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Sustainability now: What draft ESRS-40a mean for non-EU groups · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC's national office.
• 0:10
  SPEAKER_00: Hello, I'm Heather Horn, PWC's U.S.
• 0:12
  SPEAKER_00: sustainability technical leader, and welcome back to PWC's Accounting Podcast.
• 0:18
  SPEAKER_00: This is Sustainability Now.
• 0:20
  SPEAKER_00: Today we're focusing on an important development for multinational groups with operations in the EU.
• 0:25
  SPEAKER_00: FREG has released exposure drafts of the European Sustainability Reporting Standards for certain non-EU groups, which is a huge mouthful, also known as ESRS 40A, and why the 40A, we'll explain.
• 0:37
  SPEAKER_00: These standards are designed specifically for non-EU groups that have significant activities in the EU, and they represent an important next step in the implementation of the corporate sustainability reporting directive.
• 0:48
  SPEAKER_00: In today's episode, we'll discuss what's in the exposure drafts, who could be effective, and what companies should be thinking about during the consultation period.
• 0:56
  SPEAKER_00: Joining me for this conversation, I'm happy to welcome back to the podcast Diana Stoltzfitz, a national office partner and co-chair of our global environmental technical working group.
• 1:06
  SPEAKER_00: So, Diana, welcome back.
• 1:07
  SPEAKER_00: Thanks so much for having me, Heather.
• 1:09
  SPEAKER_00: All right, so Diana, we have a lot to talk about today.
• 1:11
  SPEAKER_00: And I think it would be great to just kick things off to talk about where these ESTRS 40As fit into the broader landscape.
• 1:17
  SPEAKER_00: And just as a reminder, I most recently met with Katie DeKeiser and Katie Wiggs to talk about the simplified ESRS that were issued at the beginning of July.
• 1:25
  SPEAKER_00: And then we saw these come next.
• 1:27
  SPEAKER_00: But what can you share with us?
• 1:28
  SPEAKER_01: So the Corporate Sustainability Reporting Directive, or CSRD, that we've talked about a number of times, that had a couple of different components to it.
• 1:35
  SPEAKER_01: One was reporting requirements for EU entities.
• 1:39
  SPEAKER_01: And then another component, which was part of the accounting directive, paragraph 40A, which is where we're getting these standards from, required certain groups of non-EU headquartered companies to do sustainability reporting if they met certain conditions.
• 1:53
  SPEAKER_01: And so these standards were required to be developed by the European Commission for those companies that are non-EU groups.
• 2:02
  SPEAKER_01: So those standards are specific to it.
• 2:04
  SPEAKER_01: So the thing that we've seen this month, as you just mentioned, was that FRAG, so the European Commission asks FRAG to provide technical advice.
• 2:11
  SPEAKER_01: They do that in the form of draft standards.
• 2:14
  SPEAKER_01: This is one of the first steps in the process where they're actually putting out standards for public comment.
• 2:19
  SPEAKER_01: And so that's the ESRS 40A, going back to the accounting directive, that's the connection.
• 2:24
  SPEAKER_01: And so right now there is a public comment period going on.
• 2:28
  SPEAKER_01: FRAG is also doing a number of other outreach activities.
• 2:31
  SPEAKER_01: They're holding webinars, they're reaching out to specific stakeholders, they'll do some field testing.
• 2:36
  SPEAKER_01: And then once they get that information back, they will update the standards and then deliver those to the European Commission in the form of technical advice.
• 2:44
  SPEAKER_00: Okay, perfect, Diana.
• 2:45
  SPEAKER_00: Thank you.
• 2:46
  SPEAKER_00: So then if I'm a listener, what companies would need to report under these new ESRS 40A?
• 2:52
  SPEAKER_01: Right.
• 2:53
  SPEAKER_01: So if you're a non-EU group, there's two criteria that you need to look to.
• 2:58
  SPEAKER_01: So the first criteria is if you have 450 million euro in revenue generated in the EU in the previous two financial years, and you have a branch or subsidiary that has over 200 million of euro generated in the past year.
• 3:13
  SPEAKER_01: So a couple of different numbers, a couple of different years that you're looking at.
• 3:17
  SPEAKER_01: And then if you do meet those criteria, non-EU groups are going to begin reporting in 2029 on 2028 information.
• 3:25
  SPEAKER_00: So, Dan, I think one thing that's really interesting is that these ESRS-40A aren't the only option for companies that are scoped in under this scoping in the CSRD.
• 3:37
  SPEAKER_00: So what are the alternatives?
• 3:39
  SPEAKER_01: Yeah, I think that's a really great point, Heather, is they could report, if you're a non-EU group, you could report using the ESRS-40A.
• 3:46
  SPEAKER_01: You could also report using full ESRS or the revised ESRS that we just saw come through the delegated act in July.
