(Summary)

This article focuses on the Corporate Sustainability Reporting Directive (CSRD) agreed by the European Parliament and the Council at the end of 2022 and explains how the CSRD will affect Japanese companies. The presentation will focus on the CSRD (Corporate Sustainability Reporting Directive) agreed by the European Parliament and Council at the end of 2022.

The CSRD proposes a 'broad framework concept' for sustainability reporting, which applies to companies both within and outside the EU. This broad concept refers to "the framework for disclosure information (for ESG categorisation)" and "setting the conditions on which the Directive will operate", such as the "target company categorisation".

When the general framework is set by the CSRD, detailed disclosure requirements are set separately in a delegated rule called the 'ESRS'. Therefore, when a Japanese company becomes subject to the CSRD, it must consider and disclose the reports specified in the ESRS, which is based on the general framework of the CSRD (the ESRS will be explained next time).

Regulatory deadlines: company conditions under the CSRD are classified according to company size. Japanese companies (companies with headquarters in Japan and subsidiary functions in the EU or companies with economic activities in the EU) should note the following 'publication deadlines'.

EU subsidiaries.

1. if subject to the NFRD (Non-Financial Disclosure Directive): applicable from 1 January 2024
2. large enterprise groups: applicable from 1 January 2025
3. medium-sized enterprise group: applicable from 1 January 2026
4. small business groups: applicable from 1 January 2026

Even if the company does not have subsidiary functions, if it does business in the EU and meets the prescribed conditions, the following deadlines are set within the framework of a 'non-EU company':

5. non-EU companies (many Japanese companies with economic activities in the EU): applicable from 1 January 2028

The CSRD makes it mandatory for companies to introduce an 'independent assurance system' when disclosing information.
This is a system whereby third parties are obliged to guarantee the legitimacy of the information disclosed.

Through the above broad overview, the main measures that are important for Japanese companies to take are

1. identify which group of companies your company is included in
2. where there is an EU subsidiary, the option of separate reporting by the subsidiary or consolidated reporting with the head office function
3. ensure that specialist personnel are responsible for oversight of sustainability reporting
4. setting up third-party guarantors

As a summary, Japanese companies will be subject to the NFRD from financial year 2025 at the earliest (if not subject to the NFRD) and from financial year 2028 at the latest (if conditions are met) as non-EU companies.

After a lengthy overview, this article will provide further details on CSRD according to the following sections.

Table of Contents
(Summary)
1. objectives of enacting the CSRD & benefits for companies
2. conditions for the target group of enterprises
* Mandatory guarantee schemes.
*Electronic tagging system
*Matters to be checked on the part of Japanese companies.
3. framework for disclosure information
4. the relevance of the CSRD to other sustainability disclosure indicators
5. summary.

1. objectives of enacting the CSRD & benefits for companies

The Corporate Sustainability Reporting Directive (CSRD) is a sustainability reporting standard adopted by the European Parliament and the Commission in 2022, which EU countries are required to regulate through the adoption of national legislation. The reporting requirements set out in the CSRD will be applied progressively from 2024.

Sustainability reporting standards in the EU were preceded by the Non-Financial Reporting Directive (NFRD), which was published in 2014. However, the NFRD was notably insufficient in terms of the quantity and quality of disclosed information and the small number of companies due to the fact that the conditions for companies subject to disclosure were set at "large companies in the EU with an average annual workforce of more than 500 employees" (approximately 10,000 companies). The CSRD was therefore adopted as a disclosure directive to make it more reliable and easier to make comparisons back in time.

Compared to the NFRD, the CSRD covers approximately 50,000 companies (based on the number of companies in the EU alone), which is a significant increase. In addition, the disclosure requirements have been set to cover ESG (Environmental, Social and Governance) issues.

The CSRD's main objective is to ensure that companies provide comparable and reliable sustainability information for financial institutions, investors and the general public through more consistent sustainability reporting in the EU.

The expected benefits of CSRD to the business side include :

▪ Raise awareness among stakeholders inside and outside the company to accelerate not only disclosure but also management change and sustainability initiatives.
-Reporting under the CSRD is more detailed and comprehensive, and investors and stakeholders have more reliable access to sustainability information, which has benefits such as stimulating investment.
Improved transparency through a better understanding of corporate sustainability strategies and risk management.

