The European Union’s Corporate Sustainability Reporting Directive (CSRD) is transforming sustainability reporting, with significant implications for companies operating within its jurisdiction – and globally. For fund managers with international operations and diverse investment portfolios, understanding the CSRD’s requirements is crucial.
This comprehensive guide aims to inform global fund managers about their reporting obligations under the CSRD, both concerning their own operations and their investment portfolios. We’ll delve into the directive’s scope, specific requirements for fund managers, the impact on portfolio companies, the principle of double materiality, the phased implementation timeline, and practical steps to ensure compliance.
Jump to:
Phased implementation timeline
Reporting obligations for fund managers
Practical steps for compliance
Opportunities for fund managers
Purpose and scope
The CSRD aims to enhance the quality, consistency, and comparability of sustainability information disclosed by companies. It expands upon the previous Non-Financial Reporting Directive (NFRD) and broadens the scope to include:
Large EU Companies: Companies meeting two out of three of the following criteria:
- Balance sheet total: Exceeds €25 million (updated from €20 million)
- Net turnover: Exceeds €50 million (updated from €40 million)
- Average number of employees: More than 250 during the financial year (unchanged)
All companies listed on EU regulated markets: Except micro-enterprises
Non-EU companies with significant EU activities:
- Net turnover in the EU: Exceeds €150 million over two consecutive financial years
- EU presence: Has at least one subsidiary or branch in the EU that is a large company (meeting the above thresholds) or a listed company, or the branch generates net turnover exceeding €50 million.
Key features
Double materiality
The CSRD introduces the principle of double materiality, requiring companies to consider both:
- Impact materiality: The company’s impacts on society and the environment.
- Financial materiality: How sustainability matters affect the company’s financial performance and position.
A sustainability matter is material if it meets the criteria of either impact materiality or financial materiality, or both. This approach ensures a comprehensive understanding of a company’s sustainability performance and its interdependencies with the broader environment and society.
European Sustainability Reporting Standards (ESRS)
The CSRD mandates the use of ESRS, providing detailed guidance on the sustainability information companies must report. These standards ensure consistency and comparability across companies and sectors.
Assurance of information
Companies are required to obtain limited assurance (audit) for their sustainability reports. This enhances the credibility and reliability of the disclosed information.
Digital reporting
Information must be published in a digital, machine-readable format according to the European Single Electronic Format (ESEF) regulation. This facilitates accessibility, analysis, and comparison of data by stakeholders.
Phased implementation timeline
Understanding the CSRD’s implementation timeline is crucial:
- January 1, 2024: The CSRD enters into force.
- Reporting in 2025 for FY 2024: Companies already subject to the NFRD – large public-interest entities (PIEs) with over 500 employees must report under the CSRD.
- Reporting in 2026 for FY 2025: Large companies not previously subject to the NFRD – Companies meeting the updated size thresholds begin reporting.
- Reporting in 2027 for FY 2026: listed small and medium-sized enterprises (SMEs), small and non-complex credit institutions, and captive insurance undertakings begin reporting, with an option to opt out until 2028.
- Reporting in 2029 for FY 2028: Non-EU companies with significant EU activities start reporting.
Reporting obligations for fund managers
- Fund managers as companies
Fund managers must assess whether they fall within the CSRD’s scope based on their operations:
- EU-based fund managers: Subject to the CSRD if they meet the updated size thresholds.
- Non-EU fund managers with EU activities: Subject to the CSRD if they:
- Generate over €150 million in net turnover in the EU over two consecutive financial years, and
- Have at least one subsidiary or branch in the EU that is a large company (meeting the updated thresholds) or a listed company, or the branch generates net turnover exceeding €50 million.
Obligations:
- Prepare sustainability reports: In compliance with the ESRS.
- Assurance and digital reporting: Obtain limited assurance and ensure digital accessibility.
- Consolidated reporting obligations
When fund managers have controlling stakes
Fund managers holding controlling stakes in portfolio companies may have additional reporting obligations:
- Consolidated financial statements: Required to prepare consolidated sustainability reports if they consolidate financial statements with controlled portfolio companies.
- Definition of control: Owning more than 50% of voting rights or having the power to govern financial and operating policies.
Implications:
- Include subsidiaries in reports: Cover all subsidiaries in sustainability reports.