• 3:53
  SPEAKER_01: Or there is also another option in the standard that isn't really quite available yet.
• 3:56
  SPEAKER_01: But if the European Commission had designated another framework as an equivalent framework, then they would be able to report under that.
• 4:04
  SPEAKER_01: I think one thing that's really important to note for these non-EU groups is thinking about what's creating the reporting obligation.
• 4:12
  SPEAKER_01: Because if the non-EU group has a subsidiary in the EU and that subsidiary on its own has a reporting obligation, then if that subsidiary wants to take the parent exemption and use the non-EU group reporting, they would need to make sure that that's using the full ESRS.
• 4:30
  SPEAKER_01: So that group report would not be able to be prepared under ESRS 40A if that subsidiary was trying to take advantage of the exemption.
• 4:37
  SPEAKER_01: So I think that's something that's really important to think about as companies or thinking about what's creating the obligations.
• 4:42
  SPEAKER_00: Yeah, I think that's definitely important and something that we see a lot of clients considering right now is just lining that all up.
• 4:48
  SPEAKER_00: So if we think about these different options, then we really only have two technically, because since there aren't any equivalent standards right now, then it would be either the full ESRS, and again, that's something depending on your other obligations, we see companies considering, or these ESRS 48.
• 5:05
  SPEAKER_00: Right.
• 5:06
  SPEAKER_00: Okay.
• 5:06
  SPEAKER_00: And so I guess one of the key things then is what, like at a very high level, how would you compare these with the ESRS, um, the ESRs as we call them 2026, or the ones that were issued earlier in July?
• 5:19
  SPEAKER_01: Yeah, and I think that's a great thing that FRAG did is they started with the ESRS 2026 when they created the ESRS 40A.
• 5:28
  SPEAKER_01: So when companies are thinking about the structure, the content, familiarity with the standards, if a company has been looking at the previous ESRS 2026 or even really a previous version of those, that's the basis for the ESRS 40A.
• 5:42
  SPEAKER_01: So I think that's a was a good starting point for FRAG to make it easier for companies to understand what the reporting obligations might look like.
• 5:48
  SPEAKER_00: I agree.
• 5:49
  SPEAKER_00: I think though there's a very important difference from a materiality perspective.
• 5:53
  SPEAKER_00: And that's actually where we see the most differences between the ESRS 2026 and the 40A.
• 5:59
  SPEAKER_00: So, what can you share about materiality?
• 6:00
  SPEAKER_01: Yeah, so if companies are thinking about it under ESRS 2026, companies are required to report under the double materiality.
• 6:09
  SPEAKER_01: So they need to think about materiality from two perspectives: an impact perspective.
• 6:13
  SPEAKER_01: So thinking about how the company impacts people in the environment, and then also thinking about how sustainability-related risks and opportunities impact the company.
• 6:23
  SPEAKER_01: Also think about that people call it financial materiality as well.
• 6:27
  SPEAKER_01: So that's under the full ESRS.
• 6:29
  SPEAKER_01: When you're thinking about ESRS 40A, that only requires companies to report their impacts.
• 6:35
  SPEAKER_01: So companies are not required to report their sustainability-related risks and opportunities.
• 6:40
  SPEAKER_01: So when you look at the standards, any disclosures that are related to risks and opportunities, resilience, scenario analysis, anticipated financial effects, all of those have been removed from the ESRS 40A.
• 6:54
  SPEAKER_01: I think one thing that's important is when we think about a company doing its materiality assessment, a lot of times we say, or the standards talk about starting with impact materiality, because a lot of times impacts drive risks and opportunities.
• 7:07
  SPEAKER_01: And one thing that the standards do make clear is even if an impact has results in risks and opportunities, that impact is still supposed to be reported.
• 7:16
  SPEAKER_01: So an example could be if you think about a company has an oil spill and that has a negative impact on people in the environment, they would need to report that.
• 7:25
  SPEAKER_01: That might also create risks and opportunities and that they might have to replace their infrastructure.
• 7:29
  SPEAKER_01: So they might have to make capital investments.
• 7:31
  SPEAKER_01: There might be remediation costs.
• 7:33
  SPEAKER_01: There could also be potentially lawsuits related to that, many other things, right?
• 7:38
  SPEAKER_01: And so that could create risks and opportunities.
• 7:40
  SPEAKER_01: So the company would be required to provide the disclosures and related disclosures related to that impact, but would not necessarily be required to report around those risks and opportunities.
• 7:48
  SPEAKER_00: Yeah.
• 7:49
  SPEAKER_00: And I think Dan, and one of the questions that I've gotten at least is why impacts only?
• 7:53
  SPEAKER_00: And I think it's a key point that was actually what's included in the um CSRD was that this would be limited to impacts.
• 8:00
  SPEAKER_00: And I think it's really because it's trying to take the effect on uh the EU.
• 8:07
  SPEAKER_00: Right.
