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Sustainability now: Determining required reporting · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PWC's national office.
• 0:07
  SPEAKER_01: Hello, I'm Heather Horn, the host of Sustainability Now, and thanks so much for joining us today.
• 0:13
  SPEAKER_01: One note before we jump into today's episode.
• 0:16
  SPEAKER_01: We recorded this prior to February 26, 2025, when the European Commission released its first omnibus package of proposals to quote, provide substantial simplification in the field of sustainability and EU investment programs.
• 0:32
  SPEAKER_01: End quote.
• 0:33
  SPEAKER_01: For more on these proposals, please look for an upcoming episode.
• 0:36
  SPEAKER_01: And we've also linked a number of resources in the show notes.
• 0:40
  SPEAKER_01: In the meantime, these proposals are drafted and subject to change through the adoption process.
• 0:45
  SPEAKER_01: So in today's episode, we'll continue to focus on the currently enacted requirements.
• 0:50
  SPEAKER_01: With that, let's jump into the recording.
• 0:54
  SPEAKER_01: Hello, I'm Heather Horn, PWC US's sustainability technical leader.
• 0:59
  SPEAKER_01: And I'm so happy to welcome you to the next episode in our nine-part series addressing the sustainability landscape today.
• 1:07
  SPEAKER_01: And for you, those of you who are regular listeners, you may realize that this is the first time we've actually also done video podcasts.
• 1:14
  SPEAKER_01: So if you're listening to this on one of your apps, I definitely encourage you to also check out the video, or I think I encourage you to check out the video.
• 1:21
  SPEAKER_01: So for this episode, we're really starting to get into the process of reporting, starting with the applicability.
• 1:28
  SPEAKER_01: And really, what does that mean?
• 1:29
  SPEAKER_01: Well, it's the scope of reporting.
• 1:31
  SPEAKER_01: We started saying applicability, but really it just means do the standards or which standards apply to you and where.
• 1:40
  SPEAKER_01: For this episode, I'm happy to welcome Valerie Weeman, who is another partner in our national office focusing on sustainability and in particular, I think all things regulatory and related to applicability, among other things.
• 1:55
  SPEAKER_01: So Val is a fountain of knowledge, and I'm looking forward to chatting with you.
• 1:58
  SPEAKER_00: It's just really long to fit in one title.
• 2:00
  SPEAKER_01: Exactly.
• 2:00
  SPEAKER_01: So fountain of knowledge is maybe what you should put as your new title, Val.
• 2:04
  SPEAKER_01: So anyway, thank you for joining me and let's get going.
• 2:07
  SPEAKER_01: And I think probably the place to start is I mentioned this is really the first step in the process.
• 2:13
  SPEAKER_01: But it's interesting because this is either the third or fourth episode.
• 2:16
  SPEAKER_01: So how could it be the third or fourth episode?
• 2:18
  SPEAKER_01: And then it's still the first step.
• 2:20
  SPEAKER_01: But can you really explain why this is where we think companies need to sort of enter the reporting process?
• 2:27
  SPEAKER_00: So I think we talk about it as the first step because it really is where it gets real for a lot of companies.
• 2:32
  SPEAKER_00: This is the point at which you can hear conceptually about all of the frameworks in a lot of different territories and jurisdictions.
• 2:39
  SPEAKER_00: And where it gets real is when you look at all of the frameworks, and this is a migration from voluntary reporting to mandatory reporting.
• 2:47
  SPEAKER_00: So now that it's required, each of the frameworks come with its own specific criteria.
• 2:52
  SPEAKER_00: And they differ from framework to framework pretty significantly.
• 2:55
  SPEAKER_00: And they can be complex to navigate.
• 2:57
  SPEAKER_00: Some require legal interpretation.
• 2:59
  SPEAKER_00: So this is really the point at which we say, you know, you need a plan, you need to know where you're in scope.
• 3:05
  SPEAKER_00: And if you're a multinational company, you could be in scope in a whole bunch of different jurisdictions.
• 3:09
  SPEAKER_00: So making sure that you have that full population is really important.
• 3:13
  SPEAKER_00: Now we tend to talk about the, you know, sort of a priority, and you'll hear that repeat in this whole series, is the European Corporate Sustainability Reporting Directive, or the CSRD, as well as the standards coming from the International Sustainability Standards Board, because those are the ones that have really the greatest extraterritorial or arguably the biggest global reach.
• 3:33
  SPEAKER_00: There are two other frameworks that we talk about frequently, would be California.
• 3:36
  SPEAKER_00: We're going to do a separate episode on that one.
• 3:38
  SPEAKER_00: Actually, you and I are doing that one.
• 3:40
  SPEAKER_00: And then we also talk about in the past, we've had a focus on the SEC climate rules.
• 3:45
  SPEAKER_00: That I think most of our listeners are probably aware.
• 3:48
  SPEAKER_00: We're subject to a number of legal challenges, is subject to a voluntary stay.
• 3:52
  SPEAKER_00: And there have been some uh views expressed by the commissioners that they're probably not going to pursue that.
• 3:57
  SPEAKER_00: So based on that, we're probably not we're not going to touch on that one today.
• 4:01
  SPEAKER_01: Yeah, and I think key point there is California does also have extraterritorial, and it's definitely something we've been talking to our EU colleagues about.
• 4:08
  SPEAKER_01: We spent a lot of time talking to them about uh the EU CSRD, as well as obviously our colleagues in Asia Pack and otherwise.
• 4:15
  SPEAKER_01: Um but we will cover all of that in the California episode.