The CSRD clearly states that disclosure is mandatory not only for companies within the EU, but also for companies outside the EU. Japanese companies doing business in the EU are likely to be required to comply with the CSRD as a regulation that cannot be ignored.

The next section summarises the conditions of the more detailed target group of companies.

2. conditions for the target group of enterprises

As indicated in the introduction, the CSRD sets disclosure deadlines for companies in the EU by size The CSRD hasWithin the EUAllenterprise,.SMEs listed on EU regulated markets.,,Non-EU companies with substantial operations in the EUThis applies to three main groups of companies. Listed SMEs are companies whose securities are traded on a regulated market in the EU and which do not fall within the definition of large companies. The aforementioned groups of companies subject to the NFRD will still be classified as large companies, but the CSRD will start operating one year earlier than other large companies.

Table 1: CSRD coverage conditions and eligible companies (prepared by the authors)

	Eligibility: fulfil at least two of the three requirements for two consecutive financial years.*Microenterprises are exempted from the application if they meet at least two of the requirements.	Operational start date
NFRD-eligible companies (large companies)	EU-regulated market listings and banks with at least 500 employees, e.g.	From 1 January 2024.
large-scale	More than 250 employees OR net turnover of more than EUR 40 million OR balance sheet total (total assets) of more than EUR 20 million	From 1 January 2025.
mid-scale	Less than 250 employees OR total turnover of less than EUR 40 million OR total balance sheet (total assets) of less than EUR 20 million.	From 1 January 2026.
small scale	Less than 50 employees OR total turnover of less than EUR 8 million OR balance sheet total (total assets) of less than EUR 4 million.	From 1 January 2026.
Micro-enterprises (exemption conditions)	Less than 10 employees OR sales of less than EUR 700 000 OR balance sheet total (total assets) of less than EUR 350 000	No plans to apply (if conditions are met).
Non-EU companies	Prerequisite: the non-EU ultimate parent company has a total turnover in the EU of more than EUR 150 million for the last two consecutive terms & additional conditions (one of which must be fulfilled): (1) the EU subsidiary is a large or listed company OR (2) the EU branch has a total turnover in the EU of more than EUR 40 million.	From 1 January 2028.

* Mandatory guarantee schemes.

The CSRD will gradually make 'third-party assurance' in disclosed information mandatory. This is intended to ensure the reliability of the information reported. It should be noted that the lack of existing standards at the European Commission makes it difficult to implement the strict measures immediately, so the aim is to institutionalise 'limited assurance' on some information for the time being; the Commission will adopt standards for limited assurance before 1 October 2026. It then plans to adopt the reasonable assurance (more extensive audit) standard in October 2028.

*Electronic tagging system

The reports produced (in XHTML format) require a 'tagging' assurance according to a digital classification by using the European Single Access Point (ESAP) model. The aim is to improve data convenience and re-use in the financial sector through the digitisation of information.

*Matters to be checked on the part of Japanese companies.

1. confirming the applicability of the EU subsidiary: if the EU subsidiary qualifies as a large enterprise as defined in the CSRD, it will be subject to the application from 2025. In addition, if the subsidiary is not subject to CSRD operation but meets the conditions as a non-EU company, CSRD operation will start in 2028.
In addition, if a subsidiary is listed on an EU-regulated market, it must also be identified as a medium-sized or small group of companies.

2. if the EU subsidiary is subject to the CSRD, the following two means of disclosure are considered:
(1) Disclosure of sustainability reporting under the CSRD by subsidiaries on a stand-alone basis
(2) Compliance with exemption of EU subsidiaries from reporting obligations if the parent company is compliant with the CSRD for Japanese companies or "discloses sustainability reporting on a consolidated basis based on equivalent standards".
(3) If only the EU subsidiary is dealing with this issue, check whether the local organisation has the necessary resources and experience in disclosing sustainability information: if it does not have sufficient resources or experience, it should consider supporting the parent Japanese company or reporting on a consolidated basis.

3. framework for disclosure information

The reporting obligations under the CSRD strengthen the disclosure of corporate sustainability information and set out specific reporting requirements. Items included in reporting are ESG-related information, such as a company's business model and strategy, as well as its environmental and social impacts.

The CSRD is characterised by the introduction of the concept of 'double materiality'. This is a departure from the "single materiality" approach found in other corporate evaluation standards, which requires companies to provide information that may influence investor decisions if it is not disclosed. Double materiality refers to the disclosure of information on the impact of corporate activities on the environment and society, in addition to the impact of sustainability issues on the company's performance and financial situation. The double materiality refers to the setting up of disclosures on the impact of corporate activities on the "environment" and "society", in addition to the impact on the company's performance and financial position.