• 8:07
  SPEAKER_00: And so the risks and opportunities from that point of view aren't as important if you look at it through that lens, not to say that they're not as important.
• 8:15
  SPEAKER_01: But I think it's really thinking about okay, Europe is creating this reporting obligation for entities outside.
• 8:22
  SPEAKER_01: So why is it important to Europe?
• 8:24
  SPEAKER_01: Well, it's important to Europe because it potentially is having negative or positive impacts on Europeans, people who live in the EU.
• 8:31
  SPEAKER_00: Yeah.
• 8:31
  SPEAKER_00: I think that's important as well.
• 8:33
  SPEAKER_00: So then, Diana, other than impacts, then, or maybe even including this difference between impacts, risks, and opportunities, what are some of the biggest differences that we're seeing between the frameworks?
• 8:45
  SPEAKER_01: Yeah, I think one of the things that's really interesting that they introduced as well, and this maybe gets to the point that we were just talking about, is allowing what they're called calling the mixed approach, or for entities to be able to report certain impacts, either on a topic level, a subtopic level, or a group of impacts.
• 9:04
  SPEAKER_01: And those would be isolated to EU-related impacts.
• 9:08
  SPEAKER_01: So impacts that the company has specifically on the EU.
• 9:12
  SPEAKER_01: And how they they talk about those EU-related impacts are related to activities in the EU or products or services that are specifically sold into the EU.
• 9:23
  SPEAKER_01: And so they would have to be able to, you know, specifically identify that.
• 9:29
  SPEAKER_01: Like you could say that these activities are just related to the EU or these products and services are related to the EU.
• 9:34
  SPEAKER_01: And then if a company is able to do that, they could report on that level.
• 9:37
  SPEAKER_01: I think one thing that's important to note is that climate has to be reported globally.
• 9:42
  SPEAKER_01: There's no option to report that on, you know, a more disaggregate or more granular level.
• 9:49
  SPEAKER_00: Yeah, and I think that's an important point because I think the idea when they did that is that climate is a global problem.
• 9:56
  SPEAKER_00: And so that you can't isolate it to the EU.
• 9:58
  SPEAKER_00: I do think, and we'll get into this a little, but some of the feedback then is like, well, are some of these other issues also global?
• 10:05
  SPEAKER_00: So human rights and some of the other ones.
• 10:07
  SPEAKER_00: And so that's some of the questions that we see in the questionnaire.
• 10:11
  SPEAKER_00: But if we take a step back, then I think it's interesting to tie to the point we were making earlier about the fact that CSRD is impacts only, because the EU is trying to understand the impact on the EU itself.
• 10:24
  SPEAKER_00: And so I think this mixed approach is intended to meet that objective.
• 10:30
  SPEAKER_00: Um, I understand it's something the European Commission asks FRAG to include in here.
• 10:35
  SPEAKER_00: I do think if you look at the basis for conclusions, it's an area that there was a lot of discussion among FREG members.
• 10:41
  SPEAKER_00: And I also think it can be challenging.
• 10:45
  SPEAKER_00: So, what are some of the challenges that you would say?
• 10:47
  SPEAKER_00: And I may have a few to add.
• 10:49
  SPEAKER_01: So sure.
• 10:50
  SPEAKER_01: Yeah, I think when we think about this, I mean, trying to disaggregate your operations and really being able to say that these specific products and services are, you know, just EU related or these activities are just EU related.
• 11:03
  SPEAKER_01: I think when we think about companies, they may not be managing their business in that way.
• 11:08
  SPEAKER_01: They may not be structured in that way.
• 11:10
  SPEAKER_01: Do they have the data, the processes?
• 11:12
  SPEAKER_01: Are they collecting it that way?
• 11:13
  SPEAKER_01: Another concept that's brought into the standards is are you actually managing your business that way?
• 11:19
  SPEAKER_01: To me, I think about it, and this isn't in the standards, this is just in my mind how I think about it, is thinking too about when we think about like segment reporting and you think about the CODM and like what information is that decision maker actually getting and are they actually using that to make decisions?
• 11:35
  SPEAKER_01: And I think that, you know, there's some sort of similarities.
• 11:38
  SPEAKER_01: FRAG has some things, you know, that I've kind of touched on where they're thinking about is it separately managed and that type of thing.
• 11:44
  SPEAKER_01: But I think the other challenge, not only like can you even identify EU-specific impacts, is also, and maybe to explain it a little bit better, this impacts could be global, as we talked about for climate.
• 11:58
  SPEAKER_01: It can be on a topic level.
• 11:59
  SPEAKER_01: So you could say, okay, all my social topics, I'm gonna report all of those at that, at on the EU level or on a global level.
• 12:07
  SPEAKER_01: So you basically have this choice for everything else, and it can be at the topic, subtopic, or even a group of impacts.
