On August 7, 2024, the European Commission published a comprehensive set of Frequently Asked Questions (FAQs) regarding the Corporate Sustainability Reporting Directive (CSRD) (Directive (EU) 2022/2464). These FAQs clarify the interpretation of certain provisions related to sustainability reporting, especially around the details of the regulatory framework of the CSRD. A particular focus of the publication lies on distinguishing the applicable requirements for different types of companies. 

Many guidance and further insights into the CSRD share a tendency to generalise across all entities within scope, only distinguishing them in discussions around scoping itself. Beyond that, there are, however, significant differences in requirements that can be challenging to decipher from the original regulation. With the implementation of the CSRD still in its very first stages, confusion about its exact implications is widespread. As companies try to find their way among a multitude of sustainability reporting regulations and a so-far limited supply of real-world CSRD-compliant examples, identifying applicable information can be slow. 

The Commission’s publication now sheds more light on these uncertainties by providing legal interpretations of the relevant provisions. This document provides support to companies of different sizes, corporate structures and locations within and outside the EU. By increasing companies’ understanding of their obligations and the extent to which the CSRD affects them, the Commission aims to facilitate compliance with regulatory requirements in a cost-effective manner and ensure the usability and comparability of the reported sustainability information. 

In this article, we will provide an overview of the content of the FAQ publication and highlight the key insights relevant to different types of companies affected by the CSRD. 

This article is written by Sefa Gecikli ([email protected]) and Leene Timmermann ([email protected]). Sefa and Leene are part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Strategy.

As stated, the Commission, considering inputs from many companies, released a compilation of FAQs on the CSRD. The document is divided into several main sections, each addressing different aspects of the directive and its implications for reporting entities, statutory auditors, independent assurance service providers, and other stakeholders.  

The document provides an overview of relevant terms and applicable legislation as well as the sustainability reporting requirements introduced by the CSRD. Numerous questions about the sustainability information to be reported are addressed, covering scope, application dates, exemptions, European Sustainability Reporting Standards (ESRS), value chain, and other technical aspects regarding the publication of sustainability information. The document goes into detail on the assurance process of sustainability reporting, including the roles and responsibilities of assurance providers. Additional questions are included about the terminology of the ESRS and the interplay with the EU Taxonomy. All this information is presented separately for public-interest entities and large companies falling under Articles 19a/29a of the Accounting Directive, as compared with entities outside the EU but with operations within the EU falling under Article 40a

This FAQ document focuses on procedural and administrative obligations and legal interpretation of specific clauses, distinguishing it from publications by the European Financial Reporting Advisory Group (EFRAG), which drafts the ESRS. While EFRAG provides clarifications regarding specific aspects of the ESRS, concepts like double materiality, and the content of a CSRD-compliant report, the Commission’s publication aims to assist undertakings in implementing the relevant legal provisions.

While the FAQs are published to help companies understand and apply the rules of the CSRD, only the Court of Justice of the European Union can officially decide how these laws should be interpreted. However, as the first set of guidelines from the Commission, this publication still provides extremely valuable support to companies looking for clarity on how to proceed with reporting requirements, especially concerning administrative duties.
Scoping and Implementation Timeline

The FAQ document identifies the in-scope companies by referring to specific articles of the Accounting Directive as amended by the CSRD. For consistency and thoroughness, we adopt the same approach throughout this document: 

Information about CSRD scoping can be found in our previous White Paper on the CSRD as well as our article on the scoping process. The Commission’s publication confirms these previous interpretations and supplements them with an overview of CSRD implementation dates for various categories of entities and a self-assessment decision tree to help companies determine if they fall under the scope of the CSRD. This decision tree and implementation table can be found in our full White Paper on the FAQ document.

Clarifications on the Sustainability Information and Report

While the European Commission largely focuses on the framework of the CSRD, they also provide some clarifications on the disclosures required by the ESRS. This includes a high-level summary of the sustainability information required by the CSRD.

A key takeaway is that while reporting requirements are largely consistent across company types, entities under articles 19a and 29a are expected to disclose information on business model and strategy, time-bound targets, governance, policies, incentive schemes, due diligence and impact management, risk management, and indicators. However, companies under Article 40a are not obligated to report on the resilience of their business models or opportunities related to sustainability. Consequently, the Directive's approach for the latter is more narrowly focused on actionable and strategic sustainability components rather than on broad conceptual risks and opportunities. 

Another distinction between company groups is evident with Small and Medium-sized Enterprises (SMEs), excluding micro-undertakings, that have securities traded on EU-regulated markets. These SMEs are permitted to use a more proportionate set of European Sustainability Reporting Standards, known as LSME ESRS, for preparing their sustainability statements. Currently in development by EFRAG, these standards are expected to be in effect from 2026, specifically designed to align reporting requirements with the operational scale and capabilities of smaller enterprises.

A further clarification regarding reporting timelines for different types of entities is also outlined in the FAQ document. It specifies that the management report, which includes the sustainability statement for entities covered under Articles 19a and 29a, must be published alongside the assurance opinion or report. This must occur no later than 12 months after the financial year-end, as dictated by each Member State. Entities with securities traded on an EU-regulated market, however, are subject to stricter timelines. They are required to publish their annual financial reports, which include the management report and thus the sustainability statement, within four months of the financial year-end. This requirement stems from the Transparency Directive, which mandates that issuers include sustainability information within their management report as part of their annual financial report.

