Jul 86 min read

What does the CSRD mean for UK companies?

The Corporate Sustainability Reporting Directive (CSRD) represents a significant regulatory shift that will impact thousands of non-EU companies that operate in the EU market, including many based in the UK.

Given the complexities of CSRD reporting requirements and scope of reporting obligations, it is important for third-country companies to determine as soon as possible the extent to which they are in scope of the requirements.

Key points

UK companies should review their organisational structure and identify which of their EU registered entities meet the reporting thresholds set by CSRD.
The regulatory obligation sits with a company’s lowest EU registered entities, or EU based holding companies that meet the CSRD’s reporting thresholds.
Depending on how the subsidiary holdings are structured, EU-registered holding companies may be required to report on all their subsidiaries if, in aggregate, they surpass the reporting thresholds. This may mean non-EU subsidiaries are included.
UK companies may have to report at group-level for periods beginning on or after 1 January 2028. Given a UK parent company with EU subsidiaries above the reporting threshold would effectively be required to produce two CSRD reports, at parent and holding company level, non-EU companies should consider whether it would be best to voluntarily produce a single full group-wide report against full reporting requirements to avoid this extra reporting burden.

What is the CSRD?

The CSRD aims to create harmonised EU corporate sustainable reporting standards, which should help ensure that the investment community has access to comparable information on companies’ sustainability risks, opportunities, and impacts. The full regulation requires extensive disclosures about how sustainability issues affect the business, and how the business itself impacts on a range of sustainability issues related to people and the environment. Reporting is largely dependent on the material topics a company has identified through its double materiality assessment.

The CSRD requires that sustainability statements are subject to a limited assurance opinion, later rising to a reasonable opinion. Reporting will be required to be included in a dedicated section of the entity’s management report and identified as the “Sustainability Statement”. Non-EU parents who choose to prepare a consolidated disclosure for CSRD have the option to provide disclosures as part of their consolidated sustainability reporting.

Some key implications of CSRD for companies flow from these:

How disclosing your company's detailed comparable sustainability statistics is going to be perceived by stakeholders against peers.
Whether your company can meet forward-looking (e.g., strategy and targets) disclosures for its key exposures, which have been derived via a sound materiality assessment.
That your sustainability data records, systems and process have sufficient control to pass assurance.

CSRD's applicability

The CSRD has a phased-in approach. The important dates for UK headquartered companies with EU registered or listed subsidiaries are FY2025 where EU subsidiaries considered large will be in scope for reporting on an individual entity basis, and FY2028 where EU subsidiaries that are part of a group with large EU operations. See timelines below:

* In scope EU entities, EU holding companies or artificially consolidated EU parent

** Option to opt-out until 2028

*** Yet to be published

How can the EU impose regulation on UK companies?

In summary, the CSRD places the onus for reporting on the relevant EU subsidiary or branch which falls in scope. Those entities are obligated to disclose on CSRD or indicate where disclosures can be found in parent company reports. Accordingly, the applicable subsidiary will be required to coordinate with their parent company to ensure comprehensive and accurate reporting can be found somewhere within the corporate structure. A parent company’s failure to provide the required information on behalf of its EU subsidiary would mean that its subsidiary would be liable for any penalties imposed.

Penalties for non-compliance are as yet undefined and will depend on how individual member states transpose the CSRD into their national law. Penalties for a breach of the NFRD (CSRD’s predecessor legislation) varied significantly across jurisdictions and included criminal and administrative penalties.

If I am a UK company with EU subsidiaries – must each of our EU subsidiaries produce their own sustainability statement?