• 12:13
  SPEAKER_01: And so, you know, thinking about if an entity is making a bunch of different choices, like groups of impacts, these are gonna be global, these are gonna be just EU-related impacts.
• 12:23
  SPEAKER_01: I think there's questions too around the usability of that information, the understandability.
• 12:28
  SPEAKER_01: And so I think to your point, there was a lot of questions that FRAG asked around the mixed approach specific to, you know, a lot of these questions.
• 12:38
  SPEAKER_01: And again, they did maintain um the concept of fair presentation in the standards as well.
• 12:45
  SPEAKER_01: And so thinking about how does that fit in with all this as well.
• 12:48
  SPEAKER_00: Yes, you anticipate my question.
• 12:49
  SPEAKER_00: But before I get to that one, let me ask you one other question or maybe make one other comment.
• 12:53
  SPEAKER_00: So, one of the things I think is really interesting, and we've talked about this a bit, is if you think about the mixed approach, depending on how you organize your business, this actually could make a lot of sense for you.
• 13:04
  SPEAKER_00: Because let's say you have a very separate European business and maybe everything is contained within Europe.
• 13:10
  SPEAKER_00: I think if you have a very integrated business, this could become very difficult.
• 13:13
  SPEAKER_00: And some of the challenge, you know, that we've talked about is then, well, what if you're getting, for example, materials from a sister subsidiary?
• 13:21
  SPEAKER_00: Now is that your supply chain?
• 13:22
  SPEAKER_00: And I think that becomes complicated.
• 13:25
  SPEAKER_00: But I guess from a user perspective, what strikes me is this idea that you could have some global, some topic specific, some subtopic specific.
• 13:35
  SPEAKER_00: Like, how do you think about that then, even if I'm a preparer, like how my users are going to be able to understand this information?
• 13:44
  SPEAKER_01: Yeah, I think that's one of the challenges.
• 13:46
  SPEAKER_01: I think they've tried to mitigate that by disclosure.
• 13:50
  SPEAKER_01: So you have to very provide very transparent disclosure around for each topic or subtopic, even disclosure requirements as to how, what level you're reporting on.
• 14:01
  SPEAKER_01: And so I think they've tried to solve some of that.
• 14:03
  SPEAKER_01: But I agree with you.
• 14:04
  SPEAKER_01: I think it could be really challenging if you're a user to understand is this global, is this EU only?
• 14:10
  SPEAKER_01: And to the point you just made around the sister subsidiary, when you think about supply chains, I think that's really hard to think about too.
• 14:16
  SPEAKER_01: So you have an EU-related impact, but that EU entity relies on suppliers, products, raw materials that could be in a country outside the EU.
• 14:27
  SPEAKER_01: So those are brought in.
• 14:28
  SPEAKER_01: So I it could be challenging, I think, to really understand what an EU-related impact really means when you start thinking about the value chain and other subsidiary relationships and that type of thing.
• 14:39
  SPEAKER_00: Yeah, and then I think, Diana, the related thing, and not to overly dwell on this, but I think it's one of the most important questions in the consultation, is that I think then, at least the reaction I know I had when I looked at it, it's like, well, why didn't they make this at the topic level?
• 14:53
  SPEAKER_00: Or why didn't they just make it all or nothing?
• 14:56
  SPEAKER_00: But that has challenged us as well because depending on how you manage your business.
• 14:59
  SPEAKER_00: So how do you think about that then in terms of that doesn't seem fair, I'll use that word either.
• 15:06
  SPEAKER_01: Right.
• 15:06
  SPEAKER_01: No, I think it's really hard to think about how you design approach when you're trying to introduce this concept of EU-related impacts.
• 15:14
  SPEAKER_01: I guess in my mind, FRAG put in this kind of ultimate flexibility, right, by allowing these different options.
• 15:23
  SPEAKER_01: They've asked a lot of questions in the consultation around this, like will companies even use this?
• 15:29
  SPEAKER_01: What's the user perspective?
• 15:31
  SPEAKER_01: What's investors' perspective, understandability?
• 15:35
  SPEAKER_01: Do they think just the disclosures that they've proposed are sufficient to mitigate some of the risks that we've talked about?
• 15:41
  SPEAKER_01: And so I think hopefully when the feedback comes through, and also they are doing some sort of field tests too.
• 15:48
  SPEAKER_01: So I think once you start seeing, is this even practical to do?
• 15:51
  SPEAKER_01: And I think to your point, it's probably going to depend a lot on businesses, how they're actually organized, like very facts and circumstances specific, is like, can you even isolate your impact to the EU?
• 16:03
  SPEAKER_01: And do you have the data to even report that?
• 16:06
  SPEAKER_01: Because if you don't, then you can't report on on an EU impact-only base.
• 16:09
  SPEAKER_01: Then you have to go to the global basis.
• 16:11
  SPEAKER_00: Yeah, and I guess I we can move on from this, but I do think there are criteria that you have to meet.
