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Sustainability now: EU reporting—What’s settled, what’s evolving · PwC's accounting podcast

0:00
SPEAKER_00: Thought Leadership from PWC's National Office.
0:07
SPEAKER_01: Hello, and welcome back to PWC's Accounting Podcast.
0:10
SPEAKER_01: I'm Heather Horn, PWC's U.S.
0:13
SPEAKER_01: sustainability technical leader, and I'll be your host today.
0:16
SPEAKER_01: In today's episode, we're back with another update on sustainability reporting developments in Europe.
0:22
SPEAKER_01: Our last discussion on the omnibus proposal and the European sustainability reporting standards was in September, which has been a long time, and a lot has happened since then.
0:32
SPEAKER_01: We'll focus on two major milestones in today's podcast: the provisional agreement reached in the omnibus negotiations and efforts delivery of its technical advice to the European Commission in the form of revised ESRS.
0:49
SPEAKER_01: To help cover these developments, I'm pleased to welcome back to the podcast Diana Stoltzfest, National Office Partner and Co-Chair of PwC's Global Environmental Technical Working Group.
0:59
SPEAKER_01: And of course, a very familiar voice to those of you who regularly listen to the podcast.
1:04
SPEAKER_01: Diana, welcome back.
1:05
SPEAKER_01: Thanks, Heather.
1:06
SPEAKER_01: Glad to be here.
1:07
SPEAKER_01: All right.
1:07
SPEAKER_01: So, Diana, as always, as I said, it's good to have you back.
1:10
SPEAKER_01: And I cannot believe we haven't recorded since September.
1:13
SPEAKER_01: So we definitely have a lot to cover.
1:15
SPEAKER_01: So, why don't we start with the omnibus and where things stand with the omnibus agreement that was reached in December?
1:23
SPEAKER_02: Well, maybe I'll just start by going back.
1:25
SPEAKER_02: So in February of 2025, the European Commission put out the omnibus proposal, which proposed a number of different changes to the CSRD or the Corporate Sustainability Reporting Directive.
1:35
SPEAKER_02: There was a number of negotiations throughout the year between the Parliament and the Council of the European Union.
1:41
SPEAKER_02: And then, as you said, in December, on December 9th, a provisional agreement was reached between the Parliament and the Council of the EU.
1:48
SPEAKER_02: And then on December 16th, the Parliament voted in favor of the agreement.
1:54
SPEAKER_02: And now over the next couple months here, we see that it's going to go through a linguistical and legal review, just finalizing the text of the omnibus agreement.
2:03
SPEAKER_02: But we don't expect any substantive changes coming out of that.
2:07
SPEAKER_02: The expectation is that the council of the EU will vote to approve the final omnibus agreement in February, and then we'll see that final approval.
2:16
SPEAKER_01: And I think a key point here, and something again, for us non-Europeans to keep up with all their legislative process.
2:23
SPEAKER_01: As you said, on December 16th, the European Parliament voted in favor of the agreement.
2:28
SPEAKER_01: And then at that time, the Council of the European Union they sent a letter indicating that they will approve subject to it being the same final text.
2:38
SPEAKER_01: So I think that's kind of viewed as like an approval, although we have to wait till March for it to be finalized.
2:45
SPEAKER_01: Final vote.
2:46
SPEAKER_01: Yes.
2:46
SPEAKER_01: All right.
2:47
SPEAKER_01: So then uh probably more interesting than that is actually what's the details that were agreed to.
2:52
SPEAKER_01: So what was agreed in December?
2:54
SPEAKER_02: So for EU entities, they will be subject to two criteria.
2:58
SPEAKER_02: So the first criteria is that they have more than an average of a thousand employees during the year, and that they have revenue or turnover of 450 million euro or more.
3:10
SPEAKER_02: And if they meet those criteria, they're in.
3:12
SPEAKER_02: I think one thing that's important to note is if you're a non-EU entity, but you have debt or equity securities that are listed on an EU-regulated market, that you would be subject to those two criteria, the employee criteria and the revenue turnover criteria.
3:27
SPEAKER_02: So then switching to all other non-EU headquartered companies, there are two criteria for them that are a little bit different that they need to meet in order to be required to report in accordance with the CSRD.
3:40
SPEAKER_02: So one is if you have revenue generated of 450 million euro or more, the parent entity.
3:48
SPEAKER_02: And then if you have a branch or a subsidiary that has more than 200 million euro in turnover a year, then you'd be required to report.
3:56
SPEAKER_01: Yeah, and maybe I can add to both of those.
3:58
SPEAKER_01: So I think it's really important to remember.
4:00
SPEAKER_01: So those first two criteria, including those non-EU headquartered companies with the debt and equity securities listed on EU regulated market, uh, that's quite a mouthful.
4:10
SPEAKER_01: That is the reporting under the ESRSs themselves.
4:14
SPEAKER_01: And it's sort of the new wave one because we no longer have those waves of reporting.
4:19
SPEAKER_01: Then the second criteria you talked about for the non-EU headquartered companies, that would be for reporting on the global consolidated group in 2029 on 2028 information.
4:33
SPEAKER_01: And so it I and then we will have non-EU standards that we're still waiting to see.
4:38
SPEAKER_01: We haven't seen those yes.
4:40
SPEAKER_01: That we're still waiting to see.
4:41
SPEAKER_01: Um, but one other thing is that when we're looking at that turnover for the parent company or the the the group, it's looking at 450 million euro turnover generated in the EU.
4:53
SPEAKER_02: Yes, for those non-EU headquartered companies.
4:56
SPEAKER_01: Right.
4:56
SPEAKER_01: And I think there's like a few ways to look at how you determine if you have that.
