Corporate Sustainability Reporting Directive and Irish companies.

Which Irish companies will be subject to the Corporate Sustainability Reporting Directive?

At first glance, identifying Irish companies that need to comply with the Corporate Sustainability Reporting Directive (CSRD) might seem simple, but this is a complex task.

The CSRD, an initiative of the European Union (EU), was officially published in the EU's Official Journal in December 2022. This directive supersedes the previous Non-Financial Reporting Directive (NFRD). Under the NFRD in Ireland, the reporting requirements were applicable to larger companies, specifically those with over 500 employees, including public limited companies and those regulated by the Central Bank of Ireland.

The Irish Government is presently engaged in modifying the Companies Act 2014 to incorporate the CSRD's mandates. These changes must be integrated into Irish legislation by 6 July 2024, in accordance with the EU's directive.

Is CSR reporting mandatory in Ireland?

After its implementation in Ireland, the Corporate Sustainability Reporting Directive (CSRD) will mandate a considerable number of Irish companies to create a sustainability report, which must be verified by an independent third party.

This report must adhere to the 12 European Sustainability Reporting Standards (ESRSs) developed by the European Financial Reporting Advisory Group (EFRAG). These standards, which have been formally incorporated into EU legislation, serve as the equivalent of Generally Accepted Accounting Principles (GAAP) for sustainability reporting. They encompass general sustainability criteria and specific topics within the Environmental (E), Social (S), and Governance (G) domains.

The ESRSs extend over more than 350 pages. EFRAG estimates that complying with the over 80 disclosure requirements in the ESRSs involves addressing over 1,000 data points, both quantitative and qualitative

Who needs to comply with CSRD?

The European Union estimates that around 50,000 companies across the EU will need to adhere to the Corporate Sustainability Reporting Directive (CSRD) requirements. This figure is significantly higher than the approximately 11,000 companies currently complying with the Non-Financial Reporting Directive (NFRD), marking an almost fivefold increase.

However, considering Ireland's unique corporate landscape, which includes a substantial number of special purpose vehicles, a large number of regulated entities, and its popularity as a location for intermediate holding companies in multinational groups, the increase in Irish companies impacted by the CSRD could exceed this fivefold growth compared to those under the NFRD.

While the CSRD appears to make it straightforward to identify which Irish companies must prepare a sustainability report in compliance with the European Sustainability Reporting Standards (ESRSs), this may not be as simple as it seems. Beginning with financial years starting on or after 1 January 2025, large companies, as defined by the Companies Act 2014, are required to prepare a sustainability report following the ESRSs. Some of the larger listed companies will start reporting from 1 January 2024.

However, it's important to remember that initial impressions can be deceptive. Determining which entities need to prepare a sustainability report and comply with the ESRSs demands thorough analysis and consideration, especially regarding the type of entity and the influence of group structures on the sustainability report for subsidiary companies.

What are the relevant entities?

Currently, the Irish implementation of the Corporate Sustainability Reporting Directive (CSRD) is primarily focused on companies incorporated under the Companies Act 2014.

During a webinar in July, the Department of Enterprise, Trade and Employment (DETE) of Ireland expressed its intention to exempt credit unions and friendly societies from the CSRD obligations.

However, future trends in sustainability reporting and subsequent policy decisions by the government might lead to entities not governed by the Companies Act 2014, such as credit unions and friendly societies, being required to prepare sustainability reports in accordance with the European Sustainability Reporting Standards (ESRSs).

The DETE webinar also clarified that not-for-profit companies, which are often incorporated as companies limited by guarantee, are not currently within the scope of the CSRD. Nonetheless, these not-for-profit organizations might consider voluntarily adhering to the CSRD requirements.

What do Group Company structures consider?

For subsidiaries, understanding the broader group impact of the Corporate Sustainability Reporting Directive (CSRD) is crucial. The subsidiary's sustainability reporting requirements will be significantly influenced by whether its parent company is based within the EU or outside of it.

