For large internationally operating companies scoping assessments are critical to ascertain the extent of a regulation's applicability. With the Corporate Sustainability Reporting Directive (CSRD) influencing a broad spectrum of entities, it becomes imperative for businesses within the EU market to place a high priority on these assessments. This is essential for EU-based businesses, multinationals with EU ties, or those venturing into European markets. This article outlines a four-step process to unlock the intricacies of CSRD scoping.

This article is written by Ruben Harding ([email protected]) and Sefa Gecikli ([email protected]). Ruben and Sefa are both part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Supply Chain Management.  

In the evolving landscape of corporate sustainability, understanding the scope of reporting requirements is a key aspect to become compliant. As regulations tighten and stakeholders' expectations soar, navigating the CSRD can be as formidable as it is critical. Nevertheless, through a structured, step-by-step analysis in four phases, entities can gain a solid understanding of their entities’ situation vis-à-vis CSRD. 

Phase I: Unveiling the Blueprint of Influence and Ownership in CSRD Scoping Analysis

To conduct a concrete and complete CSRD scoping analysis, firstly, the entities must conduct a comprehensive review of its structure and relationships with other entities. This entails identifying and documenting the nature and extent of rights and influences between the target entity and other entities.  Specifically, this may include understanding ownership and voting rights, which affect governance and strategic decisions, and contractual rights that dictate terms of business engagements. For example, Company A has an agreement with Company B that allows it to appoint three out of the five members of Company B's board of directors. This right gives Company A considerable influence over Company B’s governance and strategic decisions, enabling it to direct business operations and company policies. In addition to shareholding positions, this kind of factors should also be considered while preparing a comprehensive group structure for CSRD scoping for the sake of the following steps. 

Phase II: Who Falls Under the CSRD Scope? Identifying Your Obligations

Determining a company's inclusion under the CSRD requires a nuanced assessment. The directive casts a wide net, encompassing not only EU-based firms but also non-EU entities operating within the region. As a result, all entities within the group structure, both on a stand-alone and consolidated basis, should be evaluated against the criteria established by the CSRD. At a glance, the criteria are reviewed as follows:

  1. Reporting obligations under the CSRD extend to all entities listed on an EU-regulated market, encompassing both EU and non-EU firms. The directive's reach is determined by the listing of securities on designated EU-regulated markets, such as certain European stock exchanges. This encompasses entities previously covered by the NFRD, including public-interest entities, large EU-listed entities, banks, and insurance companies with a workforce exceeding 500 employees. Reporting obligations for such entities are set to begin in 2025 for financial years that start on and after 2024. For listed SMEs, the directive introduces specific nuances regarding the timeline and extent of their reporting obligations. Exceptions are few, with "micro-undertakings" being a notable one.  Reporting obligations for these entities commence in 2027 for financial years beginning on, and after, 2026. Nonetheless, SMEs within the scope have the option to defer their reporting until 2028.
  2. An EU entity, including EU subsidiaries of non-EU headquartered companies, falls within the scope of the CSRD if it is classified as a "large undertaking," determined by surpassing 2 criteria of in total assets €25 million balance sheet total, €50 million net turnover and 250 employees. Similarly, an EU entity acting as a "parent undertaking of a large group" must engage in consolidated reporting. This requirement applies to groups encompassing both parent and subsidiary entities that exceed specific consolidated thresholds. For these entities, reporting is due from 2026 for financial years starting on and after 1 January 2025.
  3. Non-EU companies with a net turnover exceeding €150 million within the EU over the last two fiscal years, coupled with having at least one large or listed subsidiary on EU-regulated markets (or a branch in the absence of such subsidiaries) are also under the scope. For such entities, reporting requirements will take effect in 2029 for financial years commencing on or after January 1, 2028.

Phase III: Navigating the Depth of Influence in CSRD Reporting: Obligation Spectrum Analysis

Following the initial two phases, entities are required to determine which of their activities are to be included in the sustainability report. At this stage, entities should leverage the group structure they outlined in the first phase. This assessment is composed of two primary layers. The first layer revolves around the analysis of reporting obligations for entities under the company's control. This includes both the control through ownership of a majority of shares, and de facto control, which considers a wider array of factors. In the Dutch implementation of the CSRD, this criterion is applied when the parent company owns 50% or more of the shares. However, according to Dutch accounting principles (Articles 406/407), controlling interest also encompasses various aspects such as the type of shares held, the parent company’s role in appointing the board, and its involvement in critical decision-making processes. It is generally believed that the latter, more comprehensive approach to defining controlling interest, should be adopted. The second layer of assessment, in line with CSRD reporting obligations, broadens the scope to include the company's entire value chain. This encompasses all entities over which the company exercises influence or in which it holds a stake, regardless of whether this constitutes a controlling interest. This layer ensures a more extensive and holistic view of the company's sustainability impacts and practices throughout its value chain. 

Phase IV: Mastering the Art of Exemptions and Consolidations in CSRD Reporting

In the fourth step, entities should explore the possibility of consolidating their reports by utilizing exemptions, thereby integrating the reports of various entities within the scope into a single document. The CSRD offers certain provisions for this purpose, which include: 

  1. For EU subsidiaries or subgroups, an exemption from individual ESRS reporting applies when they are included in the comprehensive consolidated management report of their EU parent entity. This exemption is valid if the report adheres to ESRS guidelines and encompasses the full breadth of the parent's global subsidiaries. 
  2. EU subsidiaries under non-EU parentage may also enjoy an exemption. Their consolidated sustainability reports must either comply with ESRS or an equivalent standard endorsed by the European Commission and include all subsidiaries, irrespective of their geographical location. It's worth noting that, to date, no standards have been officially deemed equivalent. 
  3. A provisional measure introduces a concept termed "artificial consolidation" for EU subsidiaries with non-EU parents, effective until 2030. This approach allows for the creation of a unified sustainability report that aggregates data from all relevant EU subsidiaries, in line with combined financial statements, thereby eliminating the need for separate entity reporting. The responsibility for its preparation and issuance is falling on the EU subsidiary recording the highest turnover within the previous five years.
    Eligibility for exemptions from the CSRD is not one-size-fits-all; it relies on the specific circumstances that bring a company under the directive's purview. Also, the decision to pursue these exemptions demands careful consideration for efficiency, going beyond mere legal assessment. It involves evaluating data consolidation capabilities, entity activities, and other critical factors in entities’ group structure.

Forward thinking

Understanding if your organization falls under the CSRD, and to what extent, is essential for enhancing your reputation, gaining investor confidence, and ensuring you follow the law. An incomplete scoping analysis can throw off your compliance efforts from the start, much like starting off with your shirt buttoned incorrectly. This can lead to a range of negative outcomes, from fines for your company to legal consequences for board members, with the seriousness and type of these penalties varying by country. Moreover, an inadequate assessment of exemptions could result in unnecessary administrative workload due to the duplication of procedures.

Entities’ approach to CSRD scoping services should be designed to ensure comprehensive compliance without compromising efficiency. To achieve this, RSM NL employs a well-established 4-step scoping analysis, honed through experience in assisting entities with their compliance needs. Our approach is to customize our services to meet their precise requirements with a high level of precision and consideration.

RSM is Thought Leader in the field of Sustainability and Supply Chain Management 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.