• 4:19
  SPEAKER_01: Maybe we should call that the state episode because we will give a few other previews, and I think we're lucky enough to have Diana and Martin back for that one as well.
• 4:27
  SPEAKER_01: So, Val, I know you mentioned CSRD in one of our earlier episodes.
• 4:32
  SPEAKER_01: We were talking about CSRD, we talked about ESRS.
• 4:35
  SPEAKER_01: It's a lot of jargon.
• 4:36
  SPEAKER_01: And I think for people who are into this, they're gonna say, well, okay, yes, but it's obvious what the difference is.
• 4:43
  SPEAKER_01: But I think it's always helpful to level set.
• 4:45
  SPEAKER_01: So can you just distinguish why we are talking about CSRD here instead of ESRS?
• 4:51
  SPEAKER_01: Because we're gonna be talking about ESRS in the rest of the episodes.
• 4:54
  SPEAKER_00: Okay, I can I can try that for you.
• 4:56
  SPEAKER_00: Um, so a CSRD standpoint, that is the directive.
• 5:00
  SPEAKER_00: That was the sort of the high-level overarching kind of goal or objective from the European Commission.
• 5:07
  SPEAKER_00: Um, that will then be transposed, and we'll talk about this a little bit later, into individual member states.
• 5:12
  SPEAKER_00: That is the broad framework of disclosures that they envision.
• 5:16
  SPEAKER_00: Now, how those get enacted and the physical process of day-to-day, what does a company need to disclose?
• 5:23
  SPEAKER_00: That's based on the European Sustainability Reporting Standards or the ESRS, which were originally developed by FREG and now were adopted by the European Commission.
• 5:33
  SPEAKER_00: So the actual disclosures that companies are going to make are going to be based on the requirements that are delineated in the ESRS that use that as its sort of guiding principle what's in the CSRD.
• 5:45
  SPEAKER_01: Yeah, and I mean I think it's easy for people to understand because if you think the IFRS accounting standards or you think about US GAAP, they don't really say, oh, what companies need to apply them.
• 5:56
  SPEAKER_01: That's coming from someplace else.
• 5:58
  SPEAKER_01: And so in this case, CSRD is telling us which companies are in scope or to which companies is this applicable.
• 6:07
  SPEAKER_01: So with that said then, broadly, well, and I guess maybe I should have set this up.
• 6:11
  SPEAKER_01: I think given that this is not sort of interrelated, but there's separate applicability for CSRD, and we'll get into the applicability for the ISSB, which is a bit different.
• 6:23
  SPEAKER_01: Let's go through CSRD first, and then we'll spend a bit of time at the end on ISSB.
• 6:28
  SPEAKER_01: So with that said then, can you give us some broad overview of how we think about scoping from a CSRD perspective?
• 6:36
  SPEAKER_00: Okay, it starts very fundamentally with the CSRD refers to an undertaking.
• 6:41
  SPEAKER_00: Um, if you say our publications, we refer to entity.
• 6:43
  SPEAKER_01: Um, and undertaking when we're talking about the law.
• 6:46
  SPEAKER_00: True, when it's because that's directly the word that they use.
• 6:48
  SPEAKER_00: Yes.
• 6:49
  SPEAKER_00: Uh and an undertaking is um basically an entity that has limited liability.
• 6:54
  SPEAKER_00: It includes partnerships.
• 6:55
  SPEAKER_00: So it's a defined term within the CSRD to whom it applies.
• 7:00
  SPEAKER_00: Once you know that you're an undertaking, um, you need to evaluate then whether you meet the size criteria.
• 7:07
  SPEAKER_00: So are you a large undertaking?
• 7:09
  SPEAKER_00: Now, large, we've talked about before, is sort of a misnomer.
• 7:13
  SPEAKER_00: It's not very large when you think about the general thresholds, but you can be large individually, or you can be considered to be large based on being a parent of a large group, meaning that an entity or an undertaking with its consolidated subsidiaries can also be considered large.
• 7:29
  SPEAKER_00: Now, large is defined as meeting two of three criteria that are delineated.
• 7:34
  SPEAKER_00: Um, those three criteria are having a balance sheet of at least 25 million euro, a uh revenue or turnover is the word that they use of 50 million euro, and an average number of employees of 250.
• 7:47
  SPEAKER_00: So if you meet two of those three criteria on two successive balance sheet dates, you're determined to be a large entity and you would be in scope.
• 7:56
  SPEAKER_01: All right.
• 7:56
  SPEAKER_01: And I mean there's definitely more to it, but maybe I should step us back for a moment because I think something is very important for people to understand is if they're paying any attention at all, they'll be aware that there's proposed changes to CRD.
• 8:10
  SPEAKER_01: There's this European competitiveness compass that's come out that's talked about uh potential changes.
• 8:18
  SPEAKER_01: One, or actually, that's just giving an overview of what they want to accomplish.
• 8:22
  SPEAKER_01: But in that document, they actually talk about this idea of a small mid-cap company.
• 8:27
  SPEAKER_01: So, just for our listeners' benefit, definitely want them to know that in today's episode, we're focusing on the law as it stands.
• 8:34
  SPEAKER_01: There's a whole other process for what may happen with the proposed legislation that's coming out, supposed to be the end of February.
• 8:41
  SPEAKER_01: Now we understand March.
• 8:43
  SPEAKER_01: Uh so anyway, I think it's very important that potentially today's criteria.
• 8:48
  SPEAKER_01: Yeah, because again, what we're hearing is that the the large is actually going to become larger.
• 8:54
  SPEAKER_01: So more to come on that.
• 8:56
  SPEAKER_01: All right.