5:01
SPEAKER_01: And we definitely recommend you take a more conservative approach.
5:04
SPEAKER_01: And that's talked about more in SRG too.
5:07
SPEAKER_01: Uh, but Diana, maybe quickly, I talked about the timing for the non-EU headquartered companies.
5:13
SPEAKER_01: What's the timing now for these um for the first group of reporters we talked about?
5:17
SPEAKER_02: So it'd be 2027 information in 2028.
5:21
SPEAKER_02: All right.
5:21
SPEAKER_01: And then obviously companies that were in wave one continue to report and until that time.
5:26
SPEAKER_01: And we'll talk a little bit about how they're reporting in a few minutes.
5:30
SPEAKER_01: Um, and then Diana, I know as well that there's an exemption for financial holding undertakings.
5:36
SPEAKER_01: And I know we got a lot of questions on that in particular because as soon as people hear exemption.
5:41
SPEAKER_01: Um, so what's our understanding of this exemption?
5:44
SPEAKER_02: So our understanding is that this is supposed to be a very narrowly applied provision.
5:49
SPEAKER_02: I think they said strictly limited in its use or something along those lines when they were talking about it in the changes to the omnibus.
5:57
SPEAKER_02: Maybe I'll just read the words that they actually use to talk about this.
6:02
SPEAKER_02: So they say this option should be strictly limited in light of its objective.
6:06
SPEAKER_02: It should only apply where the parent undertaking fulfills the definition of a financial holding undertaking, including the obligation not to involve themselves directly or indirectly in the management of the subsidiary undertakings without their prejudice to their rights as shareholders.
6:23
SPEAKER_02: And I guess a couple things that the words that really stand out to me are involved, do not involve themselves directly or indirectly in the management of the subsidiary.
6:31
SPEAKER_02: So I think that takes many holding companies out of this because they are, as we know, very involved with their subsidiaries underneath.
6:39
SPEAKER_02: We have understood that this is meant to apply kind of in private equity type situations, but again, there's lots of structures where we know that the members of private equity are very involved with their subsidiaries in the management and thinking about, you know, maybe how to change the strategy of those underlying portfolio companies.
6:56
SPEAKER_02: So I do think this is something where companies will need to talk to their legal counsel.
7:00
SPEAKER_02: I think we expect that there may be more guidance or interpretation around this coming out, but I think we understand it to be very limited.
7:09
SPEAKER_01: Yeah, and maybe the one thing I would say we do know would be that if you have just because you have a holding company and let's say it was set up for tax structure and or other purposes, you can't just look at that word holding and say, we're out, we're out.
7:23
SPEAKER_01: Yeah, exactly.
7:24
SPEAKER_01: And so definitely uh for companies that are operating companies and they have operating subsidiaries um in the EU, in general, we would not expect this to apply.
7:34
SPEAKER_01: I think it's more than it's you said portfolio companies and otherwise, then is when you start to get into the questions of whether it will or not.
7:42
SPEAKER_01: So if you're reading this and thinking, oh, well, I have holding companies, I must be out, that probably not.
7:48
SPEAKER_01: Yeah, probably not.
7:49
SPEAKER_01: Exactly.
7:49
SPEAKER_01: All right.
7:50
SPEAKER_01: And again, I mean, one thing I think we've talked about is it's been a challenge for companies that thought they were in scope and then weren't sure what would happen.
7:57
SPEAKER_01: And you talked about the fact there's a lot of, you know, we've we heard the various positions that were reached by the council and the parliament over the summer and into the fall.
8:06
SPEAKER_01: And so a lot of uncertainty for qu for companies.
8:09
SPEAKER_01: So now it's good to have more certainty.
8:12
SPEAKER_01: Right.
8:12
SPEAKER_01: Um, so that's one thing settled or almost completely settled.
8:17
SPEAKER_01: But another big thing that we've personally have probably been spending more time on is the proposed changes in the ESRSs.
8:24
SPEAKER_01: And a huge milestone was reached because on December 3rd, FREG delivered their technical advice uh to the European Commission in the form of their proposed uh revised ESRSs.
8:34
SPEAKER_01: So that's something I think that September episode was about.
8:38
SPEAKER_01: And so we're not gonna necessarily go through every single detail, but I think it's helpful to talk now on some of the overall changes from the current ESRSs, just so people can start uh to to think about them.
8:50
SPEAKER_01: But again, a reminder this is only proposed, and we'll talk about a process at the end.
8:54
SPEAKER_01: So that's a lot of background.
8:56
SPEAKER_01: Um the first one I actually am I've personally find quite interesting because I think when the ESRSs were originally issued, we actually thought that they were relatively straightforward on the surface in terms of how they were structured to cross-cutting the topical standards.
9:13
SPEAKER_01: But then when you start to get into the detail, I mean, there was a lot of things that were confusing and that we had to spend a lot of time understanding.
9:21
SPEAKER_01: Definitely.
9:22
SPEAKER_01: And I think one of the biggest changes that we've seen is just changes to the overall structure.
9:27
SPEAKER_01: So, what can you share on those points?
9:29
SPEAKER_02: And I think to your point, I think this makes the standards in my mind much easier to apply.
9:34
SPEAKER_02: So, one of the things that they did was under the current ESRS, their mandate points kind of sprinkle standards.
9:42
SPEAKER_02: So, some in the mains, some you have to think about what's in the cross-cutting, how does that apply to the topical standards?
9:48
SPEAKER_02: And then they had what they called application requirements, which were at the end of each standard, and that also had some mandatory data points.
9:56
SPEAKER_02: What they've done is put it all in the main body of the standard.
