does not contribute to the corresponding indicator of principal adverse impacts in the context of the SFDR disclosures, i.e., the value of that investment does not need to be included in the numerator of the given SFDR principal adverse impact indicator”. This is an extremely helpful clarification for asset managers when they prepare their principal adverse impact (PAI) entity reports.

The draft Commission Notice does not specify further steps and timing for its final adoption. Generally, the formal adoption and publication of such a notice in the Official Journal of the European Union would take place later, as soon as the versions in all official EU languages are available.

For more information on the CSRD and ESRS, see our CSRD Demystified materials.