• 8:56
  SPEAKER_01: So then once we've said that, one of the key things our listeners may have heard when you mentioned that is that it's measured in Euros.
• 9:05
  SPEAKER_01: And so then that immediately leads to questions.
• 9:07
  SPEAKER_01: Well, do I convert to local currency?
• 9:09
  SPEAKER_01: Do I do this or do I do that?
• 9:11
  SPEAKER_01: It's definitely Euros.
• 9:12
  SPEAKER_01: So you need to convert your local currency to euro.
• 9:15
  SPEAKER_01: But do you need to follow a particular reporting framework, such as the IFRS accounting standards, or do I use my whatever gap I'm using?
• 9:24
  SPEAKER_01: How does that work?
• 9:25
  SPEAKER_00: You can use local gap.
• 9:26
  SPEAKER_00: Um, you're generally gonna follow what's in your statutory financial reporting.
• 9:30
  SPEAKER_00: So generally, you're gonna look at turnover as it's determined in your financial statements.
• 9:34
  SPEAKER_00: Now, that said, there are some nuances to the term turnover or revenue as it applies to credit institutions or insurance undertakings.
• 9:42
  SPEAKER_00: Um, so those are specific industry definitions, but in general, you're gonna look to your financial statements regardless of the basis on which those are prepared.
• 9:49
  SPEAKER_01: Okay, and I think um one of the points we're gonna talk about here is listed entities, but I think maybe we should have rewound a little bit to talk about timing here because we jumped straight into large, but actually the first wave of reporters, there's additional requirements.
• 10:05
  SPEAKER_01: Maybe we jumped into large because you're thinking, well, the first wave of reporters already knows, but I think for completeness, maybe let's let's go back to that and say who was in the first wave, then we get to large, then we get to this next group.
• 10:17
  SPEAKER_00: That's totally fine.
• 10:18
  SPEAKER_00: So listed entities are in scope.
• 10:21
  SPEAKER_00: Um, so if you're a large listed entity, and a listed entity is someone who has debt or equity that is admitted for trading on an EU-regulated market.
• 10:31
  SPEAKER_00: Um, so there are a couple of nuances to that.
• 10:33
  SPEAKER_00: You have to be admitted to trading.
• 10:34
  SPEAKER_00: It's not just basically consider it as an issuer on that market, um, as opposed to just having your stock traded on that market.
• 10:41
  SPEAKER_00: And it needs to be an EU-regulated market.
• 10:44
  SPEAKER_00: Um, not all of the markets in Europe are.
• 10:46
  SPEAKER_00: So if you are a large issuer, an EU-regulated market with more than 500 employees, you are already required based on 2024 information or for year fiscal years beginning after January 1st, 24, for a calendar year company filing in 2025.
• 11:01
  SPEAKER_00: So right now we'll see some filings on that first wave of issuers.
• 11:04
  SPEAKER_01: Right.
• 11:05
  SPEAKER_01: And then you talked about just large entities.
• 11:07
  SPEAKER_01: So these are non-issuers, so non-listed.
• 11:10
  SPEAKER_01: So those are in wave two, and that is reporting in on 2025 information in 2026 under the current rules.
• 11:18
  SPEAKER_01: Correct.
• 11:19
  SPEAKER_01: Okay, so then now let's get to this next category.
• 11:22
  SPEAKER_00: One thing on large issuers is that applies both to EU and non-EU.
• 11:26
  SPEAKER_00: So anyone who's listed on those EU regulated markets.
• 11:29
  SPEAKER_00: From a small and medium-sized sorry, so you mean large listed is either.
• 11:34
  SPEAKER_00: Correct.
• 11:34
  SPEAKER_00: Yes.
• 11:35
  SPEAKER_00: Can be either an EU or a non-EU undertaking.
• 11:38
  SPEAKER_00: Um, from a small and medium-sized entity, obviously by definition, they're not large.
• 11:42
  SPEAKER_00: Um, but if they are issuers, again, if they have securities that are admitted to trading on an EU regulated market, they are also in scope of the CSRD.
• 11:51
  SPEAKER_01: All right.
• 11:51
  SPEAKER_01: And then I think maybe the other category that we always talk about are non-EU entities.
• 11:58
  SPEAKER_01: So when you originally talked about the large entities, those could include subsidiary, you EU subsidiaries of non-EU entities.
• 12:08
  SPEAKER_01: But in addition, the actual non-EU entity itself, in some cases, can be in scope and some reporting is required.
• 12:16
  SPEAKER_01: So can you explain that category?
• 12:18
  SPEAKER_00: Yeah.
• 12:18
  SPEAKER_00: So a non-EU entity can be in scope of the CSRD if it has consolidated net turnover or revenue that exceeds 150 million euro in each of the last two fiscal years.
• 12:31
  SPEAKER_00: That's the first criteria.
• 12:33
  SPEAKER_00: The second criteria is if it has at least one large entity or large group that's in scope of the CSRD, or if it has a small or medium-sized listed entity, or if there is at least one branch that generates more than 40 million in net turnover in the EU in the preceding fiscal year.
• 12:55
  SPEAKER_00: So that's where it gets tricky because you don't actually need to have a subsidiary in the EU in order to be caught in the scope if you're a non-EU entity.
• 13:02
  SPEAKER_01: All right, that's helpful.
• 13:03
  SPEAKER_01: And so then now sort of we understand the landscape.
• 13:09
  SPEAKER_01: Then I know, you know, one, then the next question always is, well, we always talk about ESRS.
• 13:14
  SPEAKER_01: So does that mean all of these entities apply ESRS?
• 13:17
  SPEAKER_01: They don't.