9:59
SPEAKER_02: So that should be where all your mandatory data points are now, which I think is immensely helpful.
10:05
SPEAKER_02: They also, there used to be May data points, which were voluntary data points that companies could choose to report on.
10:11
SPEAKER_02: Those have all been removed from the standards, which is helpful.
10:14
SPEAKER_02: And as I mentioned, there were these application requirements, which in some cases had additional data points.
10:21
SPEAKER_02: Now those have been contained to just either allowing flexibility in how the standards are applied or providing potential options for how companies could report the information, but not necessarily like a separate data point that would be required.
10:37
SPEAKER_02: They've also moved those application requirements from, as I said, they were previously at the end of the standard.
10:45
SPEAKER_02: Now they've been moved into the main body of the standard and also specifically tied to a data point, which is helpful to say, okay, this application requirement ties to this specific provision.
10:56
SPEAKER_02: So when I'm reading this provision, I should read this application requirement in conjunction with it to make sure that I'm really understanding.
11:02
SPEAKER_02: So I think those just structural changes really help to make the standards easier to understand.
11:08
SPEAKER_02: What are the requirements I need to apply and how would I think about them?
11:12
SPEAKER_01: I completely agree.
11:13
SPEAKER_01: I think one of the other challenges with the original answer as was the interaction between those cross-cutting standards and the topical standards.
11:22
SPEAKER_01: And once you got into it, I mean, there's clearly a structure to how it was set up and actually a logical structure to how it was set up, but nonetheless, it was confusing.
11:31
SPEAKER_01: Yeah.
11:32
SPEAKER_01: Um, particularly for people who are just trying to get their head around it or otherwise.
11:36
SPEAKER_01: So again, I think this is another place where they um made some good changes.
11:40
SPEAKER_01: So previously we had in ESRS II the minimum disclosure requirements.
11:45
SPEAKER_01: So now those have been renamed and the interaction with the topical standards has changed.
11:50
SPEAKER_01: So can you fill us in on that?
11:51
SPEAKER_01: Right.
11:52
SPEAKER_02: So for a number of the different disclosures that were included within the topical standards, when you provided those data points, you were required to also look to the cross-cutting standard to say, what are these minimum disclosure requirements that I have to fulfill when I'm doing it in the topical standard?
12:06
SPEAKER_02: So you're looking at two different standards.
12:08
SPEAKER_02: What they've done is now they have streamlined both those, as you said, now they're called the general disclosure requirements.
12:15
SPEAKER_02: So they reduce those different data points that you would need to provide when describing your policies or your actions or your targets or your metrics, any of those.
12:25
SPEAKER_02: They've reduced those.
12:26
SPEAKER_02: So really focusing on what is a material information to the user.
12:30
SPEAKER_02: So I think that's good because I think in some cases, preparers and even users felt like there was extraneous information that really wasn't necessary to really understand a company's material impacts, risks, and opportunities.
12:42
SPEAKER_02: There was also disclosures that were required around, you know, your strategy, your governance, those types of things in the cross-cutting standards.
12:50
SPEAKER_02: And then they were also additional disclosures that were required in the topical standards.
12:54
SPEAKER_02: So they've really streamlined that too.
12:56
SPEAKER_02: They've removed them from the topical standards.
12:58
SPEAKER_02: Now they're only in the cross-cutting standards.
13:00
SPEAKER_02: And so I think it makes it easier to understand, okay, this is like the general stuff.
13:04
SPEAKER_02: And then when you go to the topical standards, it's like when I think about this topic, what is the information I need to provide specific to this topic versus kind of this going back and forth?
13:15
SPEAKER_01: Yeah, I agree, Diana.
13:17
SPEAKER_01: I mean, and it's very interesting because uh Efrag was given a mandate from the European uh Commission to simplify and streamline the standards.
13:25
SPEAKER_01: And, you know, I know that there's been some feedback from uh some preparers that actually maybe the streamlining, at least initially, is going to create more work for them.
13:35
SPEAKER_01: So maybe a bit of grumbling around that.
13:37
SPEAKER_01: But I think definitely from PwC's perspective overall, we think these are change, positive changes.
13:43
SPEAKER_01: And you've said that.
13:44
SPEAKER_01: Um, but one thing I find very interesting.
13:46
SPEAKER_01: So in FREG's letter to the commission that went with the technical advice, they said that they reduced the number of mandatory data points by 61%.
13:55
SPEAKER_01: So it's a big number amount.
13:57
SPEAKER_01: Um, even though, you know, I think where we get a bit concerned when you hear that number is I don't, you know, we would not expect there to be commensurate reduction in the effort involved, particularly because I mean, I probably could say no companies, but at least definitely not the vast majority of companies who are reporting all of those data points because not all IROs apply to all companies.
14:19
SPEAKER_01: Um, so all of that said though, they made some other changes as well that are intended to simplify and ease application of the standard.
14:29
SPEAKER_01: So I want to move to those now.
14:31
SPEAKER_01: And in particular, they made some specific changes to materiality, which is one of the places a lot of preparers um had challenges in the double materiality assessment.
14:40
SPEAKER_01: So what did they do?
14:42
SPEAKER_02: Sure.
14:43
SPEAKER_02: And so I think too, when we think about the double materiality process, what they changed was how they talked about how you had to perform the double materiality assessment.
14:52
SPEAKER_02: I think companies that were reporting under the current set of the ESRS felt that the DMA process was very prescriptive and didn't allow them a lot of flexibility.
15:02
SPEAKER_02: And so FRAG heard that feedback and put provisions into the standards to try to allow preparers to understand the flexibility that was allowed.
15:12
SPEAKER_02: So really focusing on companies, entities leveraging the existing information they have.