• 16:16
  SPEAKER_00: You mentioned those earlier, but I think that's a very important point because we've been sort of talking about this.
• 16:21
  SPEAKER_00: And so it's a free choice.
• 16:22
  SPEAKER_00: Yes.
• 16:23
  SPEAKER_00: It's not fully a free choice because you it's a free choice once you figure out if you meet the criteria for reporting this way.
• 16:29
  SPEAKER_01: And maybe just one more point on that.
• 16:30
  SPEAKER_01: That is another point in the consultation.
• 16:32
  SPEAKER_01: Are those the right criteria?
• 16:33
  SPEAKER_01: Which is a big question.
• 16:34
  SPEAKER_00: Yeah, I agree.
• 16:35
  SPEAKER_00: So let me go back to where you were.
• 16:36
  SPEAKER_00: Like I said, you anticipated my question.
• 16:38
  SPEAKER_00: So you mentioned fair presentation, and I do think this is interesting because there's a lot of debate when the um ESRS 2026 were going through their consultation process about fair presentation.
• 16:50
  SPEAKER_00: What does it mean?
• 16:50
  SPEAKER_00: Does it make sense for this type of reporting?
• 16:52
  SPEAKER_00: How do you do uh fair presentation for impacts?
• 16:55
  SPEAKER_00: Yes.
• 16:55
  SPEAKER_00: And now we see fair presentation carried over uh into these ESRS 40A.
• 17:01
  SPEAKER_00: And so that raises two questions for me.
• 17:03
  SPEAKER_00: One is, okay, how does fair presentation work for impacts only?
• 17:07
  SPEAKER_00: Yeah.
• 17:07
  SPEAKER_00: And then how does fair presentation work if you're doing all these, let's call it patchwork of your business, some global, some topic, some sub-subtopic, is that really still achieving the objectives of fair presentation?
• 17:20
  SPEAKER_00: So I know you do not have all the answers on this, but any uh initial perspectives would be helpful.
• 17:26
  SPEAKER_01: Yeah, I I think maybe starting from the impact perspective, I think a company presenting fairly its impacts, maybe putting aside for a second the mixed approach.
• 17:37
  SPEAKER_01: I mean, I think if a company has sufficient disclosures and they're talking about how they impact people in the environment and they've identified their material, I think there's a a way to achieve fair presentation with that as long as it's clear it's impacts only and those types of things.
• 17:49
  SPEAKER_01: I agree with you on that.
• 17:51
  SPEAKER_01: Yeah.
• 17:51
  SPEAKER_01: And so then I think moving to the mixed approach, I think I still have a lot of questions around the mixed approach and how it can work.
• 17:57
  SPEAKER_01: I I struggle with the point that you made around companies having, especially like groups of impacts or, you know, picking and choosing some topics, some subtopics that they're on different levels.
• 18:09
  SPEAKER_01: I just struggle with how that can be effectively communicated to a user of the statement.
• 18:15
  SPEAKER_01: So I think hopefully, like going through the field tests and maybe seeing some examples of maybe what disclosure might look like or what a report might look like when you have some of these different variations.
• 18:25
  SPEAKER_01: But I know even talking with companies, still very early days, obviously the consultation process is open, but we've had some conversations with companies that are interested in that.
• 18:33
  SPEAKER_01: I think they see the challenges too.
• 18:35
  SPEAKER_01: And when you think about, you know, within companies wanting to make sure that they have the processing controls and governance in place around regulatory reporting, I think thinking about are they going to be able to have that data process control at this level, I think there's a lot of questions.
• 18:53
  SPEAKER_01: So I think still very open.
• 18:55
  SPEAKER_01: So I think if people have thoughts, definitely engaging in the consultation process is really critical.
• 19:00
  SPEAKER_00: All right, let me move to then another topic, which is also mentioned the consultation, it's interoperability.
• 19:05
  SPEAKER_00: And this one's been really interesting because I think potentially a bit less of a focus for US companies, although many of them also have in um some of their uh subsidiaries ISSB reporting.
• 19:17
  SPEAKER_00: But we are hearing a lot from our colleagues in other countries where uh their entities are required to report in accordance with ISSB.
• 19:24
  SPEAKER_00: What does this look like?
• 19:25
  SPEAKER_00: How's this going to work?
• 19:26
  SPEAKER_00: And I would say put aside the mixed approach, interoperability is probably their number one question.
• 19:32
  SPEAKER_00: So, what is the consultation saying from an interoperability point of view?
• 19:36
  SPEAKER_01: Yeah, and I think to your point, I think this is really focused at companies that have some other jurisdictional reporting requirement.
• 19:42
  SPEAKER_01: To your point, I think, you know, the IFRS sustainability disclosure standards is probably the number one other framework that's going to be required.
