Companies subject to the EU’s Corporate Sustainability Reporting Directive will be required to apply European Sustainability Reporting Standards from as early as 2024. Dave Rice examines the implications for UK companies.
It has been a momentous summer in the world of sustainability reporting. June saw the publication of the first two IFRS Sustainability Disclosure Standards, swiftly followed in July by a set of 12 European Sustainability Reporting Standards (ESRSs).
The UK government in Mobilising Green Investment: 2023 Green Finance Strategy and the Financial Conduct Authority (FCA) in Primary Market Bulletin 45 have reiterated their intent to introduce IFRS Sustainability Disclosure Standards into mandatory reporting, with a view to bring new requirements into force for listed companies for accounting periods beginning on or after 1 January 2025.
The first two IFRS Sustainability Disclosure Standards comprise IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures. The architecture of these standards will be familiar to UK listed companies as they closely follow the Task Force on Climate-Related Financial Disclosures (TCFD) structure. Nevertheless, the IFRS Sustainability Disclosure Standards significantly increase the scope and scale of sustainability reporting compared with TCFD. Their publication is, therefore, a trigger for companies to perform a gap analysis to identify the additional information that they will need to report under these new standards.
Despite being an EU directive, the CSRD may have extraterritorial implications for companies outside Europe
It is, however, not only the IFRS Sustainability Disclosure Standards that UK companies may need to prepare for. Companies subject to the EU Corporate Sustainability Reporting Directive (CSRD) must apply the ESRSs from as early as 1 January 2024. Despite being an EU directive, the CSRD may have extraterritorial implications for companies outside Europe.
What is the impact of the CSRD on UK companies?
Ultimately, all large EU companies and most companies (including non-EU companies) with listed securities on EU-regulated markets will be in scope of the CSRD. Additional reporting obligations will also apply to EU subsidiaries or branches of non-EU groups that have generated more than €150m turnover in the EU. The determination of which companies are in scope of the CSRD, and when, can be complex and is based on a number of factors, some of which are set out below.
UK companies with securities listed on an EU-regulated market
Some UK companies with securities (debt or equity) listed on an EU-regulated market will be directly in scope of the CSRD and subject to the same reporting obligations as EU-based companies. There are, however, detailed exceptions to this, such as for some debt-only issuers that meet certain criteria and for micro-undertakings.
If in scope, the date of first reporting depends on the company’s size and number of employees. For example, for companies with more than 500 employees that are already in scope of the Non-Financial Reporting Directive (which the CSRD revises) the ESRSs are applicable from 1 January 2024.
UK parent companies with subsidiaries or operations in the EU
Even if not directly in scope, there will be indirect implications for some UK parent companies that have in-scope EU subsidiaries (for example, large EU subsidiaries in scope of the CSRD from 1 January 2025). It may be that group resources are needed to support EU subsidiaries with their reporting obligations, particularly where governance structures around sustainability and financial reporting are centralised in the UK.
Reporting reliefs and exemptions
Central consideration may also need to be given to what reporting reliefs or exemptions are available to reduce the reporting burden for in-scope EU subsidiaries. For example, there is a transition relief available if a non-EU parent has multiple subsidiaries in the EU. This relief means that until 2030 the largest EU subsidiary is allowed to prepare one combined sustainability statement. This could allow the other EU subsidiaries to make use of a reporting exemption, instead of each subsidiary needing to prepare an individual sustainability statement.
Additional reporting obligations for EU subsidiaries or branches of UK groups
In addition to any reporting already required by the CSRD, from 1 January 2028, EU subsidiaries or branches that meet certain criteria will be required to request from the group all information necessary to enable them to publish an additional reduced sustainability statement covering all global operations of the group. This obligation applies where the group has generated more than €150m turnover in the EU in each of the last two years. Separate standards are yet to be developed that will specify the required contents of this reduced sustainability statement.
UK subsidiaries of EU parent and intermediate EU parent companies
UK subsidiaries may need to report sustainability information into its in-scope EU (or non-EU) parent or intermediate parent company for group reporting purposes. It will therefore be important for UK subsidiary companies to have processes in place to gather all the information needed in good time.
What do the ESRSs require?
The first set of published ESRSs are made up of 10 topic-specific standards and two cross-cutting standards. The topic-specific standards require detailed disclosures on various environmental, social and governance topics. The two cross-cutting standards explain fundamental concepts, provide principles of disclosure and presentation, establish transition options and set disclosure requirements applicable to all topics.
There are similarities between the ESRSs and the IFRS Sustainability Disclosure Standards, for example both used the recommendations from the TCFD as an input. The ESRSs, however, deviate considerably from TCFD in comparison to the IFRS Sustainability Disclosure Standards.
ESRSs cater for a broader set of stakeholders in addition to investors
Another key difference is that the ESRSs cater for a broader set of stakeholders in addition to investors. One fundamental concept that arises from this is that the ESRSs adopt a “double materiality” lens, with the aim for preparers to report not only on the issues that are financially material to a company, but on all significant impacts the company has on the environment and society. It is, however, worth noting that information about these impacts may also be financially material where the effect is sufficient to influence investor and other primary users’ decisions.
Efforts to establish interoperability between the IFRS Sustainability Disclosure Standards and ESRSs are ongoing between the ISSB and EFRAG. However, there are differences in the detail, which pose practical challenges for UK companies that will need to consider both sets of standards.
What you can do now
Consider the implications of the ESRSs for your company now. This includes carefully understanding the complex CSRD scoping provisions to determine which entities or operations in your group will need to apply the ESRSs, from when, and what exemptions or reliefs are available, so that you can plan how best to satisfy your sustainability reporting obligations.
The KPMG ESRS resource center provides practical guidance on how to prepare for the ESRSs. In addition, the EFRAG and Accountancy Europe websites provide further information on the CSRD and ESRSs.
Dave Rice, Senior Technical Manager, KPMG
