In 2024, I have heard a lot of news about CSRD reporting and the need to recruit talent to meet these new requirements in Europe. Many large Japanese companies have their European headquarters in Germany. Therefore, they would like to hire a professional in Germany who understands the requirements for CSRD reporting and handle this project together with the Japanese headquarters. As it is a new trend and regulations, there are not many candidates who have experience in these sustainability issues. It will be a big challenge for many international companies, including Japanese companies in Europe, to handle this properly in the coming years. So I did some research and made a summary about this issue.
Yu Shimokawa
- International Executive Recruitment Specialist for local management placements in Germany
- 15 years of experience as executive search, recruitment, and headhunting consultants in
- Tokyo, Japan for 1 year
- Bangkok, Thailand for 10 Years
- Düsseldorf, Germany for 4+ Years
- Currently based in Duisburg, Germany
Table of Contents
Corporate Sustainability Reporting Directive (CSRD)
The new EU directive on corporate sustainability reporting at a glance
According to European Union, The importance of CSR reporting is growing, and the requirements for corporate sustainability reporting are changing fundamentally due to the new EU directive on corporate sustainability reporting (CSRD). After the European Commission published its proposed directive in April 2021, negotiators from the Commission, Council, and European Parliament agreed on a compromise on June 21, 2022. This was formally adopted by the European Parliament and the Council and, after being signed by the President of the European Parliament and the President of the Council, published in the Official Journal of the European Union on December 16, 2022. The directive entered into force on January 5, 2023, and the new rules must be implemented by the member states within 18 months.
Expansion of Reporting Obligations
Certain public interest companies in the EU have been required to report on their sustainability for several years, regulated by the Non-Financial Reporting Directive (NFRD) since 2014. This enables stakeholders to better assess companies’ contributions to sustainability. The CSRD will significantly broaden the scope of application, expanding the number of companies subject to reporting from 11,600 to 49,000 across the EU. The following entities are affected (PwC):
- Large companies in the accounting sense
- Small and medium-sized enterprises (SMEs) in the accounting sense that are capital market-oriented
- Third-country companies with a turnover of EUR 150 million in the EU, whose subsidiaries meet the above size criteria or whose branches achieve a turnover of more than EUR 40 million
Micro-enterprises are excluded from the scope of application.
Implementation Timeline
The CSRD reporting requirements will initially apply to a limited group of companies for financial years beginning on or after January 1, 2024, and will then be gradually expanded (European Parliament):
- From January 1, 2024: Public interest entities with more than 500 employees
- From January 1, 2025: All other large accounting companies
- From January 1, 2026: Capital market-oriented SMEs, unless they opt to defer until 2028
- From January 1, 2029: Non-EU companies with a net turnover of more than €150 million within the EU, if their subsidiaries meet the relevant size criteria or their branches have a turnover of more than €40 million
Key Innovations of the CSRD
- Extended, Standardized Reporting Requirements: Companies will have to report more comprehensively and according to more uniform standards. The measurability and comparability of the information will be strengthened by greater quantification of the report content using key figures. Initial drafts of the standards are being developed by EFRAG with stakeholder and expert involvement.
- New Understanding of Materiality: The CSRD enshrines the concept of double materiality, requiring companies to report on both the impact of their business operations on people and the environment, and the impact of sustainability aspects on the company.
- External Audit: Sustainability reporting must be audited externally, similar to financial reporting. The EU Commission has set audit standards, with an initial audit with limited assurance, followed by an audit with reasonable assurance.
- Part of the Management Report: Sustainability information must be a mandatory part of the management report, highlighting its importance and aiming to give it the same status as traditional financial reporting.
- Uniform Electronic Reporting Format: Since January 1, 2020, certain capital market-oriented companies have been required to disclose their accounting documents in the European Single Electronic Format (ESEF). This requirement will be extended to sustainability reporting, with the European Commission planning to publish its own XBRL taxonomy. (Fin. Connect. NRW)
What the EU’s New CSRD Means for Companies
The CSRD significantly expands existing rules on non-financial reporting. All companies listed on an EU-regulated market (with the exception of micro-enterprises) are covered by the new reporting obligation. Additionally, non-capital market-oriented companies are covered by the CSRD if they fulfill two of the following three criteria (EU thresholds, subject to transposition into national law) (KPMG):
Large Companies – Even Ones Based Outside of the EU
Companies meeting two of the following three conditions will have to comply with the CSRD:
- €50+ million in net turnover
- €25+ million in assets
- 250+ employees
In addition, non-EU companies that have a turnover of above €150 million in the EU will also have to comply.
Small and Medium Enterprises (SMEs)
The CSRD will apply to small and medium-sized enterprises (SMEs) that are listed on European markets and meet at least two of the following three conditions:
- €8+ million in net turnover
- €4+ million in assets
- 50+ employees
The first reports for SMEs will be due in 2027, though they can opt out until 2028.
It is estimated that this would affect about 50,000 companies in the EU, including 15,000 in Germany alone.
Non-EU vs EU Companies: What’s the Difference?
When it comes to CSRD requirements, the rules are largely the same for EU and non-EU companies – the main difference is in how they qualify for reporting.
EU Companies
EU companies need to comply if they meet any two of these three criteria:
- €50+ million in net turnover
- €25+ million in assets
- 250+ employees
Non-EU Companies
Non-EU companies (including those in the UK, US, and other countries) must comply if they:
- Have a net turnover of €150 million or more in the EU, and have at least one of the following:
- A large EU subsidiary (meeting the EU company criteria above)
- A branch in the EU with net turnover exceeding €40 million
- Securities listed on EU regulated markets
This means that major international companies doing business in Europe will likely need to report their sustainability impact, even if they’re headquartered outside the EU. For example, a US tech company with significant European revenue and an office in Germany would need to comply with CSRD.