In cases where a large subsidiary falls under an EU-based parent company, it's probable that the parent will be responsible for preparing a consolidated sustainability report adhering to the European Sustainability Reporting Standards (ESRSs). This report should encompass the activities of the Irish subsidiary, and the subsidiary will likely need to provide sustainability information to its parent for inclusion in this consolidated report.

An Irish subsidiary included in the consolidated sustainability report of an EU parent complying with the ESRSs may be exempt from preparing its own sustainability report, unless it has debt or equity listed on an EU regulated market. This exemption will be a significant relief for such companies.

Conversely, for a large subsidiary of a non-EU parent company, the likelihood of the non-EU parent preparing a compliant consolidated sustainability report that includes the Irish subsidiary is low. Therefore, such a subsidiary will need to prepare its own sustainability report in line with the ESRSs. If this subsidiary has its own subsidiaries, its sustainability report will have to be a consolidated one for the group it controls.

It's important to note that the exemptions for preparing consolidated financial statements are different from those for consolidated sustainability reports. In Ireland, many intermediate parent companies, such as holding companies ultimately owned by entities in the UK or US, may find themselves needing to prepare consolidated sustainability reports compliant with the ESRSs once the CSRD takes effect.

The task of preparing a sustainability report that meets the ESRSs is challenging for a single entity and even more so for a group of companies. This challenge is amplified for an intermediate parent company that has never prepared consolidated financial statements before and lacks established systems or procedures for gathering information for consolidation.

What steps should companies take now?

For many Irish companies, determining the need to prepare a sustainability report in line with the European Sustainability Reporting Standards (ESRSs) may not be overly complex.

It is clear that any Irish company with debt or equity listed on the main market of Euronext Dublin and employing more than 500 people will be required to prepare a sustainability report compliant with the ESRSs for financial years starting on or after 1 January 2024.

Likewise, a large Irish private company, whether it is a standalone entity or the ultimate parent of a large group, will need to prepare a sustainability report in accordance with the ESRSs for financial years beginning on or after 1 January 2025.

Conversely, small or medium-sized Irish companies are not obliged to prepare a sustainability report that meets the ESRSs as long as they remain within these size categories.

However, for other Irish companies, the implications of the CSRD might not be as straightforward. These companies should seek guidance from their professional advisors and auditors regarding the CSRD's requirements.

If an Irish company is part of a larger multinational group, it should coordinate with other parts of the group to understand the group's approach to adopting the CSRD and to ascertain if there are any exemptions applicable to the Irish subsidiary.

What happens if you don't comply with CSRD?

Non-compliance with the Corporate Sustainability Reporting Directive (CSRD) can lead to several consequences for companies operating within the European Union. The specific penalties and repercussions vary depending on the member state's implementation of the directive into national law, as enforcement is typically handled at the national level. However, common consequences of non-compliance may include:

1. Financial Penalties: Many EU member states impose fines or monetary penalties on companies that fail to comply with reporting requirements.

2. Legal Actions: Companies might face legal proceedings, which could lead to further financial implications and legal costs.

3. Reputational Damage: Failure to comply can result in reputational harm, as stakeholders, including investors, customers, and the public, may view non-compliance as a lack of commitment to sustainability and good governance practices.

4. Impact on Investor Relations: Investors increasingly factor in ESG (Environmental, Social, and Governance) criteria in their investment decisions. Non-compliance with CSRD could make a company less attractive to investors focused on sustainable practices.

5. Operational Restrictions: In some cases, non-compliance might lead to restrictions on operations, especially if regulatory compliance is a precondition for certain business activities or market access.

6. Increased Scrutiny: Non-compliant companies might be subject to increased scrutiny from regulators and other authorities, leading to more frequent audits and checks.

7. Market Access Limitations: In some sectors, non-compliance with sustainability reporting might limit a company’s ability to access certain markets or participate in specific business opportunities, especially those requiring demonstrable ESG compliance.