The impact of the EU’s Corporate Sustainability Reporting Directive on businesses in Asia

The EU’s Corporate Sustainability Reporting Directive (the CSRD) seeks to fundamentally change the approach to sustainability reporting and it is biting on organisations now. 

The CSRD introduces new reporting requirements for large companies and groups and companies listed on the European Economic Area (EEA) regulated markets, including some non-EU companies, to report on a wide spectrum of sustainability issues, including environmental matters, social and human rights, and governance factors.

Given the CSRD does not only affect EU companies, but also non-EU companies with businesses operating in the EU, in this blog we consider how the CSRD potentially impacts businesses in Asia.

What does the CSRD require?

The CSRD came into force in January 2023 and aims to strengthen the current EU rules on environmental, social and governance reporting that were introduced in 2014 by the EU’s Non-Financial Reporting Directive. 

Under the CSRD, in-scope entities will have to report information on a wide range of environmental, social and governance factors across their own activities and value chain, therefore requiring in-scope entities to make extensive sustainability disclosures in their annual reports. 

What are the main features of the CSRD?

The main features are:

European Sustainability Reporting Standards (ESRS): In-scope companies must report in accordance with the European Sustainability Reporting Standards (the ESRS). The European Commission tasked EFRAG (the multi-stakeholder advisory body) to develop draft ESRS and provide implementation support for the ESRS. The ESRS are ultimately adopted by the European Commission through Delegated Acts. 

On 22 December 2023, the first set of the ESRS was published in the Official Journal of the EU. These ESRS are sector-agnostic, meaning that they apply to all undertakings under the scope of the CSRD regardless of which sector they operate in. They comprise: (i) two sets of cross-cutting ESRS on general requirements and general disclosures, (ii) five ESRS on environmental disclosures, (iii) four ESRS on social disclosures, and (iv) one ESRS on governance. 

EFRAG is also tasked with preparing the ESRS for in-scope small- and medium sized undertakings, sector-specific ESRS and ESRS for certain non-EU companies with business in the EU meeting certain thresholds but the development of these standards has been delayed. 

The sector-specific standards EFRAG is developing is prioritising high-impact sectors such as oil and gas and mining, quarrying and coal mining. 

EFRAG also published implementation guidance on the materiality assessment, on value-chain reporting and on the list of datapoints contained in the ESRS, as well as establishing an online Q&A platform for technical questions on the ESRS. Finally, the European Commission recently published FAQs, providing further guidance on how to interpret the CSRD reporting obligations.

Double materiality: The CSRD is underpinned by the concept of “double materiality”. An assessment must be undertaken to determine which sustainability matters are “material”, and therefore reportable. This comprises both (i) an impact materiality assessment; and (ii) a financial materiality assessment, therefore requiring an assessment of how climate and other sustainability issues impact the company and the impact a company has on the climate and wider society.

Value chain: The sustainability report will need to cover the undertaking’s own operations and, over time, its value chain. This means that the materiality assessment must also identify material impacts, risks and opportunities connected to the group through its direct and indirect business relationships in the upstream and/or downstream “value chain”.

Assurance: The CSRD introduces, for the first time, a general audit (assurance) requirement for sustainability information. Requiring “limited assurance” of compliance with reporting obligations under the CSRD (and ESRS) as well as EU Taxonomy Regulation disclosures is to help ensure that reported information is accurate and reliable. Such “limited assurance” requirement can develop into “reasonable assurance” in the future following an assessment to determine if “reasonable assurance” is feasible for auditors and undertakings.

How will the CSRD impact non-EU companies?

Many non-EU companies will be affected by the CSRD, in particular in the following cases:

• Reporting obligation of EU subsidiaries: EU subsidiaries of non-EU companies that qualify as a large undertaking or a small or medium-sized undertaking with securities admitted to trading on an EEA regulated market may be required to report under the new rules.
• Reporting obligation of non-EU parents: As of 2029 (with respect to financial years starting on or after 1 January 2028), non-EU companies that meet the scoping test (see below) are required to prepare a sustainability report at a consolidated level, although to note that non-EU companies may be caught by the requirements as early as 2025 (with respect to financial years starting on or after 1 January 2024) as discussed below. Such reporting by non-EU parents is expected to be more limited than that applying in the first phases of reporting.
• Reporting obligation of non-EU issuers: Non-EU issuers (being companies which have equity or debt securities listed on an EEA regulated market (Non-EU Issuers)), may also be caught by the scope of the CSRD.

What exemptions could apply?

The exemption analysis is, again, complex. Two exemptions we would highlight are: 

• the wholesale debt exemption for Non-EU Issuers which exclusively have high denomination debt securities admitted to trading on EEA regulated markets (and by “high”, this refers to a denomination per unit of at least EUR 100,000, or EUR 50,000 where the debt securities were admitted to trading before 31 December 2010); and 
• an exemption for undertakings which report or are included in a consolidated sustainability report of their parent entity prepared in accordance with the current ESRS or under the law of a third country where there is an EU determination of equivalence of the reporting standards. Guidelines on this equivalence test will be developed by the EU Commission, but we are not aware of any jurisdiction to be granted such status by the EU Commission to date. This exemption does not apply where the undertaking qualifies as a large undertaking and has equity or debt instruments admitted to trading on an EEA regulated market.

Finally, until 6 January 2030, an EU subsidiary of a non-EU parent can prepare consolidated sustainability reporting which includes all EU subsidiaries of such parent which fall within the scope of the CSRD reporting obligations based on an artificial consolidation basis (to be prepared at the level of the subsidiary with the greatest turnover in the EU in at least one of the preceding five financial years).

Listen here for a further explanation of who the CSRD applies to, when it will apply and some of the exemptions.