15:18
SPEAKER_02: We know companies have really robust risk management processes, really robust due diligence processes where they're getting a lot of information.
15:25
SPEAKER_02: Companies are also thinking about what is their strategy long term?
15:28
SPEAKER_02: How are they going to continue to be a successful business over the short, medium, and long term?
15:32
SPEAKER_02: So using that information that they're already getting through their existing processes to say, what are my material impacts, risks, and opportunities?
15:40
SPEAKER_02: And for many, you know, they might be able to say, I know these topics, my own workforce, obviously critical for companies to be successful, to have uh expertise in their workforce and support their workers and that type of thing.
15:54
SPEAKER_02: And so I think, you know, for many companies, they can clearly identify the topics.
15:58
SPEAKER_02: You know, obviously you still are gonna have to identify individual material impacts or opportunities because the disclosures are gonna drive off of those.
16:06
SPEAKER_02: But from doing the DMA, you know, maybe making more focused on, okay, what topics do I need to focus on identifying those individual IROs.
16:13
SPEAKER_02: And some topics, you know, I I know that's not material to my business because of how it works.
16:18
SPEAKER_02: And so allowing companies to do that.
16:19
SPEAKER_02: So not having to assess every possible IRO and your own operations and your value chain.
16:26
SPEAKER_02: Overall time horizon.
16:28
SPEAKER_02: Overall time horizon.
16:29
SPEAKER_02: So again, that was another thing.
16:30
SPEAKER_02: So you could do this kind of top-down that I just described, or you could do a bottoms up if you wanted where you're identifying them and then rolling up to the topics.
16:38
SPEAKER_02: So allowing more flexibility.
16:39
SPEAKER_02: And I think, you know, maybe to one of the points you were just making, Heather, is you know, explicitly saying that you an entity doesn't need to evaluate every single time horizon for every IRO or every single characteristic of an IRO to determine if it's if it's clear what the materiality conclusion would be.
16:57
SPEAKER_01: All right.
16:58
SPEAKER_01: I think I definitely think that's helpful.
16:59
SPEAKER_01: Although one thing you and I have talked about is the fact that this isn't necessarily going to change.
17:04
SPEAKER_02: I think that's a great point.
17:06
SPEAKER_02: Like, I don't think either of us believe that that it changes the outcome.
17:09
SPEAKER_02: I think it can just make it easier to get to the outcome.
17:12
SPEAKER_01: Yes, to completely agree.
17:14
SPEAKER_01: But one thing I do find interesting then is, and maybe this will have some change for some companies, is that there have been so many questions about how you think about mitigation, remediation, and prevention and how those impact IROs.
17:28
SPEAKER_01: And is it gross and is it net?
17:30
SPEAKER_01: And, you know, how do you then report that?
17:32
SPEAKER_01: And so they did give some additional guidance on that, which will hopefully help company and maybe then around the edges would make a bit of change.
17:40
SPEAKER_01: But do you want to talk a bit about that?
17:42
SPEAKER_02: Yeah, and I think one thing that's interesting, I mean, we're not spending a lot of time obviously going through all the steps that FRAG went to to get from the current ESRS to where we are now.
17:51
SPEAKER_02: But I think one thing that is interesting to say is in the initial draft that they had put out in July timeframe of the revised ESRS, they had what was called appendix C, which had a number of different scenarios, went through actual and potential impacts.
18:05
SPEAKER_02: I think people thought that level of detail was actually confusing and it was hard to understand.
18:11
SPEAKER_02: And its interaction with the actual provisions that were written within ESRS one was not clear.
18:19
SPEAKER_02: And so when they came out with the final, they have streamlined it, but they did provide guidance.
18:24
SPEAKER_02: I think it's important to note that the guidance that they put out is related to actual and potential impacts.
18:29
SPEAKER_02: There's been no guidance put out related to risks and how you would think about these actions and risks.
18:34
SPEAKER_02: So when we're talking about this, it is important to know that we're talking about actual and potential impacts.
18:39
SPEAKER_02: I think at the high level, you think about if actions have been put in place, if they've already taken place, you can take those into account.
18:47
SPEAKER_02: If they haven't, you can't.
18:48
SPEAKER_02: It gets a little bit more nuanced.
18:49
SPEAKER_02: So maybe I'll talk a little bit more about that.
18:51
SPEAKER_02: But I think that's a good kind of like high-level framework to work under.
18:55
SPEAKER_02: When you think about an actual impact, if you have an impact in the current year, you have an oil spill, you have to say, okay, what was the impact of that oil spill?
19:03
SPEAKER_02: And you take that into account.
19:04
SPEAKER_02: If that happened in the middle of the year and you've taken action since, you have to report that full impact of that oil spill.
19:11
SPEAKER_02: And then you can talk about obviously the remediation and the pro and you know, the actions that you're taking in this year and potentially going forward.
19:18
SPEAKER_02: In following years, you would take any completed actions that happened in the prior year.
19:23
SPEAKER_02: But if that impact was still material, you would still need to report on the impact in the current year.
19:27
SPEAKER_02: When you're thinking about potential impacts, it talks about this concept of implemented prevention and mitigation policies and actions, if they can reasonably be assumed to effectively reduce the severity or the likelihood.
19:43
SPEAKER_02: So there's still judgment in determining.
19:46
SPEAKER_02: You have to think about what are my policies, what are my actions.
19:49
SPEAKER_02: I think if they're implemented, there's a little judgment there.
19:52
SPEAKER_02: But then also thinking about are those really going to reduce the severity of the likelihood of an impact happening in the future.
19:59
SPEAKER_02: So still some judgment in this area, but at least being a little bit more clear.