This approach ensures that both European and international companies are held to the same standards of sustainability reporting when operating in EU markets.
Double Materiality Perspective
The new CSR Directive follows a double materiality perspective. This means that companies must record the effect of sustainability aspects on the economic situation of the company and clarify the impact of operations on sustainability aspects. The CSRD requires reporting to include information on:
- Sustainability goals
- The role of the executive board and the supervisory board
- The company’s most significant adverse impacts
- Intangible resources not yet accounted for
With the new CSRD, there is no longer the possibility to publish non-financial information in a separate non-financial report. In the future, sustainability information must be disclosed exclusively in the management report. (PwC NL)
Links to the EU Disclosure Regulation and EU Taxonomy Regulation
The EU Disclosure Regulation, or Sustainable Finance Disclosure Regulation (SFDR), obliges credit institutions to disclose sustainability information about their activities and products. To meet these requirements, credit institutions need additional data from the companies to which they lend. Since more companies have to publish sustainability reports with the CSRD, this information is easier for credit institutions to obtain. Companies that are obliged to report on sustainability must also observe the EU Taxonomy Regulation and disclose the extent to which their corporate activities are linked to ecologically sustainable business. (European Union)
Advanced, Unified Reporting Standards
Companies should report according to more comprehensive and consistent standards, with greater quantification of the content for better measurability and comparability. The exact content of sustainability reporting and the cross-EU standards were defined by EFRAG in the European Sustainability Reporting Standards (ESRS). Different standards apply to different types of companies required to report, some of which are still being developed by EFRAG. (European Union)
External Audit Obligation
Like financial reporting, sustainability reporting must also be audited. The testing standard will be gradually expanded from a test with limited assurance to a test with reasonable assurance by 2028. (European Union)
Reporting at Group Level
Subsidiaries do not have to prepare their own reports, except for capital market-oriented subsidiaries. Companies must list the risks and effects of subsidiaries in the management report if they differ significantly from those of the parent company.(European Union)
Global Effects
Though it’s an EU directive, the CSRD also applies to companies based abroad that have a presence in the EU. This means that a hypothetical U.S.-based company with dozens of subsidiaries has to abide by the CSRD if even one of those subsidiaries is in the EU. (Normative)
Impacts Inward & Outward
The CSRD – like the NFRD – requires “double materiality,” which means that businesses will have to disclose not only the risks they face from a changing climate, but also the impacts they may cause to the climate and to society. For businesses that have historically only analyzed the risks posed to them by climate change, this is a call to do some self-reflection. (Normative)
Better Comparability Through Standardization
The CSRD will require company sustainability data to be submitted in a standardized digital format. This is meant to provide a clear format for company sustainability reporting, allowing for better understandability and easier comparison between companies. (Normative)
Influences on Japanese Companies in Europe
The EU’s Corporate Sustainability Reporting Directive (CSRD) will significantly impact Japanese companies operating in Europe. The number of companies affected is estimated to be around 50,000, divided into three broad categories:(PwC Japan)
EU Undertakings
Japanese companies or corporate groups established within the EU that meet certain criteria are considered large companies and are subject to the CSRD. These criteria include sales revenue and the number of employees, regardless of whether they are listed or not. Therefore, European subsidiaries of Japanese companies that are over a certain size are likely to fall into this category. These companies will need to comply with the CSRD starting from January 1, 2025, with the first reports due in 2026.
Third-Country Operators
This category is particularly relevant for Japanese companies. Even companies established outside the EU are subject to the regulation if they have large subsidiaries or branches within the EU and record significant sales within the EU. The CSRD requires disclosure at the corporate group level, meaning that if a Japanese company falls under this category, it will need to disclose global consolidated financial statements. For third-country businesses, the CSRD will apply from January 1, 2028, with the first reports due in 2029.
Environmental Impact Assessment Required
The CSRD mandates a comprehensive assessment of both financial and impact materiality. Companies must evaluate their environmental and social impacts alongside financial risks and opportunities. The European Sustainability Reporting Standards (ESRS) outline the process for materiality assessment, which includes:
- Governance: How sustainability is governed within the company.
- Strategy: The company’s sustainability strategy and its integration into overall business strategy.
- Impact, Risk, and Opportunity (IRO) Management: How the company manages its sustainability impacts, risks, and opportunities.
- Metrics and Targets: Specific metrics and targets related to sustainability, such as greenhouse gas emissions.
Third-Party Assurance
The CSRD requires third-party assurance for the entire disclosure content. Initially, this will be limited assurance, but there are plans to transition to reasonable assurance, which is equivalent to current accounting audits. This means that Japanese companies will need to ensure their sustainability information and internal controls are robust enough to meet these assurance requirements.
Practical Steps for Japanese Companies
- Identify Scope: Determine which entities within the corporate group are subject to the CSRD based on financial statement figures, number of employees, and capital relationships.
- Establish Roles: Clearly define the roles of headquarters and EU bases, involving related companies and departments early on.
- Materiality Assessment: Compare the materiality assessment process stipulated in the ESRS with the company’s existing process and integrate any missing elements.
- Gap Analysis: Conduct a gap analysis between the ESRS and the company’s current disclosure items to identify areas for improvement.
- Documentation: Ensure thorough documentation of the materiality assessment, information gathering process, and internal controls to facilitate third-party assurance. (JRI)
Conclusion
The CSRD represents a significant shift in sustainability reporting requirements, aiming to enhance transparency and accountability. For Japanese companies operating in Europe, this means adapting to new standards and ensuring comprehensive and reliable sustainability disclosures. By proactively addressing these requirements, companies can not only comply with regulations but also strengthen their sustainability practices and corporate value.
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