- Data collection requirements: Collect detailed ESG data from controlled portfolio companies.
Investment Entity Exception
- Potential exemption: Under certain accounting standards (e.g., IFRS 10), investment entities may be exempt from consolidating financial statements.
- Impact on CSRD reporting: If a fund manager qualifies as an investment entity and does not prepare consolidated financial statements, it may not be required to prepare a consolidated sustainability report.
- Responsibilities for minority stakes
When fund managers hold minority stakes in portfolio companies:
- No consolidation requirement: Generally not required to consolidate financial statements or sustainability reports for these investments.
- Due diligence and risk management: Consider ESG factors for investment decision-making and risk assessment.
Relation to other regulations
Sustainable Finance Disclosure Regulation (SFDR)
The SFDR complements the CSRD by enhancing transparency on how financial market participants integrate sustainability into their investment decisions.
Applicability
At a conceptual level, fund managers are subject to the SFDR if they:
- Operate within the EU: Fund managers based in the EU, including asset managers, investment firms, and financial advisers.
- Market products in the EU: Non-EU fund managers offering financial products to EU investors.
Key considerations:
- Entity-level disclosures: Fund managers must disclose how they integrate sustainability risks into their investment processes.
- Product-level disclosures: Depending on the type of financial products offered (e.g., those promoting environmental or social characteristics), additional disclosures may be required.
- Principal Adverse Impact (PAI) reporting:
- Mandatory: For firms with over 500 employees.
- Voluntary: For smaller firms; however, they must state whether they consider PAIs or explain why they do not.
When is ESG data collection necessary?
- Offering Article 8 or 9 Products: If you offer financial products that promote environmental or social characteristics (Article 8) or have sustainable investment objectives (Article 9), you need to collect ESG data from portfolio companies to substantiate your disclosures.
- Considering PAIs: If you report on principal adverse impacts, ESG data collection is essential.
Implications for fund managers:
- Data needs: The SFDR increases the need for ESG data from portfolio companies, regardless of ownership stake.
- Alignment with CSRD: While the CSRD focuses on company-level reporting, the SFDR emphasises transparency in investment processes. Both contribute to increased sustainability disclosure and may overlap in data requirements.
Practical steps for compliance
- Assess Applicability
- Determine CSRD and SFDR scope: Evaluate whether you fall within the scope of these regulations based on size, EU presence, and operations.
- Understand your obligations: Identify specific reporting requirements relevant to your organisation.
- Establish data collection processes
- For controlled portfolio companies:
- Engage early: Communicate CSRD and SFDR requirements to subsidiaries.
- Standardise reporting: Implement ESG reporting frameworks aligned with ESRS and double materiality.
- Facilitate data flow: Use technology solutions to streamline data collection.
- For minority investments:
- Due diligence: Incorporate ESG considerations into investment analysis.
- Engage on ESG matters: Encourage portfolio companies to improve ESG practices.
- Leverage Technology Solutions
- Data management platforms: Utilise tools for ESG data collection and reporting.
- Cross-framework compatibility: Implement systems that allow data re-use across different frameworks (e.g., CSRD, SFDR).
- Enhance Internal Capabilities
- Training and awareness: Educate teams about CSRD and SFDR requirements.
- Resource allocation: Allocate resources to manage increased reporting demands.
- Monitor Regulatory Developments
- Stay updated: Regularly review updates to the CSRD, SFDR, and related regulations.
- Adapt to changes: Be prepared to adjust processes as guidance evolves.
Opportunities for fund managers
- Enhanced transparency
- Investor confidence: Improved reporting can enhance trust and attract capital.
- Competitive advantage: Demonstrating strong ESG practices differentiates fund managers.
- Risk management
- Identify risks and impacts: Comprehensive ESG data helps in risk mitigation.
- Improve decision-making: ESG insights contribute to informed investment decisions.
- Value creation
- Operational improvements: Addressing ESG issues can lead to efficiencies.
- Positive impact: Aligns with broader societal and environmental goals.
Conclusion
The CSRD introduces significant reporting obligations for global fund managers, particularly those with operations in the EU or controlling stakes in EU-based portfolio companies. Understanding these requirements, including the principle of double materiality and the interplay with SFDR, is essential to ensure compliance, manage risks, and capitalise on opportunities from enhanced sustainability practices.