20:03
SPEAKER_02: The one additional provision that came in that I think there's been some questions about was saying that information about a company's policies and actions and how they manage potential impacts could be material information to users, even if a company feels like they've effectively managed that risk, or that if it's, you know, there's lots of highly regulated industries where companies have to do things to make sure that they've mitigated those impacts.
20:33
SPEAKER_02: And so I think that some of those situations we could think through could be if a company operates in like the food industry and they're providing food.
20:42
SPEAKER_02: Obviously, it's heavily regulated into sanitation and making sure that food is safe for people to eat.
20:48
SPEAKER_02: But obviously, like the impact could be really big to people if there was a contamination and those types of things.
20:54
SPEAKER_02: So information about how the company managed the risk of contamination or those types of things could be an example of something where it could still be material information.
21:03
SPEAKER_01: So, Diana, one thing that I think is can be a challenge, and this is a separate podcast, but it's understanding the interrelationship with impacts, risks, and opportunities.
21:12
SPEAKER_01: Uh, but it's was very notable there that you were talking about impacts with one slight mention of risks.
21:20
SPEAKER_01: But can you just talk about?
21:22
SPEAKER_01: So you talked about this in the context of impacts.
21:25
SPEAKER_01: What does this mean from the identification of risks and opportunities?
21:29
SPEAKER_02: Well, and I think maybe just playing off of like the food safety, right?
21:32
SPEAKER_02: So if you are a company, you potentially have an impact where you negatively impact the health of your consumers, that also can be a risk to you, right?
21:41
SPEAKER_02: There's going to be a lot of cost with remediating that, potentially having to pay for the health consequences of that.
21:48
SPEAKER_02: Obviously, whatever caused that contamination, there's probably additional expenditures that you're going to need to, you know, put mitigation, prevention actions in place to prevent that from happening again.
22:00
SPEAKER_02: So as we've said, uh, we haven't talked about it on this podcast, but in others, you know, there's a real relationship between impacts, risks, and opportunities.
22:08
SPEAKER_02: And so you do need to think about the interaction between the two of them.
22:11
SPEAKER_01: Yeah.
22:11
SPEAKER_01: So thinking about these factors you talked about is not unique to thinking about impacts.
22:16
SPEAKER_01: That's probably the key point here.
22:19
SPEAKER_01: And I guess the reason partly I wanted to bring that up, and this is where you did mention risk, is I think sometimes for a company that really has managed its risks, but then everyone else in the industry, you know, that is a major risk for them because maybe they haven't done as good a job.
22:35
SPEAKER_01: Right.
22:35
SPEAKER_01: Then that's where I think people would be looking for that disclosure of what you have done.
22:39
SPEAKER_01: And so I think that's a good example of those policies and actions.
22:42
SPEAKER_02: And maybe that can also be, you know, those are opportunities for companies too to do something different.
22:47
SPEAKER_01: Exactly.
22:48
SPEAKER_01: Very good point there.
22:49
SPEAKER_01: All right.
22:50
SPEAKER_01: So I want to keep us moving here.
22:52
SPEAKER_01: Um, let's talk now about the reporting boundary a little bit.
22:54
SPEAKER_01: So they did provide some more guidance on this.
22:57
SPEAKER_01: And big picture reporting boundary is still equal to the same boundaries, the financial statements, which I think foundationally is very helpful.
23:04
SPEAKER_01: Um, but what are some of the new things they've talked about with the reporting boundary?
23:09
SPEAKER_02: I think sometimes there's arrangements that are within our financial statements that aren't as clear-cut as like, are you in or are you out?
23:14
SPEAKER_02: Right.
23:15
SPEAKER_02: And so one of the things that was under the previous ESRS was related to non-material subsidiaries.
23:21
SPEAKER_02: So there's lots of times where a company may not consolidate a subsidiary because it's not financially material to them.
23:26
SPEAKER_02: Previously, they said it doesn't matter because there could be a material IRO in that entity, it has to be within the boundary, the reporting boundary of your sustainability statement.
23:36
SPEAKER_02: They have said now you still need to look if it's not consolidated, not part of your financial statements, you can keep it excluded from the sustainability statement as long as there is not a material IRO.
23:46
SPEAKER_02: So you still need to look at them to make sure there's not, but if there isn't, you can keep that excluded.
23:51
SPEAKER_02: The couple other areas would be so long-term employee benefit funds.
23:56
SPEAKER_02: So if there's any impacts, risks, or opportunities related to the assets that are included within that fund, those would be connected to the reporting entity and would be reported as part of its value chain.
24:07
SPEAKER_02: Leased assets, this is a big area where there were a lot of questions around it.
24:11
SPEAKER_02: So it's nice to get some clarity here.
24:13
SPEAKER_02: So when we think about this, so from the lessor perspective, if there are impacts, risks, or opportunities that are related to it or related to that asset that they're leasing out to a third party, those would be considered part of its value chain.
24:27
SPEAKER_02: From the lesse perspective, then on the other side, the person that is leasing that asset and is using that asset, let's say it's a building, any impacts, risks, or opportunities related to that asset, its use of that asset would be considered its own operations.
24:40
SPEAKER_01: Yeah, the one thing I think personally is slightly confusing about this is that even for the lessor, you say it's in the value chain.
24:47
SPEAKER_01: Let's say you're leasing a building.
24:49
SPEAKER_01: So now that's in the value chain.
24:51
SPEAKER_01: But if you have receivables, you could have a risk associated with those receivables that are in your own operations.
24:58
SPEAKER_01: And so, I mean, I do think it's extremely helpful that they gave this guidance, but it's not quite as easy as just saying, oh, I'm the lessor, it's only impacts things in my value chain or vice versa.