• 13:17
  SPEAKER_01: So what can you share on that?
• 13:18
  SPEAKER_00: Everyone is going to follow ESRS, but there are different versions or basically flavors of the ESRS.
• 13:24
  SPEAKER_00: Um, so first is the full ESRS.
• 13:26
  SPEAKER_00: We've talked about that.
• 13:27
  SPEAKER_00: That's the two cross-cutting standards and the 10 topical standards.
• 13:30
  SPEAKER_00: Um, those are the standards that you're going to apply if you're a large entity or a parent of a large group.
• 13:35
  SPEAKER_00: Um, that's again what we call full ESRS.
• 13:38
  SPEAKER_00: Then you have for the issuers who are small and medium-sized entities, they're going to follow what's referred to as simplified ESRS.
• 13:46
  SPEAKER_00: So basically a lighter version.
• 13:48
  SPEAKER_00: Those are currently in development.
• 13:50
  SPEAKER_00: And then the third category is for non-EU entities.
• 13:55
  SPEAKER_00: Um, those are the ones we're just talking about, um, if they have significant uh activity in the EU, they'll follow a sort of a third version that I think you refer to as N ESRS.
• 14:06
  SPEAKER_00: Yeah, non-European.
• 14:07
  SPEAKER_00: Non-European uh ESRS.
• 14:09
  SPEAKER_00: Uh, and those will differ in some regards from the full ESRS standards.
• 14:13
  SPEAKER_01: Yeah, I mean, I think key on that.
• 14:14
  SPEAKER_01: So there's middle category, right?
• 14:16
  SPEAKER_01: It was referred to as the L SME standards, in case people hear that.
• 14:19
  SPEAKER_01: There's the V SME standards, which are voluntary, which we definitely will not talk about more.
• 14:25
  SPEAKER_01: And then these N ESRSs, you know, what we've seen from the draft is that they what they did is they just took a subset of the ESRSs.
• 14:35
  SPEAKER_01: And because the non-EU entities were only required to report on impacts, so they basically took the impacts and put them into their own package, and including striking the other paragraphs and just saying not use.
• 14:47
  SPEAKER_01: And I personally think if I were a reporter, I'd be so happy with this because at least then I've already had to develop reporting, maybe for my subsidiary.
• 14:57
  SPEAKER_01: And so, you know, the interpretations, the QA's, all of those different things, you know, it will be one for one for the other.
• 15:04
  SPEAKER_00: That might be if they had created brand new standards.
• 15:07
  SPEAKER_01: Exactly, exactly.
• 15:08
  SPEAKER_01: Although, again, we don't know what's going to happen with all of this.
• 15:11
  SPEAKER_01: I think for our series, we'll be focused on ESRs, but it's important to have all this background.
• 15:16
  SPEAKER_01: So thank you for that.
• 15:17
  SPEAKER_01: All right.
• 15:17
  SPEAKER_01: So then the next question that always comes up is probably the biggest one I think that you've been dealing with is so let's take an entity structure.
• 15:26
  SPEAKER_01: And so, listeners, please try to visualize this.
• 15:29
  SPEAKER_01: So you have a little parent company that's a non-EU entity, and then you have some EU subsidiaries, some in scope, some aren't in scope.
• 15:37
  SPEAKER_01: For maybe this purpose, let's assume none of them are listed, just to simplify things a bit.
• 15:42
  SPEAKER_01: Um, but some of them are large.
• 15:43
  SPEAKER_01: So now, Val, if I'm responsible for all this reporting, what am I supposed to do?
• 15:48
  SPEAKER_01: And what are some of the considerations?
• 15:51
  SPEAKER_00: So definitely I've spent a lot of time looking at these organizational charts and they get very complex very quickly.
• 15:58
  SPEAKER_00: But so once you know which entities are individually in scope, you really need to look at that um the sort of the parent bracket, like your holding company structure, because there are two different alternatives that can make it easier on reporters.
• 16:11
  SPEAKER_00: So, first is that if you have a subsidiary that's in scope, it can claim an exemption if it's included in a full ESRS report at its parent level.
• 16:22
  SPEAKER_00: And that parent can be an EU or a non-EU entity.
• 16:25
  SPEAKER_00: Um, so that's going to save a lot of time when you think of all of these structures and subsidiaries on top subsidiaries.
• 16:30
  SPEAKER_00: Um, so that is an exemption that can be claimed.
• 16:33
  SPEAKER_00: There's some other criteria based on referring to the report that you are, the subsidiary has to refer to the parent's report where it's included.
• 16:40
  SPEAKER_00: Um, and again, it has to follow the full ESRS.
• 16:43
  SPEAKER_00: So that one is we see most often that companies are saving a lot on the number of reports they need to prepare based on that.
• 16:50
  SPEAKER_00: The other side is a limited uh term option.
• 16:53
  SPEAKER_00: It's called artificial consolidation.
• 16:55
  SPEAKER_00: So until 2030, companies can take individual in-scope entities.
• 17:00
  SPEAKER_00: A non-EU entity can take individual in-scope EU entities and kind of mush them together into a pretend legal entity.
• 17:08
  SPEAKER_00: Mush is a technical legal term.
• 17:09
  SPEAKER_00: All right, I like it.
• 17:10
  SPEAKER_00: I don't think it's in the CSRD, but uh we definitely I've seen that used.
• 17:14
  SPEAKER_00: Uh basically, you're going to take sister entities and combine them into a consolidated entity and kind of pretend that that's its own legal entity.
• 17:23
  SPEAKER_00: Now that reporting would be prepared for that consolidated group.
• 17:27
  SPEAKER_00: Um, and it's only available until 2030.
