The Corporate Sustainability Reporting Directive (CSRD) introduces stringent sustainability reporting requirements for large companies across the EU, requiring organizations to report not only on their sustainability impacts but also on how sustainability matters affect their performance and financial position. A critical aspect of the CSRD is determining which entities within a group structure are required to report, known as “scoping.” Scoping is essential as it defines the boundaries of an organization's sustainability reporting obligations, encompassing both parent companies and subsidiaries. Failure to accurately determine the scope can lead to non-compliance risks, which may impact an organization’s reputation, financial stability, and potentially even jeopardize the ability to receive an audit opinion on the annual report. This article provides an overview of the CSRD scoping process, covering the essential steps, key considerations, and why this phase is a critical part of the journey toward CSRD compliance.

This article is written by Bart Ladru ([email protected]) and Sefa Geçikli ([email protected]). Bart and Sefa are both part of RSM Netherlands Business Consulting Services with a focus on Sustainability and International Trade.  

Understanding CSRD Scoping and the Role of the Reporting Entity

The first step in CSRD scoping is identifying the reporting entity, especially for large groups. According to Article 29a of the EU Accounting Directive, parent undertakings of large groups must include sustainability information in their consolidated reports. A “large group” under CSRD is defined as a parent and its subsidiaries that meet at least two of the following criteria:

  • A balance sheet total of at least €25 million,
  • A net turnover of at least €50 million,
  • An average of 250 employees over the financial year.

Once the criteria mentioned above are satisfied, the parent company is required to report at the consolidated level, including all subsidiaries in which it holds a controlling interest. In The Netherlands, according to the Dutch Draft transposition of CSRD, this consolidation applies regardless of any financial reporting exemptions. This means that even if a parent company is eligible for financial reporting exemptions, it must still adhere to CSRD reporting requirements if it qualifies as a large group. It is essential to recognize that this may vary from one member state to another, so it is advisable to review the relevant national transposition of the directive for specific requirements.

Steps in the Scoping Process

The CSRD scoping process involves the following key steps:

  1. Identifying the Parent Entity: Begin by determining the ultimate parent company within the group, as the CSRD requirements generally apply to the top-level entity. For groups operating in the Netherlands, the Dutch draft legislation for CSRD implementation provides that only specific types of entities (e.g., Public Limited Companies (in Dutch, N.V.) and Private Limited Companies (In Dutch, B.V.)) qualify as “parent companies” under the CSRD. Foundations and associations are excluded from the parent entity designation under the CSRD scope in the Netherlands. It is important to note that this can differ across regulatory frameworks.
  2. Evaluating Control and Ownership: Once the parent entity is identified, the next step is to evaluate its controlling interests across the subsidiaries. Control is generally established if the parent company has more than 50% of voting rights in the general meeting of a subsidiary or has significant influence over the subsidiary’s management. In cases where two companies hold equal shares (50% each), the relationship must be analyzed further through shareholder agreements or additional control mechanisms to determine which entity has actual control or if both are considered “co-parents” of the large group.
  3. Consolidation of Subsidiaries’ Data: After determining the parent entity, it is crucial to identify which subsidiaries are included within the scope of the CSRD reporting obligations. Subsidiaries are typically included if the parent has a controlling interest. In-scope subsidiaries will generally not prepare their own reports; instead, the parent company’s consolidated report will cover their sustainability impacts. However, subsidiaries still have limited administrative obligations, such as disclosing the name and address of the parent company and linking to the consolidated sustainability report in their management reports.
  4. Reviewing Exemptions and Administrative Requirements for Subsidiaries: Under the CSRD, certain exemptions reduce reporting burdens for subsidiaries. Specifically, an in-scope EU subsidiary is exempt from individual ESRS reporting if included in a consolidated report by an EU parent or a non-EU parent, such as an intermediate holding or the global ultimate parent. Additionally, for groups with multiple EU subsidiaries, the CSRD allows "artificial consolidation," where the largest subsidiary consolidates ESRS information for all in-scope EU subsidiaries. In cases of joint control, proportional consolidation of financial data is applied.

Key Considerations in CSRD Scoping

Throughout the scoping process, companies should keep the following considerations in mind:

  • Consistency with National Legislation: Each EU member state may have specific requirements regarding which entities qualify as parent companies or how controlling interests are defined. In the Netherlands, for instance, CSRD scope is aligned with certain definitions within the Dutch Civil Code, which may differ from other jurisdictions.
  • Accurate Calculation of Size Criteria: It is essential to accurately calculate the size of the group based on consolidated figures, as exceeding the thresholds makes the group subject to CSRD reporting. This calculation should include data from all subsidiaries under the control of a parent company, even if they operate outside the EU, as their impacts are relevant under the CSRD.
  • Stakeholder Consultation and Auditor Input: To ensure an accurate and compliant CSRD report, organizations should work closely with auditors and stakeholders throughout the scoping process. Auditors can provide guidance on interpreting control mechanisms, verifying calculations, and ensuring all entities under the parent’s control are accurately identified.

The Importance of Effective Scoping for CSRD Compliance

Accurate scoping under the CSRD is essential for several reasons:

  1. Ensuring Comprehensive Reporting: Correctly identifying the scope allows the parent company to capture all relevant sustainability data across its subsidiaries, leading to a more accurate and comprehensive sustainability report. This avoids potential compliance risks from under-reporting. 
  2. Enhanced Transparency and Accountability: CSRD reporting helps organizations communicate their sustainability impacts transparently, fostering trust with stakeholders, including investors, regulators, and customers. With sustainability becoming a core component of business strategy, accurate scoping contributes to building a company’s reputation for accountability.
  3. Alignment with CSRD Compliance Requirements: The CSRD scoping process lays the foundation for subsequent stages in the CSRD reporting cycle, such as the double materiality analysis, the scope of data collection and disclosure. A well-defined scope allows organizations to focus their resources efficiently on reporting material issues and managing sustainability risks effectively.
  4. Mitigating Compliance Risks and Preparing for Assurance: By conducting scoping accurately, organizations reduce the risk of non-compliance and avoid penalties. Given that CSRD requires third-party assurance, ensuring accurate and complete scoping from the start will facilitate the assurance process, reducing potential audit challenges. Accurate scoping is also essential to avoid invalidation of the CSRD report, as reporting at an incorrect entity level may prevent auditors from issuing the required assurance. This could result in restricted access to financial services such as loans, insurance, assurance and government tenders.

Forward Thinking

CSRD scoping is a fundamental step in the sustainability reporting process, laying the groundwork for a company’s consolidated sustainability report. By following a structured approach—identifying the reporting entity, evaluating control, consolidating data, and verifying any applicable exemptions—organizations can ensure compliance with CSRD requirements. Correct scoping supports a transparent, comprehensive, and meaningful sustainability report, aligning the organization with both regulatory expectations and stakeholder demands for greater sustainability accountability. As the CSRD framework continues to evolve, organizations should stay informed of updates and national-level adaptations to remain compliant and advance their sustainability practices.

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