In today’s business landscape, sustainability reporting has become a cornerstone of corporate responsibility and transparency. The Corporate Sustainability Reporting Directive (CSRD) mandates that in-scope companies align their sustainability disclosures with the European Sustainability Reporting Standards (ESRS). While this alignment is relatively straightforward for single large entities, complexities arise when dealing with companies that have multiple subsidiaries.
Understanding Group-Level vs. Entity-Level Reporting
When it comes to ESRS-aligned sustainability reporting, companies have two primary options: group-level reporting and entity-level reporting. Choosing the right approach is crucial for compliance and effective communication of your sustainability efforts.
Group-Level Reporting
Group-level reporting involves consolidating data from all subsidiaries into a single, comprehensive report. This method provides a unified view of the entire group’s sustainability performance, making it easier to present a cohesive strategy to stakeholders.
Advantages:
- Unified Reporting: Simplifies the reporting process by consolidating all data into one report.
- Consistency: Ensures consistent reporting standards across all subsidiaries.
- Efficiency: Reduces the administrative burden of managing multiple reports.
Entity-Level Reporting
Entity-level reporting requires each subsidiary to prepare its own separate sustainability report. This approach is beneficial when subsidiaries operate in different sectors or regions with unique sustainability challenges and opportunities.
Advantages:
- Customization: Allows for tailored reporting that reflects the specific context of each subsidiary.
- Detailed Insights: Provides deeper insights into the sustainability performance of individual entities.
- Flexibility: Enables subsidiaries to highlight their unique sustainability initiatives and impacts.
When to Opt for Consolidated ESRS Reporting for Subsidiaries?
Consolidated reporting becomes mandatory under specific conditions outlined by the CSRD:
- Parent Company Criteria: If a parent company prepares consolidated financial statements for the group and its subsidiaries, it must apply the same consolidation approach to its sustainability report.
- Prudential Consolidation: This involves aggregating information from separate entities within the group into a single report. There are three main types:
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- Parent Company Report: The parent company includes all subsidiaries in the group report.
- EU Holding Company Report: An EU holding company prepares a separate report encompassing all subsidiaries.
- Largest Subsidiary Report: The largest subsidiary consolidates information from all subsidiaries into a single report.
What are Mandatory ESRS Reporting Requirements?
- FY2024: If the company is the parent of a large group, qualifies as a Public Interest Entity (PIE) under Directive 2013/34/EU, and employs over 500 people.
- FY2025: Companies that are parent to a large group with publicly listed securities on the EU market but do not meet all PIE criteria.
When to opt for Entity-Level ESRS Reporting?
Entity-level reporting is essential when individual disclosures provide clearer insights into a subsidiary’s specific circumstances. The ESRS allows for disaggregation under certain conditions:
- Country-Level Disaggregation: If there are significant differences in material impacts, risks, and opportunities (IROs) between countries.
- Site or Asset-Level Disaggregation: When disclosures are highly specific to particular locations or assets.
- Materiality Assessment: Ensures that the level of disaggregation aligns with the double materiality assessment, maintaining relevance and clarity.
What is the Timeline for Entity-Level ESRS Reporting?
- Public Interest Entities (PIEs) with over 500 employees: Required from FY2024.
- PIEs with fewer than 500 employees: Required from FY2025.
- Publicly Trading SMEs on EU-Regulated Markets: Required from FY2026.
- SMEs with EUR150 Million+ Turnover in the EU: Required from FY2028 either through entity-level or consolidated reporting.
Deciding the Right Reporting Approach
Choosing between group-level and entity-level reporting involves evaluating several factors:
- Financial Consolidation: Is the subsidiary’s financial statement already consolidated at the group level?
- Sector Diversity: Do the subsidiaries operate in different sectors?
- Material IROs: Are the IROs similar across subsidiaries, or do they vary significantly?
- Reporting Capabilities: Which entities within the group have the expertise and resources for effective reporting?
- Governance Processes: What governance structures support the reporting process, including audit and verification?
There is no one-size-fits-all solution. Companies must assess their unique circumstances, resource availability, and strategic goals to determine the most effective reporting approach. Additionally, the ability to meet CSRD audit requirements plays a crucial role. Consolidated reporting can simplify the assurance process, as the group can be held accountable for the consolidated information.
Leveraging Digital Data Management for Effective ESRS Reporting
Implementing an automated data management system can significantly enhance the sustainability reporting process. Benefits include:
- Traceability: Every data point is tracked, ensuring verifiability.
- Efficiency: Simplifies internal data collection, especially for large organizations with complex value chains.
- Collaboration: Enables secure data sharing with external assurance providers.
- Error Reduction: Minimizes human error, safeguarding data integrity.
- Compliance Checks: Assesses compliance with CSRD requirements before external audits, saving time and resources.
Conclusion
Navigating ESRS reporting for subsidiaries under the CSRD involves careful consideration of reporting scope, consolidation requirements, and strategic planning. Whether opting for group-level or entity-level reporting, companies must assess their unique structures, material IROs, and resource capabilities to make informed decisions. Additionally, leveraging advanced data management systems can enhance the accuracy and efficiency of sustainability reporting, ensuring compliance and fostering trust among stakeholders.
At Credibl, we offer robust ESG data management software that facilitates seamless data sharing, compliance assessment, and efficient reporting. Our Platform helps organizations streamline their sustainability reporting processes, ensuring they meet CSRD and ESRS standards with ease.
For more insights and guidance on ESRS reporting, book a demo today.