• 17:30
  SPEAKER_00: So after that, companies would need to find another alternative.
• 17:33
  SPEAKER_00: Uh, and that filing would be included in the subsidiary that has the highest turnover of that group in one of the last five years.
• 17:41
  SPEAKER_01: All right, so you have a bit of optionality then of which entity, which subsidiary has to file it?
• 17:47
  SPEAKER_01: Is that you do?
• 17:48
  SPEAKER_01: All right.
• 17:48
  SPEAKER_01: And then I know we don't want to get in too much detail here, but what are some of the requirements to take either of these exemptions?
• 17:55
  SPEAKER_01: So let's say I'm the entity, the sister company that's not filing in an artificial consolidation, or I'm the subsidiary and my parent is filing.
• 18:05
  SPEAKER_00: So there are some requirements.
• 18:06
  SPEAKER_00: So they can um they would be required to include in their filing a link to where they are included in their parent companies or the artificial consolidated entity.
• 18:16
  SPEAKER_00: Um so they can provide a link to the website or the filing that where the parent company is or where it will be filed.
• 18:23
  SPEAKER_00: Uh, there's also a requirement that the taxonomy information be included.
• 18:27
  SPEAKER_00: The parent has to be following full ESRS.
• 18:29
  SPEAKER_00: That's important.
• 18:30
  SPEAKER_00: So you can't, if you're following the non-EU standards, a subsidiary can't claim exemption based on that.
• 18:36
  SPEAKER_00: Um, but other than that, um, they are uh there may be some local territorial requirements as well.
• 18:42
  SPEAKER_00: So in some jurisdictions, they may have a requirement that the consolidated report be translated into the local language.
• 18:48
  SPEAKER_00: So that's where it's important to understand exactly what the requirements are in each country.
• 18:52
  SPEAKER_01: All right, so a few follow-up questions.
• 18:54
  SPEAKER_01: You reference filing there.
• 18:56
  SPEAKER_01: And I think this is something that again can become complicated quickly because the location of where these disclosures, the ESRSs, need to be made actually varies depending on the type of company.
• 19:07
  SPEAKER_01: So can you just give a bit of background on what you do if you're a non or if you're the EU entity and then what the differences might be if you're a non-EU entity?
• 19:17
  SPEAKER_00: So, from an EU perspective, your disclosures under the ESRS are going to be included in a separate section in the management report, um, sort of in a very loose term, think of it like the mDNA, sort of the description that accompanies the financial statements.
• 19:31
  SPEAKER_00: And that's an existing part of the statutory filing that companies are used to making.
• 19:35
  SPEAKER_00: So your report would be in the the CSRD standard uh disclosures would be included in the management report.
• 19:41
  SPEAKER_00: Now, if you're a non-EU entity, we used to get this question a lot: do I have to put it in my TED K?
• 19:46
  SPEAKER_00: Yes.
• 19:46
  SPEAKER_00: Do I have to create a management report?
• 19:48
  SPEAKER_00: Uh and the answer is no.
• 19:50
  SPEAKER_00: So in the provisions for the exemption, it says that they can be included in a non-EU entity's sustainability reporting.
• 19:57
  SPEAKER_00: So their corporate sustainability report, the CSR, uh, can include those references as well.
• 20:02
  SPEAKER_01: Yeah, and I think key point there, you reference the 10K.
• 20:04
  SPEAKER_01: So even though you don't have to put the full report in the 10K, you definitely need to consider if there's information that you're disclosing.
• 20:10
  SPEAKER_00: From a risk disclosure standpoint, you don't want inconsistencies in how you're disclosing material risks.
• 20:15
  SPEAKER_01: Exactly.
• 20:15
  SPEAKER_01: So I think that's a very important point.
• 20:17
  SPEAKER_01: And then a few more follow-up questions on that.
• 20:20
  SPEAKER_01: So often what we see questions around is that there's a lot, let's say again, in my imaginary corporate structure, I have my non-EU entity, but let's say under my non-EU entity, I have some operations in another part of the world, but then I have an EU holding company and all these nice little subsidiaries under that.
• 20:38
  SPEAKER_01: And that EU holding company doesn't create financial statements.
• 20:42
  SPEAKER_01: So then what happens?
• 20:44
  SPEAKER_00: So you're still required to file.
• 20:45
  SPEAKER_00: That's not an exemption.
• 20:46
  SPEAKER_00: We've gotten that question before.
• 20:47
  SPEAKER_00: Many times.
• 20:48
  SPEAKER_00: But the holding company itself technically does not need, well, definitely, does not need to create full financial statements for that entity.
• 20:57
  SPEAKER_00: So that's full stop.
• 20:58
  SPEAKER_00: They don't need full financial statements.
• 21:00
  SPEAKER_00: However, however, there's no words or whoever.
• 21:03
  SPEAKER_00: Um, from a first, from a uh when you're trying to identify your material risks, you need to have sufficient information about the numerical, um, sort of your total financial performance of that entity to determine what's material from a financial perspective.
• 21:17
  SPEAKER_00: Uh, there are also some disclosures within the ESRS that leverage numbers.
• 21:21
  SPEAKER_00: So, for example, intensity metrics on emissions based on unit of revenue.
• 21:25
  SPEAKER_00: That revenue that's required to be disclosed would be based on that hold co revenue.
• 21:30
  SPEAKER_00: So you don't need financial statements, but you will definitely need to create certain elements of financial reporting and uh totals that you need to prepare for that group.
• 21:38
  SPEAKER_01: All right.