CSRD regulatory matters are set out based on the following three ESG factors :

Table 2: ESG indicators, various items

environmental indicator	social index	Governance Indicators
greenhouse gas	Employee Management	Board composition and diversity
energy	Work environment and work-life balance	officer's compensation or remuneration
Water and marine resources	Gender equality and equal pay	risk management
natural resources	Supply chain management	Governance structures and practices
pollution	Community involvement	Lobbying and other political activities
biodiversity

Taking these factors into account, the regulatory requirements in the CSRD are as follows (* detailed requirements for each matter are set out by the ESRS, which is a delegated regulation)

Business models and strategies, including risks and opportunities
... Targets with deadlines
Role and necessary expertise and skills of management, supervisory bodies, etc.
Policy.
Incentives offered to members of management and supervisory bodies, etc.
∙ Identification of negative impacts in the due diligence process/business and value chain and responses and results for prevention, mitigation, etc.
The main risks and how they are managed.
KPI (Key Performance Indicators)

4. the relevance of the CSRD to other sustainability disclosure indicators

This is a supplementary section to the section on "cases where a Japanese company discloses sustainability reporting on a consolidated basis based on equivalent standards" referred to in "*Cases to be checked on the part of Japanese companies" in "2. Conditions for target group of companies".

The CSRD (and the Delegated Regulation ESRS) have indicated their intention to establish 'equivalent sustainability reporting requirements', although they are not clear at this stage. This means that other sustainability regulations that meet the criteria envisaged on the part of the CSRD will be considered equivalent, as follows. :

Provides comprehensive coverage of a wide range of sustainability matters.
Easier inter-company comparisons of sustainability performance.
Establish trustworthy measures to ensure the accuracy of the information provided.
Present information in a way that is easily accessible and understandable to stakeholders.

On the CSRD side, the ISSB (International Sustainability Standards Board) has been identified as a potential equivalence criteria assessment target. Taken in a broader sense, it is envisaged that the scope of these equivalence standards could be expanded to include GRI Standards, SASB Standards and TCFD (Task Force on Climate-related Financial Disclosures). It is important to note that these are still 'under consideration for finalisation' and therefore the start of the application of the CSRD is imminent.

In addition, Japan is currently considering a domestic sustainability reporting standard based on the ISSB standard, which is expected to be published by the end of 2024, and there may be further discussions on whether the CSRD should be assessed against the equivalent standard.

Thus, with regard to the application of the CSRD, it is difficult for Japanese companies to decide whether to have the CSRD applied or to have other sustainability reporting standards as equivalent standards to be exempted.

5. summary.

This article describes the EU version of the sustainability reporting standard, the CSRD, which puts forward a broad concept that applies to companies within and outside the EU, with specific disclosure requirements, etc., to be set separately The aim of the CSRD is to provide comparable and reliable corporate sustainability information.

The CSRD covers companies in the EU, with the start date of application depending on the size of the company. It also applies to non-EU companies with substantial operations in the EU. For Japanese companies, it is necessary to check the applicability of the CSRD to their EU subsidiaries and the conditions for being a non-EU company, and consider how to respond to the application of the CSRD.

The reporting obligations under the CSRD require disclosure of information from environmental, social and governance perspectives. In particular, the double materiality concept will be introduced, whereby companies will disclose not only their performance and financial position, but also their environmental and social impact. 

Regarding the relevance of CSRD to other sustainability disclosure indicators, the CSRD side has indicated its intention to recognise equivalent standards, but the specific standards are still undecided. For Japanese companies, it is difficult to decide whether to consider applying the CSRD or to receive an exemption response with other standards as equivalent.


aiESG provides support on CSRD, from the basics to the actual disclosure of non-financial information. aiESG is happy to assist companies that need help with CSRD compliance.

Enquiry: 
https://aiesg.co.jp/contact/

*Related page*.
Commentary] What is the SASB Standard for ESG Information Disclosure? (Part 1) SASB Overview
https://aiesg.co.jp/report/2301025_sasb1/

[Explanation] What is the TNFD? A new bridge between finance and the natural environment
https://aiesg.co.jp/report/230913_tnfdreport/