Although in principle each EU subsidiary that meets the threshold criteria will have a separate reporting obligation, there are three key exemptions to all EU entities reporting their own individual sustainability statements. These are summarised below:

EU holding level
1. This would entail the EU holding company publishing a consolidated management report accounting for all its applicable subsidiaries (including any non-EU subsidiaries). Under this option, individual subsidiaries would not be required to make separate reports.
Non-EU parent
1. If a non-EU parent publishes a consolidated management report including all its EU and non-EU subsidiaries, the individual subsidiaries will not be required to make separate reports.
Artificial consolidation
1. A temporary exemption (until 2030) is available for EU subsidiaries in scope of CSRD with a non-EU parent company, whereby the companies artificially consolidate all the EU subsidiaries in scope, with the largest EU subsidiary by turnover being responsible for preparing and publishing the a sustainability statement, thereby exempting individual subsidiaries from making separate reports.

Note that any ‘large’ companies that have debt or equity securities listed on an EU-regulated market must report separately and are not eligible for a reporting exemption.

Companies should review the applicability of the various reporting obligations with their legal advisors.

What will the UK ultimate parent company need to report?

UK companies that meet the group-level threshold above will need to produce a sustainability statement in 2029 for the period beginning on or after 1 January 2028.

At present the definitive guide as to what third-country entities in scope of CSRD will need to disclose in their group-wide sustainability statement is unclear. We expect the non-EU dedicated standards to cover the same environmental, social, and governance topics and a focus on impact materiality as the full reporting standards, but we assume that they will be somewhat simplified with a reduced number of data points.

The European Commission was expected to adopt the non-EU dedicated standards for third-country companies by 30 June 2024, but this has since been postponed to 30 June 2026. This will mean affected companies will have less time to determine their reporting requirements and collect the required information. Although many non-EU parent companies will be inclined to wait for the release of the non-EU standards, it is advisable to begin working as soon as possible to prepare for the eventual disclosure deadline by referencing the existing full ESRS requirements.

Note that group-level company reporting will be in addition to the full CSRD reporting requirements for any EU entity/entities. As such, and in the interests of aligning all global reporting obligations, a non-EU company might be well advised to voluntarily choose to produce a single group sustainability statement, in accordance with the full EU reporting standards. Once group level reporting is in place, the relevant EU subsidiary or EU holding group in scope of CSRD would be able to refer to this reporting and exempt itself from its particular reporting obligations.

We expect that there is a high likelihood of equivalence being established between the ISSB standards and CSRD. The full implications for UK companies may become clearer once the UK government finalises its intention to apply ISSB reporting on a mandatory basis to certain UK companies.

Conclusion

UK companies with operations in the EU should seek confirmation from their legal advisors to map out which of their entities will fall under the scope of CSRD. Given that by 2028 a UK parent company with EU subsidiaries above the reporting threshold would effectively be required to publish multiple overlapping CSRD compliant sustainability statements, it will be important for such entities to consider whether to voluntarily produce a full group-wide report to reduce the complexity of their reporting burden.

How CEN can help

Compliance with the CSRD requirements is an extensive task that should not be delayed. For a proven process and precise guidance on how to navigate the CSRD requirements, please contact our CEN consultancy team. We currently work with a number of clients on CSRD and can work with you to develop a comprehensive plan to ensure your compliance and leverage this for strategic business advantage.

We bring the required technical, financial, sustainability and organisational expertise to help integrate the management of material sustainability topics in your corporate strategy and to ensure reporting is aligned to CSRD requirements. Our service includes:

Double materiality assessment determining impacts, risks and opportunities and the scope of reporting, including financial and impact materiality
Gap analysis to European Sustainability Reporting Standards (ESRS), covering two general and 10 topic area standards
TCFD, scope 3 emissions reporting and net zero transition planning aligned to limiting global warming to 1.5c
Risk assessment and target development, including mandatory disclosures for non-climate related environmental exposures
Support for developing and collating qualitative disclosures and financial-grade ESG metrics, in preparation for third-party assurance
Alignment to the EU Taxonomy as the framework for economic activities to be classified as sustainable
Structuring risk-based reporting and writing sustainability reports to Governance, Strategy, Risk Management, Metrics & Targets structure
Aligning report disclosures for mandatory electronic tagging