On 7 August 2024, the European Commission published draft frequently asked questions (FAQs) clarifying the scope of CSRD, and its implementation, and clarification of certain provisions of the first set of the European Sustainability Reporting Standards (ESRS) where the Commission has deemed it necessary. The FAQs do not create additional obligations under the CSRD, however they do provide some helpful clarifications for  companies that are preparing to comply with the CSRD.

See here and here for further analysis we have published on the CSRD.

The FAQs contain the following information:

• an overview of the sustainability reporting requirements introduced by CSRD together with a flow chart to help entities understand whether they are in scope and how they need to report (ie consolidated or individual sustainability statements), the timeline for application of the provisions and assurance requirements;
• clarification on the sustainability information to be reported under Arts 19a/29a of the Accounting Directive (individual and consolidated sustainability statement); and
• clarification on the sustainability information reported in respect of third-country undertakings under Art 40a of the Accounting Directive;
• confirmation on assurance of sustainability reporting and key intangible resources; and
• clarification of the relevant reporting requirements for third-country issuers.

Below we highlight some of the key clarifications provided by the Commission :

Who is in scope and should they report on an individual or consolidated basis?

Section III – Qus 11-14: clarify that UCITS and AIFs (including ETFs and REITs which qualify as UCITS and AIFs) are exempt from CSRD reporting, however managers of UCITS and AIFs will not be exempt and so will have to provide sustainability information if they fall under the scope of the CSRD. Pension funds also cannot avail themselves of the same exemption, and so will need to provide sustainability information if they fall under the scope of CSRD.

Section III – Qu 20: confirms that where an in-scope EU subsidiary is seeking to rely on its parent undertaking's consolidated sustainability report under the group consolidation exemption, it is not necessary for the parent report to be available within the reporting deadline for the in-scope subsidiary provided that the subsidiary includes a weblink which refers to where the  consolidated sustainability will be available in the future. The Commission also proposes that the parent undertaking could provide a guarantee to its subsidiary to publish the consolidated sustainability report, which can be set out in the subsidiary's management report (alongside the relevant weblink).

Section III – Qus 25/26: undertakings which are required to publish sustainability information under the CSRD, but who are not otherwise required to prepare an individual or consolidated management report are permitted to publish their sustainability statement in a separate standalone document.  Such undertakings who elect to publish their sustainability statement in a separate standalone document  should still include financial information that is "necessary to understand the undertakings’ impacts on sustainability matters and to understand how sustainability matters affect the undertaking’s development, performance and position".

Reasonable effort and the value chain

Section III – Qu 29: refers to the concept of “reasonable effort” under the CSRD can be applied where an undertaking is reporting estimates for their value chain information (rather than reporting information collected from its actors within the value chain). The FAQ clarifies that this application of the "reasonable effort" concept will depend on the undertaking, and also distinguishes between reporting on “policies, actions and targets" and reporting on metrics.  The Commission remarks that undertakings may use estimates more in the first years of application of the reporting requirements but that it should become less common over time. 

Reporting sustainability information under Art 40a of the Accounting Directive

Section IV – Qu 42/43: clarify that (i) a third-country ultimate parent undertaking falling under the scope of the CSRD under Art 40a of the Accounting Directive may prepare the report itself and make it available for the EU subsidiary or branch by publishing on its website or in an EU business registry or (ii) the EU subsidiary or branch may prepare, publish and make accessible the report on behalf of its third-country ultimate parent undertaking.  If there are EU subsidiaries or branches in more than one Member State, it is not necessary to publish multiple sustainability reports, instead the subsidiaries or branches may provide a link to sustainability reports published by another EU subsidiary or branch.

Section IV – Qu 46/47: confirms that third-country ultimate parent undertakings undertaking falling in scope for CSRD under Art 40a of the Accounting Directive are not required to report Art 8 Taxonomy Regulation disclosures.  However, where an in-scope EU subsidiary is required to make Art 8 Taxonomy disclosures then these disclosures can be included either (i) in the third-country parent undertaking’s consolidated sustainability reporting or (ii) in the subsidiary’s own management report.

Clarifications on assurance

Section V – Qu 77: confirms that if an undertaking is reporting on a voluntary basis, then no sustainability assurance opinion is required.

Section V – Qu 80: confirms that sustainability assurance opinions should be published with the sustainability report.  There is currently no specific format required for the assurance opinion but the sustainability report is required to be submitted to the relevant Member State collection body in a data extractable format with metadata.

Third-country undertakings who are issuers of transferable securities

Section VII – Qus 85/89: confirm that third country issuers who have transferable securities admitted to trading on an EU regulated market must include sustainability information within their management report as part of their annual financial report. In addition, these issuers will also need to report Art 8 Taxonomy Regulation disclosures in respect of the activities of their entire group.

Queries on SFDR

Section VIII – Qu 90: clarifies that any indicator reported as non-material by an investee company applying ESRS as part of its CSRD reporting does not then need to be included in the calculation for the corresponding indicator of principal adverse impacts (PAIs) within its SFDR disclosures.

Next Steps

The FAQs are currently in draft format, there is no information included in the document as to next steps but we would expect official adoption and publication in the Official Journal to follow in time.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.  We are following this important development very closely so please get in touch if you would like to discuss sustainability regulation and how to implement it into your business and strategy and prepare for future requirements.

This note is intended to be a general guide and covers questions of law and practice. It does not constitute legal advice.

Authored by Rita Hunter, Emily Julier, Jessica Dhodakia, and Julia Cripps.