25:11
SPEAKER_01: One point on this, and I know you have one more item to talk about here, but I think it's very interesting that now this is a point of potential divergence with the ISSB standards.
25:23
SPEAKER_01: And there was some, again, I'll use the word criticism of the afrag of saying, well, you shouldn't, you should not adopt provisions that diverge from ISSB.
25:34
SPEAKER_01: And this is something we spent quite a lot of time talking about.
25:37
SPEAKER_01: And I do think it's important that, you know, they made the point.
25:42
SPEAKER_01: They prioritize simplification and the the fact that they didn't want to sub-optimize things for their reporters because, you know, the ISSB standards had something different.
25:54
SPEAKER_01: And I mean, definitely something we agree with.
25:56
SPEAKER_01: But I don't know if you have anything else you just want to add there because I think this is a good example where we think this is a helpful clarification, but some may have criticized it.
26:06
SPEAKER_02: Yeah, I I think to your point, I think having clarity for reporters is really important.
26:12
SPEAKER_02: There's people that have to prepare these reports.
26:14
SPEAKER_02: And if you have questions and you don't have answers, it just makes it really hard.
26:18
SPEAKER_02: And, you know, big thing that, you know, having global reporting and having regulatory reporting, a big point is for consistency.
26:26
SPEAKER_02: And so then you can look at entities across industries, you can look at within the same industry.
26:32
SPEAKER_02: And if you can really and leased assets can be a big part of companies' operations.
26:37
SPEAKER_02: And so, and obviously that's just one of these where they provided clarity.
26:40
SPEAKER_02: But I think having that consistency in the application and to your point, clarity for reporters, I think some of those considerations really, in my mind, override interoperability.
26:51
SPEAKER_01: But I think that's really helpful perspective, Diana, and definitely a topic that we could spend another whole podcast on.
26:57
SPEAKER_01: Um, one more of the reporting boundary items is joint operations.
27:01
SPEAKER_01: There was some clarity there.
27:02
SPEAKER_01: I don't think we need to get into it now so we can keep moving, but just if people have a lot of joint operations, definitely something to look at.
27:10
SPEAKER_01: One thing I do want to mention though on the reporting boundary before we move on is specifically them related to GHG emissions.
27:16
SPEAKER_01: And, you know, there's a lot of questions around the additive approach that's in the original ESRS, where you have financial control plus operational control.
27:25
SPEAKER_01: They've now clarified that it's financial control and then that you would add operational control, basically if it would be meaningful to your users.
27:33
SPEAKER_01: I mean, they have more technical language.
27:35
SPEAKER_01: I think the way they worded it was a bit confusing.
27:38
SPEAKER_01: And maybe this is something we'll see cleaned up in the final, but nonetheless, I do think this is intended to be easier for companies to implement, but we'll see on that.
27:48
SPEAKER_01: Yeah.
27:49
SPEAKER_01: Okay, let's move on to the reliefs because I think this is something that's quite interesting.
27:54
SPEAKER_01: So they introduce a number of new reliefs with the amended standards.
28:00
SPEAKER_01: Um, and maybe the one we could start with is talking about reasonable and supportable information.
28:05
SPEAKER_01: And this is actually a point of, I'll say convergence with the ISSB to where they actually did move towards more interoperability.
28:13
SPEAKER_02: Yeah, this is a concept that is in the ISSB standards that I think people felt was really helpful.
28:18
SPEAKER_02: So it's the use of reasonable and supportable information available at the reporting date without undue cost and effort.
28:25
SPEAKER_02: And really the intention of this provision is to really say that an entity doesn't need to do an exhaustive search for information, right?
28:33
SPEAKER_02: There's a lot of information that is available that a company, you know, we talked about earlier risk management due diligence processes, it's getting information, information that's used in its own forecasting, whether that's for operating decisions, strategy decisions, it's financial reporting processes.
28:48
SPEAKER_02: There's a lot of external information available.
28:51
SPEAKER_02: So it's thinking about using information that is available.
28:54
SPEAKER_02: I think, you know, we want to caveat that because this doesn't mean like, oh, you have to have it and use it.
29:00
SPEAKER_02: Like you have to do the work to try to obtain the information that's necessary to provide information about your impacts, risks, and opportunities.
29:08
SPEAKER_02: But this was introduced and applies to many parts of the sustainability statement.
29:12
SPEAKER_02: So thinking about when you're identifying your impacts, risks, and opportunities, what's the scope of your value chain, the preparation of your metric.
29:19
SPEAKER_02: So in a number of different places.
29:21
SPEAKER_02: But I think this was a welcome convergence with the ISSB standards.
29:24
SPEAKER_01: Yeah.
29:25
SPEAKER_01: And again, I the reason I personally find it interesting is I like the fact that FRAC just looked at what's best from a reporting perspective.
29:33
SPEAKER_01: And so they converged where it made sense.
29:35
SPEAKER_01: And then they did things, you know, to simplify where appropriate.
29:38
SPEAKER_01: So, Diana, speaking of simplifications, the next one was also, I think, very welcome by many reporters and actually reminds me of old days in some ways of financial reporting.
29:50
SPEAKER_01: Um, and this relates to the treatment of acquisitions and disposals.
29:54
SPEAKER_01: Okay.
29:54
SPEAKER_02: So this is saying that if a company has acquired a new business during the year, that they can defer the inclusion of that acquisition or the impacts, risk, and opportunities related to that acquisition until the next year.
30:08
SPEAKER_02: And similarly for a disposal, if they've disposed of a business during the year, they can take the impacts, risks, and opportunities that were related to that business that's been disposed of out of their sustainability report as of the beginning of the year.
