Corporate Sustainability Reporting Directive (CSRD): A legal perspective from Luxembourg

Since its adoption in January 2023, the Corporate Sustainability Reporting Directive (CSRD) has sparked passionate debates in the EU. Its detractors highlight the administrative burden it imposes, which could lead to a loss of competitiveness for EU companies, especially small- and medium-sized enterprises (SMEs). In short, the CSRD is seen as a “bureaucratic delusion.”

As a response to these concerns, on 8 November 2024, European Commission President Ursula van der Leyen announced a proposal to consolidate EU sustainable finance regulations (including CSRD) into an “omnibus regulation.” It’s not yet clear where this proposal will lead or to what extent it will amend the requirements under CSRD. Pending further announcements following the Commission meeting scheduled on 26 February 2025, let's take a moment to review the objectives of the regulation and its impact on Luxembourg.

 

A vital tool for the EU Green Deal

As part of the European Green Deal, the EU has come up with an ambitious plan: transforming the EU into a modern, resource-efficient and competitive economy, characterized by the absence of net greenhouse gas emissions by 2050 and an economic growth decoupled from resource use. To achieve this goal, companies have to increase data availability and disclosure of non-financial information. Greater transparency in economic activities should help channel financial and capital flows towards sustainable investments and limit the risk of greenwashing.

Directive 2014/95/EU on the disclosure of non-financial information and diversity information (NFRD) has introduced a requirement on some large undertakings and groups to report information on, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.

But some problems have been identified as to its effectiveness. Because of its limited scope, many undertakings didn’t have to report sustainability information. And NFRD didn’t require the use of common non-financial reporting standards, nor did it impose detailed disclosure requirements. As a result, there was a lack of comparability, reliability and relevance of the non-financial information disclosed.

The CSRD is meant to go one step further by extending the reporting obligations to additional undertakings and creating a common reporting framework for sustainability information. Companies subject to CSRD will have to report according to European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group. The first set of ESRS was published on 22 December 2023 under the form of a delegated regulation and applies to companies regardless of the sector they operate in.

 

Implementation in Luxembourg

On 29 March 2024, a bill of law 8370 was submitted to the Luxembourg Chamber of Deputies to transpose CSRD into national law (Bill).

In line with the provisions of CSRD, the reporting requirements will successively apply to:

• as from financial years starting on or after 1 January 2024, undertakings (including non-EU entities) with more than 500 employees and being large entities listed on an EU market or listed parent companies of a large group;
• as from financial years starting on or after 1 January 2025, large undertakings or parent undertakings of a large group exceeding certain thresholds during two consecutive financial years (ie 250 employees; net turnover of EUR50 million; total balance sheet of EUR25 million);
• as from financial years starting on or after 1 January 2026,
• SMEs listed on an EU regulated market (except micro undertakings);
• small and non-complex credit institutions that are large entities or listed SMEs;
• captive insurance undertakings that are large entities or listed SMEs;

• as from financial years starting on or after 1 January 2028, non-EU parent companies generating a net annual turnover of at least EUR150 million in the EU and either with an EU subsidiary qualifying as a large entity or as an SME listed on an EU regulated market or a branch in the EU generating a net turnover of over EUR40 million.

Many financial institutions, large enterprises and multinational corporations (including their holding companies) will be subject to new reporting requirements in Luxembourg, whether on a standalone or consolidated basis.

Beyond the size criteria, the new CSRD requirements will only apply to specific corporate forms. These include S.A, S.C.A, S.à r.l, société cooperative as well as SNC and S.C.S, provided their unlimited partner(s) are established as limited liability companies of any of the aforementioned corporate forms. Based on a strict reading of the Bill, S.C.Sp and S.A.S won’t be covered.

Alternative investment funds (AIFs) and UCITS are out of scope of CSRD.

Some exemptions may apply depending on the relevant structure. Unlisted subsidiaries may be exempted from preparing a sustainability reporting if:

• their parent undertaking is established in the European Economic Area and it prepares a consolidated sustainability statement that include these subsidiaries. This exemption doesn’t apply to large undertakings that are public-interest entities; or
• their parent undertaking is established in a third country and prepares a consolidated sustainability statement that’s carried out in accordance with ESRS or in a manner equivalent to those standards. But no equivalence has been determined to date.

The scope of consolidation of sustainability information was clarified recently following the Luxembourg Parliament’s submission of some amendments to the Bill on 28 October 2024. It’s been confirmed that the exemptions applicable to the scope of the consolidation of financial information should also apply to the scope of consolidation of sustainability information. This is especially relevant for asset managers who usually rely on the “Private Equity Exemption” under the Luxembourg law of 10 August 1915 on commercial companies, as amended, which exclude from the scope of consolidated financial statements undertakings whose “shares (…) are held exclusively with a view to their subsequent resale.”

 

Main reporting requirements

Undertakings falling under the scope of CSRD will have to include the sustainability report in a dedicated section of their management report. They will have to comply with the following requirements:

• Double materiality: in line with the approach already adopted under NFRD, the undertaking will have to carry out a double materiality assessment by disclosing not only how sustainability issues might affect the company (outside-in risks) but also how the company affects society and the environment (inside-out risks). Value chain: the sustainability information to be disclosed should go beyond the boundaries of the undertaking or the group to include the whole value chain of the undertaking, including its products and services, its business relationships and its supply chain.
• Expanded audit report: Statutory auditors will have to issue an opinion on the compliance of the (consolidated) sustainability information with CSRD, including compliance with the ESRS. Based on the current Bill, auditors can either be the statutory auditor (réviseur d'entreprises agrée) in charge of the statutory audit of the undertaking or the group, or another statutory auditor. At this stage, Luxembourg hasn’t exercised the option under the directive to have an opinion issued by other types of independent service providers.

In addition to reputational damage, non-compliance with CSRD can result in significant sanctions, including fines and imprisonment for the management.

 

Practical impact

From a practical standpoint, the stringent requirements of CSRD entail establishing robust systems for collecting and managing sustainability data across an undertaking, its group and its supply chain. This process has already proven to be resource-intensive and may require significant investment in new technologies and processes.

The costs associated with complying with CSRD (including data collection and processing, reporting and assurance costs) can be significant.

CSRD obligations can be particularly challenging for wealth and asset managers. As stated by experts in the field: “Unlike other sectors, they manage complex, multi-asset class portfolios and investor expectations that vary widely across markets. These organisations face the challenge of having to report their direct operations and assessing and disclosing sustainability impacts, risks and opportunities (IROs) across investment portfolios. This requires detailed insights into portfolio emissions, biodiversity, social impact and governance practices – data which is typically not as accessible or standardised.”¹

 

And now?

The directive has already been transposed in some jurisdictions, and businesses have started preparing. We’re seeing some reorganisations in Luxembourg to rationalize group structures in light of the CSRD requirements.

The uncertainties around the omnibus regulation are in that sense quite unfortunate. It’s also worth noting the recent speech by Luc Frieden, who suggested halting the transposition in Luxembourg pending European decisions.

The debate around CSRD revives the idea that progress on ESG topics can only be made at the expense of efficiency and competitivity of businesses. That’s certainly not the ambition under the European Green Deal, nor the perception of stakeholders who are pushing for its implementation.

This article was originally published in AGEFI Luxembourg and is reproduced with permission from the publisher.

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¹ Siddhi Salvi and Sasha Polikarpova," Four steps to prepare for CSRD and the niche challenges for wealth and asset managers", published on 21 November 2024.