• 21:39
  SPEAKER_01: And then another one I know we find quite interesting is that to take the exemptions, what happens if you are the subsidiary and you've met your timeline, you need to file your management report, but the entity that's going to include the report that for which you're going to take the exemption has not filed yet.
• 21:56
  SPEAKER_01: What do you do?
• 21:57
  SPEAKER_00: I kind of snuck in that you need a link to where the report.
• 22:00
  SPEAKER_00: Is or will be.
• 22:01
  SPEAKER_00: And in total transparency, you and I absolutely, when we first issued uh information on this, we said, well, obviously the parent has to file first in order to claim an exemption.
• 22:11
  SPEAKER_00: However, again, the famous however's, um, there was a European Commission FAQ that came out that said, hey, in this circumstance, what happens?
• 22:20
  SPEAKER_00: And what they said is that it's actually permissible for a subsidiary to provide a link to where the parent report will be filed.
• 22:28
  SPEAKER_00: Um, so from a timeline standpoint, uh, they can actually uh the subsidiary can take an exemption even if the parent report is not completed yet.
• 22:36
  SPEAKER_01: And then Val, how about any other questions that are sort of frequent that you're getting on uh either the exemptions or applicability?
• 22:47
  SPEAKER_00: I think the we've covered most of them.
• 22:50
  SPEAKER_00: A lot of it relates to uh pretty uh straightforward on whether you need to include the non-EU entities within the scope.
• 22:57
  SPEAKER_00: Yes, that's a good question.
• 22:58
  SPEAKER_00: Whether you can carve those out.
• 22:59
  SPEAKER_00: Uh and the answer is no.
• 23:00
  SPEAKER_00: Again, we're following basically your legal structure.
• 23:03
  SPEAKER_00: So in your example of a hold co, uh you would look at the entire consolidated hold co, uh, regardless of whether those subsidiaries are in the EU or non-EU.
• 23:11
  SPEAKER_01: Yes.
• 23:12
  SPEAKER_01: So to be clear, the answer to your first question is no, you cannot carve them out.
• 23:16
  SPEAKER_01: And your second question is yes, you need to include them.
• 23:18
  SPEAKER_01: Absolutely.
• 23:19
  SPEAKER_01: Yes.
• 23:19
  SPEAKER_01: All right, that's important and good to know.
• 23:21
  SPEAKER_01: And so you mentioned in when you were talking about the requirements for taking these exemptions, that maybe there's something in local law that would have incremental requirements or this local language or otherwise.
• 23:33
  SPEAKER_01: So, and you introduced this earlier, transposition.
• 23:36
  SPEAKER_01: So, this is something I think when we first started talking about CSRD, you know, it was just, oh, it will be transposed.
• 23:44
  SPEAKER_01: Obviously, that's not the case, but maybe first can you in all cases, but can you explain what we mean when we talk about transposition, where we are, what we expect?
• 23:55
  SPEAKER_00: Sure.
• 23:55
  SPEAKER_00: Um, so transposition is a process required because it is a directive.
• 24:00
  SPEAKER_00: So the corporate sustainability reporting directive was finalized in January of 2023.
• 24:05
  SPEAKER_00: What that did according to European Union law was establish an 18-month time period when countries were supposed to transpose it or basically adopt it into their local law.
• 24:16
  SPEAKER_00: So individual countries are not applying the broad top-level CSRD.
• 24:21
  SPEAKER_00: They're applying their country's transposition of the CSRD.
• 24:25
  SPEAKER_00: And before people get excited that, oh, well, maybe my country will reduce it or sort of mitigate some of the requirements, they're actually not allowed to make it easier.
• 24:35
  SPEAKER_00: They can make it harder.
• 24:36
  SPEAKER_00: And in some cases, they may put additional requirements on some of the exemptions.
• 24:41
  SPEAKER_00: Some we referred to the language, so they can add additional requirements, but they can't actually pull it back or make it easier.
• 24:47
  SPEAKER_00: So the CSRD is basically the floor.
• 24:49
  SPEAKER_00: Now, that transposition process, as I said, was supposed to be completed by July of 2024.
• 24:54
  SPEAKER_00: Not everybody exactly made the deadline.
• 24:57
  SPEAKER_00: Um, and that starts a process referred to as an infringement notice, uh, where the European Commission let the member states, and I think at the time there were over 10.
• 25:07
  SPEAKER_00: I think now we're down to less than eight.
• 25:09
  SPEAKER_00: Or eight, yeah.
• 25:10
  SPEAKER_00: Is there eight that have not transposed.
• 25:12
  SPEAKER_00: Um, so it starts a process where the European Commission lets them know that they should have transposed.
• 25:17
  SPEAKER_00: They had two months to respond.
• 25:18
  SPEAKER_00: That was as of November of 24.
• 25:21
  SPEAKER_00: Uh the next step would be for the uh European Commission to send them an official notice or official opinion saying you're delinquent for anyone who has not yet transposed.
• 25:30
  SPEAKER_00: Uh, and then if they still don't respond, that would get referred to the courts.
• 25:33
  SPEAKER_00: But now, all of that said, we are very hopeful that this will be resolved and all the countries will transpose by the end of 2025.
• 25:40
  SPEAKER_00: But it does create a bit of uncertainty, especially when we talked about those wave one filers.
• 25:45
  SPEAKER_00: So those issuers, if you were an issuer in, for example, the Netherlands, the Netherlands had not yet transposed the um the CSRD, in which case the CSRD's predecessor, which was the non-financial reporting directive for the NFRD, was still in effect.
• 26:01
  SPEAKER_00: And the NFRD doesn't require ESRS.