30:22
SPEAKER_02: I will say there's still some disclosures that you need to make related to your acquisitions and dispositions and its impact on your on your statement, but not the full inclusion of your IROs and all the related information.
30:35
SPEAKER_01: Okay, and then we have two reliefs related to metrics.
30:38
SPEAKER_01: So can you walk through those?
30:40
SPEAKER_01: Sure.
30:40
SPEAKER_02: So the first metric is related to under the current reporting, if a company identifies a material impact risk or opportunity and they're reporting a metric related to that, they're required to include information from across their entire entity when they're reporting that metric.
30:58
SPEAKER_02: This said, well, if there's, you know, a part of your business, a subsidiary, a specific activity that's really driving that impact risk or opportunity, you can report the metric for that part of your business.
31:10
SPEAKER_02: So for whatever's the significant driver is the term that they use.
31:14
SPEAKER_02: And so I think that's really helpful to companies because there were many cases where maybe, you know, 80% of the metric was coming from one part of its business and they had to spend a lot of time gathering information for the remaining 20%.
31:25
SPEAKER_02: And so now it's saying, well, if it's that 80%, you can, it's clearly related, you know, the IRO is really driven from that part of your business.
31:31
SPEAKER_02: You can be specific about that and report that metric on that part of the business.
31:35
SPEAKER_01: I'm laughing when you say, I believe this is really helpful because uh this is actually something when we, PwC, last spring was actually looking.
31:45
SPEAKER_01: Um, FREG had done an early solicitation basically for feedback on areas of improvement.
31:51
SPEAKER_01: This was one in particular that we had suggested.
31:53
SPEAKER_01: I'm sure other people suggested it too, but it was definitely a relief we were happy to see in there.
31:58
SPEAKER_01: And something that it comes from direct feedback we heard from Wave One reporters.
32:02
SPEAKER_01: Definitely.
32:02
SPEAKER_01: All right, how about the other one?
32:03
SPEAKER_01: Also, I'll say something PWC was a big advocate of.
32:06
SPEAKER_02: Yes.
32:07
SPEAKER_02: So this is one, and this ties a little bit back to that concept we were talking about reasonable and supportable information.
32:13
SPEAKER_02: In an instance where an entity is not able to obtain reasonable and supportable information without undue cost or effort, they are able to limit the reporting of a metric.
32:23
SPEAKER_02: So, but I think a couple things to be very clear on.
32:26
SPEAKER_02: This is able to be used if you're able to determine, like an objectively determine a reporting value for the portion of the metric that you're going to report.
32:35
SPEAKER_02: So for instance, we know there's there's places, certain countries where they require reporting of certain types of information.
32:42
SPEAKER_02: That information may not be able to be obtained in other countries.
32:45
SPEAKER_02: So if you can say for country A, B, and C, I'm reporting, there's a material IRO and I'm reporting this metric, but it's specific to these countries, we think that is an objectively definable.
32:56
SPEAKER_02: There's other instances maybe where there may not be measurement methodologies for certain substances of concern, but other ones.
33:02
SPEAKER_02: As long as you can objectively determine that boundary and disclose what that boundary is and then report the metric, then they're able to do that.
33:11
SPEAKER_02: So I think that's a lot of areas where there was concern about companies being able to get some of this data.
33:16
SPEAKER_02: I think especially like within their value chain.
33:19
SPEAKER_02: Um, and so I think that relief is helpful.
33:21
SPEAKER_02: There again are disclosures that are required when you apply these reliefs and making sure that it's understanding the limitations and what you're trying to do to improve the data.
33:29
SPEAKER_02: But I think welcome relief for companies.
33:32
SPEAKER_01: Yeah.
33:32
SPEAKER_01: And I think one key thing there is this is not to say you don't have that IRO anymore in those other parts of the business or related to your example of the other substances of concern.
33:43
SPEAKER_01: It's just saying you say you have this IRO, but this is the only information that you have.
33:48
SPEAKER_01: Yeah.
33:49
SPEAKER_01: And I do think that objectively uh identifiable is very important because I mean, this is really intended actually to help with even greenwashing, that you don't want companies to pick and choose what information they're reporting or not.
34:01
SPEAKER_01: One thing actually I should have asked you about when we talked about materiality, but it can also fit in from a relief point of view is materiality of information.
34:09
SPEAKER_01: And I have to say this is probably my personal favorite relief because um previously this concept did not apply across the entire um, you know, sustainability statement.
34:20
SPEAKER_01: But can you just explain the concept quickly and then what the new relief is?
34:24
SPEAKER_02: Yeah.
34:24
SPEAKER_02: So once you've determined what your material IROs are, you need to determine what is material information I'm going to provide about them.
34:30
SPEAKER_02: And under the current ESRS, there's certain disclosures that are required regardless of your determination of whether that information would be material to a user.
34:40
SPEAKER_02: Now, what they've said is that materiality of information is applied across every single provision.
34:47
SPEAKER_02: So it's really thinking about what is material information to my user.
34:50
SPEAKER_02: So it is from a user perspective and the users for ESRS is is broader than maybe our traditional financial statement user.
34:58
SPEAKER_02: You're not just thinking about kind of investors or that type of thing.
35:01
SPEAKER_02: So I think that's really helpful for companies to say, I'm going to provide information that is relevant to my users.
35:07
SPEAKER_01: All right.
35:08
SPEAKER_01: Last point then is why don't we talk about the phase-in reliefs and maybe less about the details and more about just the approach they took to the phase-ins?
35:16
SPEAKER_01: Because it is, it makes sense, but it's quite interesting.