• 19:49
  SPEAKER_01: So, what FRAC has done in the ESRS 40A is allowed companies kind of expanded incorporation by reference.
• 19:56
  SPEAKER_01: So if a company has another report, they're allowed to report to incorporate by reference or point to those other disclosures that would be in their ISSB report, let's say, and then not have to repeat those disclosures again in their ESRS 40A.
• 20:13
  SPEAKER_01: So really expanding that, even having a provision within the standards that says that they understand that a substantial portion of the report might be contained in this outside document.
• 20:23
  SPEAKER_01: There are still the requirements around making sure they have the appropriate level of assurance.
• 20:27
  SPEAKER_01: And, you know, there's a list of other things to be able to meet the incorporation by reference.
• 20:33
  SPEAKER_01: And so there are open questions like is this the right way to address interoperability?
• 20:39
  SPEAKER_01: Or, you know, are there other suggestions that that companies might have?
• 20:43
  SPEAKER_00: So, Diana, the fundamental question I have, and I know materiality is very near into your TO, is that the ESRS 40A talk about impacts.
• 20:53
  SPEAKER_00: The ISSB standards talk about risks and opportunities.
• 20:57
  SPEAKER_00: Obviously, you gave examples early on in this discussion that there are impacts that lead to risks and opportunities.
• 21:04
  SPEAKER_00: So, in perhaps those cases, then the ISSB report, the report prepared in accordance with the ISSB standards would incorporate that.
• 21:11
  SPEAKER_00: But do we really think a substantial portion?
• 21:14
  SPEAKER_00: And again, I know it's just your point of view.
• 21:16
  SPEAKER_00: You have not done an exhaustive study, but I know it's something you've thought about quite a lot from a materiality perspective.
• 21:22
  SPEAKER_01: I mean, I think it's important to understand that, right?
• 21:25
  SPEAKER_01: That like impact and risks and opportunities are related, but they are different, and there's different disclosure requirements under each.
• 21:30
  SPEAKER_01: So I don't know that a substantial portion would be, but I do think that when you think about, and we didn't necessarily touch on this, was the ESRS 40A, as they're organized the same as the ESRS, they have they still have the four pillars of strategy, risk management, governance.
• 21:49
  SPEAKER_01: And so when you think about their organization and metrics and targets, and then you think about how the ISSB standards are organized in that way too, I think maybe some of those base disclosures they're could be overlap between those two.
• 22:02
  SPEAKER_00: Yeah, I actually think that's a really great point.
• 22:04
  SPEAKER_00: And it's funny because as you know, we're working on updating uh the SRG right now, our sustainability reporting guide.
• 22:11
  SPEAKER_00: And the section I'm actually working on right now is talking about the um those fundamental parts of this the statements and what's included in ESRS two and how that aligns with IFRSS one.
• 22:22
  SPEAKER_00: And you're right there, I mean we talk about this in our current SRG six.
• 22:26
  SPEAKER_00: There is a huge amount of overlap.
• 22:28
  SPEAKER_00: So I think that's a good point.
• 22:30
  SPEAKER_00: And so what I think what you're seeing is maybe from a metrics, potentially targets point of view, it could be different, but a lot of the other that you would anticipate would at least be similar.
• 22:41
  SPEAKER_00: Yes.
• 22:42
  SPEAKER_00: Maybe some differences from a strategy or risk management perspective.
• 22:45
  SPEAKER_00: All right so definitely something I think for companies to think about when they have these other reporting obligations.
• 22:51
  SPEAKER_00: Another maybe the last one that I'd want to call out from the consultation is relates to, and I'll quote this, references to EU laws and regulations and their feasibility.
• 23:01
  SPEAKER_00: And so this one even some of our EU colleagues had questions about, but really what this is asking is that the original ESRS 2026 and then ESRS 40A, they talk about European laws and regulations and then they talk about how this is potentially going to apply if you have operations in other places, which would be the expectation for a non-EU headquartered company.
• 23:23
  SPEAKER_00: And so what exactly is this aspect of the consultation and what would you focus on?
• 23:28
  SPEAKER_01: Yeah I think this is as you said the base of the ESRS and ESRS 40A was obviously initially written ESRS for EU entities.
• 23:39
  SPEAKER_01: And so a lot of the times when they're referencing regulations whether you know social concepts, environmental concepts, those are based in EU regulations.
• 23:50
  SPEAKER_01: And so if you're an EU entity you might have a lot of familiar you might be reporting under those.
• 23:54
  SPEAKER_01: If you're a non-EU entity you may not and your own jurisdiction your own country might have different regulations related to those environmental or social topics.
• 24:04
  SPEAKER_01: And so you might be reporting under those and so you know you kind of have this reconciliation that you need to do between your own data, you know, and that whether that's a regulatory framework or not and then what these concepts are in the EU regulations.