• 26:04
  SPEAKER_00: So it created this really limbo land of companies who were looking to uh prepare their disclosures, and then you know, it wasn't actually required in the territory in which they were in scope.
• 26:13
  SPEAKER_00: So it does create a bit of confusion.
• 26:15
  SPEAKER_00: Like I said, we're absolutely hopeful that by the end of the year, everyone will have transposed.
• 26:19
  SPEAKER_01: Yeah, and I think the key point there is I think for the most part, we're seeing companies just proceed, even though it's not required.
• 26:25
  SPEAKER_01: They're just going to complete.
• 26:26
  SPEAKER_00: You have to put in all that work in.
• 26:27
  SPEAKER_00: Yeah.
• 26:28
  SPEAKER_00: Like at the last minute to pull it back seems a bit of a waste.
• 26:30
  SPEAKER_00: So yeah, we are saying that.
• 26:31
  SPEAKER_01: And when you're looking to your peers or filing and otherwise, I do think I agree with you on this hopeful they'll transpose.
• 26:38
  SPEAKER_01: I think the omnibus regulation and what comes from that maybe will have some impact.
• 26:43
  SPEAKER_01: So I know a few of the countries at least have said they're waiting to see what they're doing.
• 26:47
  SPEAKER_01: Yeah, they're gonna wait and see.
• 26:49
  SPEAKER_01: But again, I think our message would be to anyone in wave two, even if you're in one of these countries that has not transposed, this is definitely not the time to stop because to your point, the expectation is they will transpose, they're required by law to transpose, there's this process.
• 27:04
  SPEAKER_01: And even with subsequent changes, that has to go through a different process.
• 27:08
  SPEAKER_01: Correct.
• 27:09
  SPEAKER_01: So definitely something to think about.
• 27:11
  SPEAKER_01: Now, we covered this, um, I would say, in a hodgepodge.
• 27:14
  SPEAKER_01: That's uh a word of another technical term.
• 27:16
  SPEAKER_01: Um, but I want to make sure just for our listeners that we go through it in a more step fashion.
• 27:23
  SPEAKER_01: So the the timeline for reporting, we talked about wave one, and so I'll do that one.
• 27:27
  SPEAKER_01: It's easy.
• 27:28
  SPEAKER_01: 2024 information reporting in 2025.
• 27:31
  SPEAKER_01: So those are the companies reporting now, and we've start to see lots of reports too.
• 27:35
  SPEAKER_00: Totally agree.
• 27:36
  SPEAKER_00: Um, just one caveat on that.
• 27:37
  SPEAKER_00: It's years beginning after January 1st, 2024.
• 27:40
  SPEAKER_00: So if you're an off-cycle year end, it may not technically apply.
• 27:42
  SPEAKER_00: So we're referring to calendar for ease of reference for calendar companies.
• 27:45
  SPEAKER_01: Yes, very good point on that.
• 27:47
  SPEAKER_01: So, and that's again the large listed entities are the the ones in scope of that.
• 27:53
  SPEAKER_01: Correct.
• 27:53
  SPEAKER_01: So then who's next?
• 27:54
  SPEAKER_00: So next would be all of the other large entities.
• 27:58
  SPEAKER_00: Um so they would be, and again, on a calendar basis, reporting in 26 on 25 information.
• 28:04
  SPEAKER_00: And then?
• 28:05
  SPEAKER_00: Uh and then you have, I guess in order would be your listed small and medium-sized entities.
• 28:10
  SPEAKER_00: Um, so they'd be reporting in 27 on 26, except that there is a transitional provision that allows them to take an elective two-year delay in that timing.
• 28:19
  SPEAKER_00: Um, I'm not sure how many will then file if they have permission to wait an extra two years.
• 28:24
  SPEAKER_00: And then the final group would be when we refer to those non-EU entities with significant European operations.
• 28:29
  SPEAKER_00: That's actually not until uh years beginning January 2028.
• 28:33
  SPEAKER_00: So in 29 on 28 information.
• 28:36
  SPEAKER_01: So, Val, that's a lot from ESRS.
• 28:38
  SPEAKER_01: Again, I think the biggest message we have here is for companies that are already in process of reporting, continue along your process, but definitely people should be paying attention to what we see coming out of the EU.
• 28:49
  SPEAKER_01: Hopefully, we'll see something in March related to this, these new developments on the omnibus regulation, the first to the omnibus.
• 28:56
  SPEAKER_01: But we also mentioned that we would talk about ISSB or the IFRS sustainability reporting standards.
• 29:02
  SPEAKER_01: Definitely completely different process.
• 29:04
  SPEAKER_01: So maybe taking a big step back, can you explain overall what the process is, and then we can talk a little bit about the progress of adoption worldwide?
• 29:12
  SPEAKER_00: Sure.
• 29:12
  SPEAKER_00: So the way the ISSB standards are adopted in an individual territory is the same way that they're be adopted, uh, the IFRS accounting standards are adopted.
• 29:22
  SPEAKER_00: So uh they're not broadly applicable once they're issued.
• 29:25
  SPEAKER_00: They need to actually be adopted by the individual territory.
• 29:28
  SPEAKER_00: And there are over 30 uh territories right now who have either already adopted them or who are in the process of adopting or have announced their intention to adopt them.
• 29:39
  SPEAKER_00: And in those territories, the added complexity here is a little bit that it can vary from uh country to country.
• 29:45
  SPEAKER_00: So uh in some territories, they are thinking of only adopting the climate-related standard.
• 29:51
  SPEAKER_00: Uh, in other territories, the ISSB standards may only apply to public entities.
• 29:55
  SPEAKER_00: So there is um the ability of each territory to make its own determination.
