EU Corporate Sustainability Reporting Directive adoption getting closer, but important implementation decisions by members states still to occur

Over the last few weeks, the spotlight has been on the European Sustainability Reporting Standards (ESRS) recently finalized by the European Commission. The ESRS are a big deal and an important milestone in the implementation of the Corporate Sustainability Reporting Directive (CSRD). However, the EU member states must still make additional decisions that will impact CSRD reporting, governance and audit practices when they transpose the Directive into national law.

Although most elements of the CSRD must be adopted by the member states (i.e., “shall”), in some cases they are given a choice (i.e., “may”). These policy choices are nicely framed in the proposed policy response to a public consultation on member state options recently published by Ireland's Department of Enterprise, Trade and Employment. That consultation focused on the CSRD provisions that allow or require member states to choose how they implement the CSRD.

Where do member states have discretion? The topics discussed in the proposed policy response include (among others) whether to:

• Phase-in public-interest entities added through “gold-plating” of the Non-financial Reporting Directive in 2024 versus 2025. (Article 5)
• Adopt a reporting carve-out for information relating to pending developments or matters being negotiated where disclosure would be seriously prejudicial to the undertaking. (Article 19a, 29a)
• Require CSRD disclosures by a parent undertaking organized in another jurisdiction to be provided in a language accepted by the member state of the exempt subsidiary undertaking. (Article 19a, 29a)
• Require website publication of management reports. (Article 30)
• Allow a statutory auditor or audit firm other than that which carries out the statutory audit of the financial statements to provide assurance. (Article 34)
• Allow independent assurance services providers to provide assurance on sustainability reporting. (Article 34)
• Require EU subsidiary undertakings or branches of third-country (non-EU) undertakings to furnish information on member state and EU turnover generated by the third-country undertaking. (Article 40a)
• Apply national assurance standards, procedures or requirements for sustainability reporting to the extent the European Commission has not adopted an assurance standard covering the same subject matter. Under the CSRD, the Commission has until October 2026 to adopt a standard on limited assurance for the audit of sustainability reporting, with a reasonable assurance standard to follow later if practical. (Article 26a)
• Allow the assurance report on sustainability reporting to be included as a section of the audit report on the annual financial statements if the same auditor performs both audits. (Article 28a)
• Permit the functions assigned to the audit committee relating to sustainability reporting and assurance to instead be performed by the undertaking’s administrative or supervisory body as a whole or a dedicated body established by the administrative or supervisory body. (Article 39)

Member states have a relatively short window to make decisions on these and other permissive aspects of CSRD. They are required to transpose the CSRD into national law by July 6, 2024.

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