35:19
SPEAKER_02: Yeah, I think this was one of the things I found really interesting when reading the technical advice that FRAG gave over to the European Commission.
35:26
SPEAKER_02: So what they said was we're going to lay out what the phase-in provisions would be for wave one entities, and included in what they defined as wave one entities would be anyone who would have qualified as wave one, regardless of whether the member state that that that created that reporting obligation had transposed the original CSRD.
35:45
SPEAKER_02: And so they laid out a number of different phase-in provisions over a number of years.
35:49
SPEAKER_02: I would say very similar to the quick fix, what is included in there.
35:54
SPEAKER_02: But then what they said was for all other entities that will come into reporting, we're going to leave that up to the European Commission.
36:01
SPEAKER_02: So we we don't know what the phase-in provisions will look like as of now.
36:05
SPEAKER_01: So, Diana, it's a perfect lead-in to my next question, which is what's next?
36:09
SPEAKER_01: So this was technical advice.
36:10
SPEAKER_01: It's very important to emphasize that what we've said here is only proposed.
36:15
SPEAKER_01: And I'll differentiate between our first discussion of the omnibus agreement, which is not final, final, but I'd say it's final.
36:23
SPEAKER_02: Pretty much we don't expect any changes to those provisions.
36:26
SPEAKER_02: Like we don't think, oh, they're going to change a scope and new companies are going to come into reporting.
36:30
SPEAKER_01: Nothing like that.
36:30
SPEAKER_01: So it's it's more I'll use sort of formality.
36:32
SPEAKER_01: What has to still happen?
36:34
SPEAKER_01: That is not the case here.
36:35
SPEAKER_01: So FREG handed over its technical advice to the commission.
36:38
SPEAKER_01: Now the commission has a process.
36:40
SPEAKER_01: Can you share with us what's next?
36:42
SPEAKER_02: Yeah, so currently the European Commission is working with the different member states, working with the European supervisory authorities to think about what changes would they want to make to the revised ESRS from FRAG.
36:56
SPEAKER_02: We expect, or what we're hearing, is that in April they will put out the an a new set of ESRS for a four-week comment period.
37:06
SPEAKER_02: And then from there, they'll make any additional changes that they want to make with the expectation that the ESRS would be finalized through a delegated act in the June timeframe.
37:15
SPEAKER_02: It is still subject to a period of scrutiny.
37:17
SPEAKER_02: If you've heard anything about the taxonomy that we talked about, I think it's a four-month period of scrutiny with a potential two-month extension.
37:24
SPEAKER_02: So hopefully if they get it out in that June time frame, we'll know it's final, final by the end of the year.
37:29
SPEAKER_01: All right.
37:29
SPEAKER_01: And then we can talk on a subsequent podcast about what that might mean for current Wave One reporters, but definitely for companies that are coming into scope, then these amended ESRFs would be what you're using for reporting in 2027.
37:43
SPEAKER_01: So we talked about the fact it's not quite final.
37:46
SPEAKER_01: And like we would, I mean, definitely expect some changes to come from the commission, if nothing else.
37:51
SPEAKER_01: We're going to see the phase-in provisions, if any.
37:54
SPEAKER_01: Uh, so what do you recommend when you're talking to the companies now that expect to be in scope?
37:59
SPEAKER_01: Let's let's use that as our threshold.
38:02
SPEAKER_01: What are you telling them to do right now during this, I'll say, final waiting period?
38:07
SPEAKER_02: Yeah, I think a couple different things.
38:09
SPEAKER_02: I think one is we've seen the commitment to double materiality throughout this process, right?
38:14
SPEAKER_02: They emphasize that from the time that the omnibus proposal was put out last year, that they will stick with double materiality.
38:21
SPEAKER_02: So I don't expect any changes related to that.
38:24
SPEAKER_02: So I think companies that um are coming into scope can think about how I would go through that process, how would I think about designing it given I don't also see any of those like practical considerations or things to ease the application, the flexibility.
38:39
SPEAKER_02: I don't think I don't think anything significant there.
38:41
SPEAKER_02: So I think companies can start to think, and as we said, we wouldn't expect the outcome to be different around what your material impacts, risks, and opportunities are either way.
38:48
SPEAKER_02: So I think starting to identify what are my material impacts, risks, and opportunities are, and then I think you can start then to understand what are the topics that are going to be in scope, what is the type of information.
38:58
SPEAKER_02: I, you know, maybe not gathering the individual data points, but you can start thinking about what are the types of information and then is that information available without undue cost and effort?
39:08
SPEAKER_02: So I think you can begin to think about designing those processes and controls.
39:11
SPEAKER_02: I mean, I think that was one of the challenges we definitely saw with wave one reporters was it was so tight between when the ESRS were finalized and they had and then when the initial reporting for wave one entities that some of those companies had to, you know, report on spreadsheets or do other things where they couldn't have really a fully designed process just given the time constraints.
39:30
SPEAKER_02: So I think this can allow companies to maybe be a little bit more thoughtful in how they would design their processing controls around this information.
39:37
SPEAKER_01: All right.
39:37
SPEAKER_01: Excellent update and very good advice.
39:39
SPEAKER_01: So thank you for sharing and uh thanks for joining me today.
39:42
SPEAKER_01: We'll definitely have to have you back before another six months goes by.
39:45
SPEAKER_01: Maybe when we see uh the uh European Commission draft of the SRSs will be a good time to talk about changes.
39:52
SPEAKER_01: So thanks again.
39:52
SPEAKER_01: Thanks, Heather.
39:54
SPEAKER_01: That's our show for today.
39:57
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40:02
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40:07
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40:17
SPEAKER_01: From Thought Leadership at PWC, I'm Heather Horn.
40:21
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40:32
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