Clarifications on Value Chain Disclosures

A comprehensive understanding and communication of the value chain are core foundations of CSRD-compliant sustainability reporting. During the reporting stage, this means that thorough reporting on material matters often requires value chain information that the reporting company does not currently have access to. The ESRS contains several acknowledgements for the difficulties of collecting such information. It subsequently includes provisions which allow companies to use sector-average data and other proxies under certain circumstances. The exact nature of these circumstances is however described very vaguely in the standards. Companies must be unable to collect the data “after making reasonable efforts to do so”. 

Since conditions vary, what is considered reasonable effort can differ between companies. The Commission introduces a range of criteria which can guide and influence what constitutes a reasonable effort. The size and resources of a company relative to the scale and complexity of its value chain are important to consider. The technical readiness of a company to collect value-chain information, as well as the availability of tools to access and share value-chain information, also affects the difficulty of data collection and, subsequently, what constitutes reasonable effort. Particularly in the first years, as companies have less CSRD experience and supporting tools are still being developed, higher efforts are required. 

The characteristics of actors in the value chain, particularly their size and resources as well as their technical readiness, can be considered. The relationship between the reporting company and the value chain actor is also highlighted, particularly their relative level of influence and buying power, as well as their proximity.
Due to the overall expected difficulty, the ESRS includes transitional provisions which allow companies to restrict value chain information disclosures during the first three years of their reporting. Regarding unavailable data, companies are able instead explain the efforts they made to obtain this information, why they were unsuccessful and how they are planning to obtain the information in the future. Companies may also limit value chain information to the data already available to them including publicly available information. Only metrics derived from other EU legislation, which can be found in ESRS 2 Appendix B, are strictly required to be disclosed in the first three years. 

These transitional provisions, alongside the published criteria, are expected to protect many SMEs from additional resource demands through CSRD reporting. While they may be part of an in-scope entity's value chain, their small size and potential lower technical readiness form a good substantiation to avoid being included in data collection processes. In the first years, data collection efforts are likely to be largely restricted to SMEs that are Tier 1 suppliers or customers of in-scope entities, have previously reported sustainability information or are connected to severe negative impacts.

Assurance

The Commission's FAQ document addresses several intricate aspects of assurance requirements for sustainability reporting. Clarifying these matters, the document outlines necessary qualifications for statutory auditors and audit firms engaged in sustainability assurance. It pays particular attention to cross-border assurance services, including auditor approval processes and Member State jurisdictions, highlighting how the provisions of both the Audit Directive and the CSRD are primarily designed to facilitate the mobility of assurance providers within the EU. 

The Commission goes on to describe with content and format of the required assurance opinion for companies falling under Article 19a and 29a of the Accounting Directive as well as those falling under Article 40a. While the explanations closely mirror each other, an important aspect regarding third-country undertakings is highlighted. In cases in which such an undertaking fails to provide the required assurance opinion, the EU subsidiary or branch of this non-EU parent company must issue a statement indicating this lack of provision. This statement is critical because it ensures transparency and informs stakeholders of the non-compliance, maintaining the integrity of the reporting framework established under the CSRD.

Relationship with other legislations

The FAQ document provides detailed guidance on the inclusion of Article 8 Taxonomy Regulation disclosures within CSRD disclosures. All undertakings falling under Articles 19a/29a of the Accounting Directive are required to include these disclosures in their sustainability statements. This does not apply to entities reporting under Article 40a. In other words, if a third-country parent opts to publish a consolidated sustainability statement in line with ESRS instead of a sustainability report under Article 40a, it is not required to include Article 8 disclosures. 

However, if its EU subsidiaries are exempt from their reporting requirements under Articles 19a/29a due to the consolidation, the activities carried out by these subsidiaries must still be disclosed under Article 8 in either their own reports or the parent's consolidated reporting. This ensures transparency on the subsidiary’s sustainable activities even if the parent is not required to comply fully with the CSRD.

Forward thinking

The Commission’s publication is an important further step in clarifying the requirements of the CSRD. As EFRAG has shed more light on the requirements of the ESRS and its implementation, the Commission now contributes by further clarifying the CSRD and its requirements. The regulatory landscape remains complex, but publications such as this provide valuable tools to comb through the various obligations. The legislators’ awareness of the CSRD’s high demands for companies has led them to include numerous provisions to tailor their requirements to different company types. This includes both longer implementation timelines as well as selective phase-in disclosures. 

These provisions aim to protect companies that have less available resources or experiences with sustainability reporting from being overwhelmed by a sudden onslaught of the full force of the CSRD. Avoiding such scenarios both shields companies in the short term and enables them to build up well-functioning and reliable ESG reporting systems in the long term. Identifying these opportunities spread throughout the regulations will be the key to finding the most efficient way to implement the CSRD for each specific company. 

RSM is a thought leader in the field of Sustainability and Strategy Consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.