What has to be reported by in-scope non-EU companies?

The scope of the reporting obligation is broad. 

In-scope companies will have to report information on the full range of ESG issues relevant to their business, in line with the applicable ESRS. As discussed above, this includes information on “sustainability matters” (i.e., environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters, and governance matters). 

The reporting must cover sustainability risks faced by the company, as well as the impact of the business on broader ESG objectives (e.g. the impact of the business on climate and society) – referred to as “double materiality”. The materiality assessment must also identify material impacts, risks and opportunities connected to the group through its direct and indirect business relationships in the upstream and/or downstream value chain. 

In May 2024, EFRAG published the first three ESRS Implementation Guidance documents to assist in-scope companies in complying with their new obligations under the CSRD. These include the guidance on materiality assessment and value chain reporting. In August 2024, the European Commission published FAQs on the interpretation of certain provisions of the CSRD. T

For more information, see our EU CSRD demystified webpage. 

When will the CSRD apply from?

Application of the CSRD is phased in from 2025 (for financial years starting on or after 1 January 2024) to 2029 (for financial years starting on or after 1 January 2028). However, when exactly a company is caught within this timeframe will depend on a variety of factors. For the purposes of this blog, we have provided a simplified overview of what is typically quite a complex line of analysis – for example as to whether the application is at entity or consolidated level and whether certain exemptions apply. 

For non-EU companies, at a high and simplified level:

Sustainability reporting in 2025 (for financial years starting on or after 1 January 2024) will have to be published by Non-EU Issuers which are: 

• large undertakings exceeding the average number of 500 employees; or 
• parent undertakings of a large group exceeding the average number of 500 employees on a consolidated basis. 

Large undertakings and parent undertakings of a large group for the purposes of the CSRD are those which meet two of the three criteria below (for parent undertakings on a consolidated basis):

• more than 250 employees during the financial year; 
• a balance sheet total of more than EUR 25 million; and/or
• net turnover of more than EUR 50 million. 

Sustainability reporting in 2026 (for financial years starting on or after 1 January 2025) will have to be published by Non-EU Issuers which are large undertakings or parent undertakings of a large group, other than those already within scope.

Sustainability reporting in 2027 (for financial years starting on or after 1 January 2026) applies to Non-EU Issuers which are not already covered by 2025/2026 reporting and meet two of the three following criteria:

• more than 10 employees during the financial year;
• a balance sheet total of more than EUR 450,000; and/or
• net turnover of more than EUR 900,000. 

These Non-EU Issuers may choose to postpone reporting until 2029 (in respect of FY 2028). In such case, the undertaking nevertheless needs to briefly state in its management report why the sustainability reporting was not provided.

Sustainability reporting in 2029 (for financial years starting on or after 1 January 2028) applies to non-EU ultimate parent undertakings, if the parent undertaking generated a net turnover of more than EUR 150 million in the EU for each of the last two consecutive financial years (at an individual or group level) and has either:

• at least one subsidiary EU group company which qualifies as a large undertaking or as a small or medium-sized undertaking with securities admitted to trading on an EEA regulated market; or
• at least one branch in the EU that generated a net turnover of more than EUR 40 million in the preceding financial year.

How does the CSRD interplay with other disclosure standards being developed in Asia?

Important questions remain about the interoperability of the ESRS with other sustainability reporting standards, in particular with the International Sustainability Standards Board (ISSB) standards given more than 20 jurisdictions have decided to use the ISSB standards or are taking steps to introduce the standards in their own frameworks, including Japan, Singapore, Hong Kong, South Korea, Malaysia, and China (for example, see here and here).

EFRAG has published interoperability guidance to illustrate the alignment between ISSB’s IFRS Sustainability Disclosure Standards and the ESRS and explains how companies can comply with both sets of standards, with a specific focus on climate-related reporting (see our previous blog post), although despite alignment between the two standards, differences such as the approach to materiality, still need to be navigated.

What do companies in Asia have to think about?

The changes coming in through the CSRD will have an impact on sustainability disclosure and reporting and on value chains of many companies in Asia which may require changes to the way organisations currently operate, transact and report, and how they interact with their business partners.

Below are a few points to be considered:

• Scoping analysis: As a first step, companies that have activities in the EU or otherwise do business with the EU should identify those entities in their group that may be subject to the new reporting requirements under the CSRD. The application tests are complex and should be worked through on an entity-by-entity basis.
• Interaction with other reporting obligations: For certain companies in Asia, that are or may be in scope of the new climate-related disclosure requirements based on the ISSB or other standards, there is a challenge to work through the degree of alignment between their different reporting requirements – with the “double materiality” requirement under the ESRS still being a key difference from the approach under the ISSB and other existing standards.
• Assessing value chain: Over time, compliance with the new requirements will require access to sufficient information on the company’s value chain and engaging with stakeholders to be able to access the necessary data. This is going to need more robust processes to collate data, engagement with stakeholders as well as review of contracts with suppliers and other contract parties to reflect any necessary changes. For companies based in Asia in such value chains, they should be prepared to receive requests from EU-based companies (or non-EU companies caught by the CSRD) for additional information and may need to adapt their existing systems and processes to source, validate and provide the necessary information. 
• Capacity building: Scaling up of teams, capacity-building and preparation may be required to comply with these new requirements. 
• Assurance: Given the requirement of “limited assurance”, companies will need to engage with assurers at an early stage to ensure the preparation of their sustainability reports are compliant.

What next? 

The CSRD was due to be transposed into national law in every EU member state by 6 July 2024. View our updated Transposition Tracker to find out the current status in each country.

For more information:

All of our key CSRD materials can be accessed via this page on our website: EU CSRD demystified.