• 24:16
  SPEAKER_01: And so what this disclosure was trying to say is we understand that that the EU laws could be a reference point for like an explanation of the concept but that doesn't mean necessarily that the entity has to comply with those regulations or report you know with the same information.
• 24:34
  SPEAKER_01: And so they may be using approximations or estimations to kind of get at a similar concept to what's in the EU law regulation.
• 24:40
  SPEAKER_01: So one allowing that and then two talking about what disclosures then are required you know because if you're a reporter and you may have familiar or you're a user of the statement, you might have familiarity with whatever that EU law regulation is, you know, you want to understand what are the significant differences or assumptions that a company might be using in that context.
• 25:00
  SPEAKER_00: It's really interesting I was just reflecting that this is one place I think it's gonna be important for companies to make sure they're they're looking at ESRS 2026 or actually these standards for the regulations that are referenced because I was most recently looking at the new ESRS E2, which is about pollution and it's much less prescriptive in terms of how you report on your substances of concern and substances of very high concern.
• 25:25
  SPEAKER_00: And you still have to do the reporting and it still references EU law and regulation but then you take like a managerial approach.
• 25:31
  SPEAKER_00: So maybe some of those changes will be helpful where it's not so much report in accordance with this particular law.
• 25:39
  SPEAKER_00: But I have not done an analysis.
• 25:41
  SPEAKER_00: So I would encourage companies that are impacted by this to definitely look at the areas that are you know potentially important to you to make sure what's there is going to work.
• 25:50
  SPEAKER_00: Right, agreed okay so then taking a step back what comes next?
• 25:55
  SPEAKER_00: You mentioned I think we talked up front there's a consultation period uh we talked about those questionnaires so what can you share on both of those?
• 26:02
  SPEAKER_01: Yeah so there's a 100 day public consultation period we're we're still early in it so it ends October 31st so companies definitely still have time to respond.
• 26:11
  SPEAKER_01: The consultation I think as we've touched on a number of times there's a number of different questions in it a few required questions but a lot of optional questions.
• 26:19
  SPEAKER_01: So don't feel like you have to answer the whole thing even though it can look a little overwhelming if you print it out.
• 26:24
  SPEAKER_01: But it is really focused on the mixed approach.
• 26:27
  SPEAKER_01: I think that's the mixed approach and the impacts only impacts only a little bit less because that was part of the CSRD.
• 26:33
  SPEAKER_01: So that was something that came through the actual directive but the mixed approach again was from the European Commission.
• 26:40
  SPEAKER_01: But there's a lot of questions around that and around some of the things that we've touched on as well you know how it's going to work I won't go back through that but you know the things that we've touched on.
• 26:49
  SPEAKER_01: So I think it's important for people to get engaged and respond to the questionnaire.
• 26:54
  SPEAKER_00: Yeah.
• 26:54
  SPEAKER_00: And so Diana one thing that you reminded me of is that I think one of the things we've even talked about is that I know within PWC there's still some points of view on some of the data points that are in ESRS 2026 where maybe they're not exactly what you know we would have optimally hoped for or maybe we've gotten feedback from companies and that is not the point of this consultation.
• 27:17
  SPEAKER_01: No, right.
• 27:17
  SPEAKER_01: I mean they're starting with the ESRS 2026 as we talked about at the beginning and it's really focused on the the changes that they've made from that not making changes to the base ESRS 2026 but the 40A and that really brings in this impacts only which again was from the directive.
• 27:34
  SPEAKER_01: So that really leaves kind of the mixed approach and then the couple other things that we've touched on too interoperability is this the right approach to address interoperability and this EU regulations is this the right way to address that or there are other things that people think about.
• 27:46
  SPEAKER_00: Yeah and I guess then if we think they left the right impacts, if there's any risks and opportunities they feel like are left, but I feel like most of that appears pretty straightforward, but we haven't finished our analysis.
• 27:57
  SPEAKER_01: Yeah and maybe just to wrap up so 100 day consultation period they'll make any adjustments they'll deliver what's called technical advice or draft standards to the European Commission.
• 28:06
  SPEAKER_01: The European Commission will go through their own process similar to what they did for ESRS 2026, where we'll see the ESRS 40A go out for public comment.
• 28:16
  SPEAKER_01: They'll get any feedback making any adjustments and they will ultimately are planning to have a delegated act in mid-2027.
• 28:24
  SPEAKER_01: So maybe one's one date I missed was that um the technical advice from FREG to the European Commission is anticipated to be in January of 2027 and then standards through the delegated act mid-2027.
• 28:38
  SPEAKER_00: And then just a reminder that then companies that choose to report under these standards that are in scope and choose to report under these standards, it will begin January, well assuming your calendar year January 1, 2028 reporting 2029.
• 28:50
  SPEAKER_00: That's correct.
• 28:51
  SPEAKER_00: Okay so given that timeline which seems like a long way away and not all at the same time what do you recommend that companies do now?
