CSRD: The Fun Is in the Transposition

A Slow Implementation 

As companies operating in the European Union ("EU") likely now know, new environmental, social, and governance ("ESG") regulations are set to have a significant impact on disclosure and governance obligations for EU and non-EU companies alike. Some of these new obligations include extensive sustainability reporting and due diligence requirements on potentially highly sensitive and detailed ESG matters, including as related to climate risks.

The EU Corporate Sustainability Reporting Directive 2022/2464 ("CSRD") will impose significant new reporting obligations on "large" EU companies and groups of companies with an EU subgroup parent company starting now and, in 2029, will require reporting from non-EU companies doing business in the EU for FY2028 information. Currently, most subsidiaries and subgroups of U.S. and other non-EU parent companies are expected to have to report in 2026 for FY2025 information. This includes groups and subgroups of companies (EU and non-EU) held by an EU-parent entity.

These rules must now be implemented, or "transposed" in EU parlance, by each of the 27 EU Member States. On September 24, 2024, the European Commission ("EC") sent letters of formal notice to 17 EU Member States throughout the EU that have not fully transposed the CSRD, directing them to complete transposition of the CSRD within two months or face a reasoned opinion issued by the EC, including an explanation of why the EC believes these countries are in violation and setting a deadline for each country to inform the EC of the measures taken to comply.

Given the first upcoming reporting period of January 1, 2025, companies operating in the EU are facing an increasingly complex regulatory environment with uneven CSRD implementation that, in many countries, has not yet been passed into law. Recent public statements, such as the French prime minister's expressed desire to postpone CSRD's application in France and "revisit" its scope, combined with existing uncertainty under the CSRD rules themselves, exacerbate stress on companies and practitioners seeking to comply with applicable law.

Determining the Scope of the CSRD

Companies operating in the EU are now evaluating whether the CSRD applies to their group companies and, if so, when reporting will be required. Some multinational companies are finding surprising outcomes when evaluating which companies in their group may be subject to CSRD reporting, such as:

• Non-EU subsidiaries and groups of companies held by an EU entity for tax purposes may require disclosure over a significant portion of business that takes place outside the EU;
• EU subsidiaries qualifying as "large" across different business units and jurisdictions will require a reporting strategy adapted to business units that may not follow strict corporate ownership on which CSRD scoping is based; and
• Strategic or transaction-based entities that are not wholly owned subsidiaries, such as joint ventures, may be within the scope of the CSRD.

As written, the CSRD scoping rules appear simple enough; an EU company or group is required to publish an annual sustainability report when it is considered "large" under the EU Accounting Directive 2013/34, as amended by the CSRD (the "Accounting Directive"). "Large" companies will meet two of the three criteria on the balance sheet date of two consecutive financial years: (i) €20 million (soon to be €25 million) in assets, (ii) €40 million (soon to be €50 million) of net revenue, and (iii) 250 employees. However, practical application has proven complex in some cases.

Lookback Periods and "Large" Entities

One example of an ambiguous CSRD provision is the financial statements lookback period when determining "large" status. The CSRD's definition cross-references the Accounting Directive, which requires companies and groups with EU parents to determine whether the abovementioned thresholds are met on "two consecutive" financial years. Therefore, under a strict reading of the Accounting Directive, an EU company could have "switched on" the CSRD in prior years, and even if no longer meeting two of the three thresholds during the reporting year, may still have to report under the CSRD. This could result in corner cases where, for example, a company reporting in 2026 for FY2025 information is no longer "large" in 2025 but was "large" in 2023 and 2024 and would therefore only stop reporting in 2027, assuming the company ceases to meet the thresholds for two consecutive years (i.e., 2025 and 2026). For companies winding down their operations in the EU, going dormant under the CSRD (without winding up or dissolving the entity) in this case would require at least an additional year of reporting. 

In the Netherlands, the current draft transposition law wording appears in line with the Accounting Directive, mirroring the size thresholds for financial reporting under Dutch law. Therefore, technically a Dutch company's lookback period will extend indefinitely to determine whether CSRD thresholds were met further back in time, and requiring a company to be "not large" for two consecutive years before "turning off" its CSRD reporting obligation. That being said, the Dutch transposition law has not yet been finally adopted and therefore remains subject to further guidance or revision (although significant changes are not expected).

The French transposition law, on the other hand, refers to the last two consecutive financial years—potentially allowing a company to escape being "large" if it does not meet the thresholds on the balance sheet of either of the past two fiscal years.

The Italian transposition law, while similar to the Dutch lookback period, has additional complexities around the ability for Italian companies to claim an exemption from CSRD reporting that may be available to other EU companies. The Italian transposition law currently does not allow Italian companies or groups to claim an exemption from reporting when: (i) an EU subgroup parent is reporting on behalf of a "large" Italian entity or group unless the Italian companies or groups are consolidated by the EU subgroup parent from an accounting perspective or (ii) a subsidiary with the highest revenue among the EU subsidiaries in the last five years reports on behalf of the entire EU group, including the Italian entity(ies) (so-called "artificial consolidation").

CSRD implementation is a dynamic exercise where the goal posts are being regularly moved. Experienced counsel can assistant companies with the challenges associated with understanding their CSRD obligations.

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