What Irish companies will the Corporate Sustainability Reporting Directive apply to?

First impressions suggest that identifying the Irish companies required to comply with the CSRD will be a straightforward process, but first impressions can be deceptive, writes Fiona Hackett

The European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) was published in its Official Journal in December 2022.  

The CSRD replaces the Non-Financial Reporting Directive (NFRD), which in Ireland was applied by companies with more than 500 employees that are public limited companies or regulated by the Central Bank of Ireland.

The Irish Government is currently working on the amendments to the Companies Act 2014 that will enact the requirements of the CSRD in Ireland. It is required that these amendments be reflected in Irish law by 6 July 2024.

GAAP for sustainability reporting

Once enacted in Ireland, the CSRD will require a significant number of Irish companies to prepare a sustainability report subject to assurance by a third party.

The sustainability report will need to comply with the suite of 12 European Sustainability Reporting Standards (ESRSs) issued by the European Financial Reporting Advisory Group (EFRAG).

These 12 ESRSs have been directly written into EU law and are effectively GAAP for sustainability reporting, covering general sustainability requirements and topical matters under the ‘E’ (Environmental), ‘S’ (Social) and ‘G’ (Governance) pillars.  

The ESRSs run to over 350 pages and EFRAG has estimated that there are over 1,000 quantitative and qualitative data points necessary to comply with the more than 80 disclosure requirements of the ESRSs.

The CSRD and companies in Ireland

The EU has estimated that the number of companies across the EU that will apply CSRD requirements is about 50,000 as opposed to the roughly 11,000 companies that apply NFRD – almost a five-fold increase.

However, I would argue that due to the large number of Irish special purposes vehicles, the large population of Irish regulated entities and the popularity of Ireland as the location for intermediate holding companies in large multinational groups, there will be a greater than five-fold increase in the number of companies impacted by the CSRD in Ireland compared with those complying with the NFRD.

First impressions of the CSRD suggest that identifying the Irish companies that will be required to prepare a sustainability report and comply with ESRSs is straightforward.  

At its simplest, for financial years starting on or after 1 January 2025, large companies, for the purposes of the Companies Act 2014, will be required to prepare a sustainability report that complies with the ESRSs (with some of our large listed companies reporting from 1 January 2024). 

We all know that first impressions can often be misleading, however. Identification of what entities will be required to prepare a sustainability report and comply with the ESRSs requires careful consideration and analysis of the type of entity, and – if the entity is a subsidiary company – how the group structure impacts on the preparation of a sustainability report that complies with the ESRSs.

Why is type of entity relevant?

At present, the Irish enactment of the CSRD is focusing on companies incorporated under the Companies Act 2014.  

The Department of Enterprise, Trade and Employment (DETE) indicated in a July webinar that it intends to exempt credit unions and friendly societies from the requirements of CSRD.  

Future developments in sustainability reporting and later government policy decisions may see such entities, not subject to the Companies Act 2014, required to prepare sustainability reports that comply with the ESRSs. 

The DETE webinar also indicated that not-for-profit companies (often incorporated as companies limited by guarantee) are not in scope of CSRD. They may consider voluntary adoption of the requirements, however.  

What should subsidiaries consider?

For companies that are subsidiaries, the wider group impact of the CSRD needs to be considered and understood. Whether the subsidiary has a parent in the EU or outside the EU will be crucial in determining the level of sustainability reporting required by the subsidiary.

For a large company that is a subsidiary of an EU parent company, it is likely that the EU parent company will be required to prepare a consolidated sustainability report that complies with the ESRSs.  

This consolidated sustainability report of the EU parent should include the activities of the Irish subsidiary. It is likely the Irish company will be required to report sustainability information to its parent for inclusion in the consolidated sustainability report.  

Such an Irish subsidiary, included in the consolidated sustainability report of an EU parent that complies with the ESRSs, will likely be able to avail of an exemption from preparing its own sustainability report, unless it has debt or equity listed on an EU regulated market. This will be a welcome relief for such companies.

On the other hand, in the case of a large company that is a subsidiary of a non-EU parent company, the non-EU parent company is very unlikely to be preparing a consolidated sustainability report that includes the Irish company and complies with the ESRSs. 

The large subsidiary company will, therefore, be required to prepare its own sustainability report and comply with the ESRSs in this report.  

If this large subsidiary of a non-EU parent company has its own subsidiaries, its sustainability report will be a consolidated report for the group of companies it controls.  
It is important to understand that the exemption regime for preparing consolidated financial statements differs from the exemption regime for preparing consolidated sustainability reports.  

In Ireland, I expect we will see many intermediate parent companies that have never prepared consolidated financial statements – such as intermediate holding companies that are ultimately subsidiaries of parents in the UK or US – being required to prepare consolidated sustainability reports that comply with the ESRSs when the CSRD becomes effective.  

The preparation of a sustainability report that complies with the ESRSs is a significant challenge for a single entity, a bigger challenge for a group of companies and, arguably, an even bigger challenge for an intermediate parent company that has previously never prepared consolidated financial statements, and which does not have an established system or procedures of gathering information for consolidation purposes.

Independent exemption regime

The exemption regime for companies with respect to preparing a sustainability report that complies with the ESRSs operates independently of the exemption regime for preparing consolidated financial statements.  

This appears to be a conscious policy decision made by the EU in developing the CSRD and has been acknowledged in paragraph 26 of the preamble to the CSRD which states:

“It should be specified, however, that the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. An undertaking can therefore be exempted from consolidated financial reporting requirements but not from consolidated sustainability reporting requirements where its ultimate parent undertaking prepares consolidated financial statements and consolidated management reports in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country, but does not carry out consolidated sustainability reporting in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country.”

I believe this policy decision demonstrates the importance the EU has placed on sustainability reporting, and both its efforts to be at the forefront of top-quality sustainability reporting and expectation that sustainability reporting will play its part in helping users of annual reports evaluate the sustainability performance of EU companies. The policy decision is also an example of how the CSRD forms part of the European green deal.

What action should companies now take?

For some Irish companies, there won’t be a lot of complexity involved in understanding whether they are required to prepare a sustainability report that complies with the ESRSs.  

We know that an Irish company that has debt or equity listed on the main market of Euronext Dublin and more than 500 employees will have to prepare a sustainability report that complies with the ESRSs for financial years beginning on or after 1 January 2024.  

We also know that a large Irish private company that is a standalone company or the ultimate parent company of a large group will be required to prepare a sustainability report that complies with the ESRSs for financial years beginning on or after 1 January 2025.  

On the other hand, we also know that a small or medium Irish company will not be required to prepare a sustainability report that complies with the ESRSs while it remains small or medium. 

For other Irish companies, the impact of the CSRD is perhaps not as clear-cut. These companies should discuss the requirements of the CSRD with their professional advisors and auditors.  

If an Irish company is part of a large multinational group, that company should engage with other parts of the group to understand what work is being done in relation to the adoption of the CSRD and whether there will be exemptions available to the Irish company.