• 28:59
  SPEAKER_01: Well I think one thing is maybe going back to the beginning when we talked about scoping one, understanding if you're in scope and then also understanding do you have subsidiaries in scope, this subsidiary exemption?
• 29:10
  SPEAKER_01: So because that's going to really drive are you going to use full ESRS or are you going to use ESRS 40A?
• 29:15
  SPEAKER_01: And then also just thinking when you're engaging with your stakeholders and others, what reporting do you think would be helpful to them?
• 29:22
  SPEAKER_01: You know, if you're gonna feel like you might have to create other types of reports to meet others, you know, does it make sense to use the full ESRS or does it make sense to use the ESRS 40A depending on what your reporting needs are.
• 29:34
  SPEAKER_01: And then I think you know once you've made that decision then you can start thinking about your DM your materiality assessment and then thinking about you know kind of those planning stages.
• 29:43
  SPEAKER_00: Yeah and obviously responding to the consultation to the extent that you know that you want to weigh in and I think you made a really good point about the consultation.
• 29:51
  SPEAKER_00: The first few questions are required right but then you're gonna get into it and the the rest of them I think none of I think once you get through the first few they're not and so like don't give up if you just see that if you start to look at the questionnaire.
• 30:06
  SPEAKER_01: And maybe just one more plug for the questionnaire.
• 30:08
  SPEAKER_01: There are some that are specifically targeted towards preparers or targeted towards investors.
• 30:13
  SPEAKER_01: So they are looking for certain feedback from certain groups on certain points.
• 30:17
  SPEAKER_01: So I think you know if you have a strong feeling you might want to look as to what group you're in and maybe those questions might be really relevant for you.
• 30:23
  SPEAKER_00: So Diana I'm just trying to put myself in a preparer's shoes.
• 30:27
  SPEAKER_00: So let's assume I'm non-EU headquartered and I'm scoped in because of subsidiaries not because of the branch although I know we actually think there are going to be quite a few companies that are scoped in because they have subsidiaries above the subsidiary threshold even though those subsidiaries are not separate reporters because there's a a difference there.
• 30:48
  SPEAKER_00: But let's assume I have subsidiaries that are separate reporters.
• 30:51
  SPEAKER_00: These are likely to change I would say based on what we've seen before we don't know how much they're going to so is it a case I have to say well I've got I need to wait or can I really start to do my analysis now of should I do full, should I not do full?
• 31:06
  SPEAKER_01: I mean I think the one piece that I think is probably most at risk of changing is probably this mixed approach.
• 31:13
  SPEAKER_01: So I would think about you know do you think reporting impacts only or do you think reporting the more complete impacts, risks and opportunities, which path do you want to go down?
• 31:23
  SPEAKER_01: I think as we said the impacts only is part of the legislation so that can't really change.
• 31:29
  SPEAKER_01: So I think you're pretty safe and at least understanding that is still a really big difference between these two sets of standards.
• 31:35
  SPEAKER_01: So I think understanding that distinction and then thinking about which path makes sense.
• 31:39
  SPEAKER_01: I think probably going through starting thinking about preparing detailed disclosures, I would probably say you might want to to wait.
• 31:44
  SPEAKER_01: To wait.
• 31:45
  SPEAKER_00: Yeah although it is interesting because I'm just reflecting if I have subs that are in scope those subs are going to be subject to reporting starting January 1 2027 or January 1 2027 not 2028.
• 31:57
  SPEAKER_00: And so I probably do need to make my decision relatively soon.
• 32:01
  SPEAKER_01: If you're definitely gonna if you're gonna do the subsidiary exemption then you need to yes yes okay definitely a lot to think about any other final words wisdom I think just you know my favorite topic the materiality assessment and should have known so I think what you know if companies feel confident they're in scope and feel confident with what scope or which set of standards they're gonna apply.
• 32:23
  SPEAKER_01: I mean I don't think it's too early to start thinking about your materiality process whether that's the full DMA or your impact assessment and making sure that you're starting to engage with the relevant parties within your entity and thinking about what reporting might look like.
• 32:35
  SPEAKER_00: All right that's helpful and I definitely think there's a lot to absorb here.
• 32:38
  SPEAKER_00: So I highly recommend companies take a look at the in-depth that we issued because it does go through in more detail and it's sometimes easier I think when you can read it and then obviously talk to your PWC engagement team because they're going to be able to provide you some additional perspective.
• 32:52
  SPEAKER_00: So that would be my final words I would say all right well to our listeners thank you so much for joining us today I really appreciate it.
• 32:59
  SPEAKER_00: And if you do have more questions please look for the in-depth on viewpoint.pwc.com and also as I always remind you please sign up for our newsletter andor uh sign up for our podcast so that you get all of our news and information on a recurring basis.
• 33:14
  SPEAKER_00: Thanks again for listening.