• 30:00
  SPEAKER_00: So that, you know, not to sort of give short shrift to the ISSB compared to the complexity of the ESRS, but it does require a company to understand in all of the territories what the rules are that have been adopted.
• 30:11
  SPEAKER_01: Yeah, and I think maybe looping back to where you started in the podcast where we're talking about the state requirements and then the SEC requirements that, you know, we don't expect to move forward now.
• 30:22
  SPEAKER_01: I think this is where it's just a great reminder for companies you really need to be paying attention to any jurisdiction where you have operations, understanding what the rules are because you have these EU regulations, you have the ISSB, you see different like Hong Kong, you know, China and what they're doing.
• 30:40
  SPEAKER_01: So there's a lot of different requirements that are coming out, as I said, California.
• 30:45
  SPEAKER_01: And so if I'm a company, I think thinking through compliance is probably one of the, you know, one of the difficult steps.
• 30:53
  SPEAKER_01: There's many more, but one of the difficult steps in this process.
• 30:56
  SPEAKER_00: And a lot of times they're working on this concurrently.
• 30:58
  SPEAKER_00: Um, so there are territories that have already adopted.
• 31:01
  SPEAKER_00: Um, there are um, I think Turkey is required in 25 on 24.
• 31:04
  SPEAKER_00: There are other countries that have adopted that are going to require in 26 on 25.
• 31:08
  SPEAKER_00: So you're really working on multiple fronts at the same time.
• 31:10
  SPEAKER_01: Yeah, and again, California will be the same thing in 26 on 25 information.
• 31:15
  SPEAKER_01: So a lot to think about.
• 31:16
  SPEAKER_01: So then, with all of that said, and we only skimmed the surface of some of the complexity related to the EU.
• 31:21
  SPEAKER_01: And then obviously, we talked about the fact that there's all different things you need to think about for uh ISSB.
• 31:28
  SPEAKER_01: So, with all that said, then what do you recommend?
• 31:31
  SPEAKER_01: Again, I know you're having a lot of these conversations with companies dealing with a lot of different types of structures.
• 31:37
  SPEAKER_01: What are you seeing as good practice?
• 31:39
  SPEAKER_01: And then what broad recommendations would you have?
• 31:42
  SPEAKER_00: I think coming way back to sort of the first question you asked is why is this the first step?
• 31:46
  SPEAKER_00: Because it's the first step, because it's the most important.
• 31:49
  SPEAKER_00: Um, definitely uh companies need to have a mechanism where they're tracking and monitoring what these developments are to make sure that they're fully aware of the full scope of where they need to actually report.
• 32:00
  SPEAKER_00: Um, so that would be the first step.
• 32:02
  SPEAKER_00: I think then a lot of companies are looking for the commonalities between the reporting requirements.
• 32:08
  SPEAKER_00: So if all of the territories have to do greenhouse gases, they're looking at kind of a data forward approach where they're looking at the process to accumulate greenhouse gas information for reporting, um, where you have a central sort of, they refer to it as a single source of truth that they can then use that as a foundation in order to make individual changes as necessary in other territories.
• 32:30
  SPEAKER_00: So I think that's the next step.
• 32:32
  SPEAKER_00: Um, and then honestly, just drafting reporting and getting out ahead of it.
• 32:36
  SPEAKER_00: So cannot stress enough that you need to spend a significant amount of time figuring out exactly how to operationalize how you get these disclosures done.
• 32:44
  SPEAKER_01: Yeah, and I think the one thing, you know, we said multiple times in this podcast, it's the first step, it's the first step.
• 32:50
  SPEAKER_01: And I think that implies this is once.
• 32:54
  SPEAKER_01: So you take the first step, then you take the next step.
• 32:56
  SPEAKER_00: If only they were so lucky.
• 32:57
  SPEAKER_01: If only they were so lucky.
• 32:58
  SPEAKER_01: So it might be once in one territory.
• 33:02
  SPEAKER_01: However, as again, because we keep seeing evolution of these rules, you know, we we don't know.
• 33:08
  SPEAKER_01: And so it really is an iterative process.
• 33:11
  SPEAKER_01: Agree.
• 33:11
  SPEAKER_01: Yeah.
• 33:12
  SPEAKER_01: All right.
• 33:12
  SPEAKER_01: Well, Bell, any other final thoughts for our audience?
• 33:15
  SPEAKER_00: No, I think just to uh listen to the rest of the series, we're uh dividing this up into really digestible chunks for you.
• 33:21
  SPEAKER_01: All right, thank you.
• 33:21
  SPEAKER_01: Well, and actually it's perfectly done to Maya close.
• 33:24
  SPEAKER_01: So thank you so much for joining me today.
• 33:26
  SPEAKER_01: And to our listeners, thank you as well for listening uh to our discussion of applicability.
• 33:31
  SPEAKER_01: And I definitely want to encourage you to tune in next week.
• 33:34
  SPEAKER_01: We will be covering reporting boundaries or boundaries of reporting.
• 33:38
  SPEAKER_01: And if you're thinking that's a term I don't really use, in fact, we actually do have boundaries for financial reporting, just don't necessarily think about them that way.
• 33:46
  SPEAKER_01: But if you want to understand how this all fits together and what these boundaries are for sustainability reporting, as I said, tune in next week.
• 33:52
  SPEAKER_01: And I'll be joined by Diana Stolzfest as we talk about that topic.
• 33:56
  SPEAKER_01: Thanks again.
• 33:56
  SPEAKER_01: Thank you again, Val.
• 33:57
  SPEAKER_01: Thanks.