Understanding CSRD Consolidation: Entities to Include in Your CSRD Report

As organisations prepare to align with the Corporate Sustainability Reporting Directive (CSRD), understanding the consolidation requirements becomes essential, particularly for groups and parent companies managing subsidiaries and other related entities. This article delves into the consolidation requirements in the context of CSRD, focusing on defining organisational boundaries, and managing potential challenges.

In this article, we will cover the following:

• Overview of the CSRD and ESRS 
• Defining Organisational Boundaries as CSRD’s Initial Step
• Which Entities to Include in a Consolidated CSRD Report? 
• Why Consider Consolidation Requirements Early for CSRD Reporting? 
• How can Greenomy help?
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Overview of the CSRD and ESRS

The CSRD aims to enhance and standardise sustainability reporting for both EU-based companies and non-EU companies operating in Europe, significantly broadening the scope of the Non-Financial Reporting Directive (NFRD). The directive mandates comprehensive sustainability disclosures, now regulated by the European Sustainability Reporting Standards (ESRS), developed by EFRAG. These standards introduce detailed requirements for organisations to report on a broad range of environmental, social, and governance (ESG) topics.

The disclosures specified in the ESRS rely on a Double Materiality Assessment (DMA) to identify the undertaking's material impacts, risks, and opportunities, which will ultimately determine the scope of the required disclosures. With over 1,000 data points in the ESRS, both quantitative and qualitative, that could be deemed material, parent companies must carefully consider which entities will be included in the assessment and consolidated in the group-level CSRD report to ensure compliance.

Defining Organisational Boundaries as CSRD’s Initial Step

While the Double Materiality Assessment (DMA) is frequently cited as the initial step in the CSRD reporting journey, it is important to recognise that it doesn’t truly mark the beginning of your CSRD checklist. The Double Materiality Assessment identifies "what" is material to the undertaking, but before determining the "what," organisations must establish their organisational boundaries. 

Defining these boundaries answers the essential question of "who" is affected, identifying which entities and locations fall within the scope of the reporting. This foundational step is critical and should precede the DMA, as it sets the stage for a comprehensive and accurate sustainability report.

Which Entities to Include in a Consolidated CSRD Report? 

As a rule of thumb, the scope of entities included in the CSRD report should align with the financial statements, ensuring consistency between the two. According to ESRS 1, paragraph 62, "The sustainability statement shall be for the same reporting undertaking as the financial statements. For example, if the reporting undertaking is a parent company required to prepare consolidated financial statements, the sustainability statement will be for the group," underscoring the importance of this alignment. 

In the context of the Accounting Directive, the EU framework setting harmonised rules for the preparation, presentation, and publication of financial statements, a group is defined as "a parent undertaking and all its subsidiary undertakings," where a "subsidiary undertaking" is any entity controlled by a parent undertaking, even if control is exerted without holding a majority of voting rights. 

While some subsidiaries might be excluded from financial reporting consolidation due to materiality or practical considerations, these subsidiaries could still have material sustainability topics that warrant inclusion in the consolidated CSRD report. Therefore, assessing the materiality of their impacts, risks, and opportunities (IROs) is crucial to ensure comprehensive and accurate group-level CSRD reporting.

Entities under Operational Control

In addition to subsidiaries that are controlled by the undertaking, the ESRS also requires the inclusion of information from entities under operational control for a limited set of specific data points. In the context of Scope 1 and Scope 2 emissions, pollutants, and sites, operational control plays a pivotal role in determining the extent to which an undertaking must account for and report its environmental impact. 

• For Scope 1 and Scope 2 emissions, operational control dictates that an undertaking must fully consolidate and disclose 100% of the greenhouse gas (GHG) emissions from entities it operationally controls, including those from investees and joint ventures that are not fully consolidated in financial statements but fall under its operational influence. This ensures that the company’s environmental footprint accurately reflects its true operational impact, even in part-time or shared control scenarios. 
• Similarly, when disclosing pollutants, the undertaking must include emissions from all facilities it controls operationally, ensuring comprehensive reporting of its environmental liabilities. 
• In terms of site management in ESRS E4, operational control requires the undertaking to report on material sites under its influence, particularly those in biodiversity-sensitive areas, and to disclose any negative impacts on land, species, or ecosystems. 
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Entities not Under Operational Control

When associates or joint ventures (not under operational control), accounted for under the equity method or proportionally consolidated in the financial statements, are part of the undertaking’s value chain, for example as suppliers, the undertaking shall include information related to those associates or joint ventures with the approach adopted for the other business relationships in the value chain. In this case, when determining impact metrics, the data of the associate or joint venture are not limited to the share of equity held but shall be taken into account based on the impacts that are connected with the undertaking’s products and services through its business relationships.

Where associates and joint ventures (not under operational control) do not form part of the value chain as suppliers or customers (also referred to as actors in the value chain), they are treated as investments. Investments form part of the undertaking’s business relationships (as defined). As such, they may give rise to impacts that are connected to the undertaking and that are to be considered in the materiality assessment and reported when material. However, topical ESRS do not have specific reporting requirements that indicate how to measure these impacts, apart from GHG Scope 3 Category 15.

Therefore, while such entities are usually not consolidated in the financial statements, their material impacts, risks, and opportunities must still be assessed and disclosed in the sustainability statement. However, they are not treated as part of the undertaking's own operations and are typically not consolidated with entities under financial control. Instead, they are included as value chain information through their connection as part of the undertaking’s broader business relationships.

What About Joint Operations?

In the context of the ESRS, joint operations are treated as part of the financial perimeter of the undertaking. This means that the assets, liabilities, revenues, and expenses associated with joint operations are considered as part of the reporting entity’s own operations.

Why Consider Consolidation Requirements Early for CSRD Reporting? 

Consolidation considerations play a critical role from the very beginning of the CSRD reporting journey. Establishing a clear mapping of the organisational structure and boundaries is essential for informing the Double Materiality Assessment, as it allows for the accurate identification of impacts, risks, and opportunities (IROs). This foundation promotes consistency throughout the CSRD reporting process, ensuring alignment in subsequent stages. By addressing CSRD consolidation early, organisations can streamline the data collection process and significantly improve the efficiency of the subsequent reporting stages.

How can Greenomy Help?

Seeking assistance with your CSRD reporting? Collaborating with sustainability experts like Greenomy offers invaluable guidance and support, ensuring your organisation meets regulatory requirements and utilises its sustainability reporting as a strategic asset. Discover Greenomy's innovative CSRD solution to streamline data capturing and reporting for long-term efficiency. Additionally, explore our Sustainability Advisory services, where our experts will help you initiate your CSRD reporting journey. Book a demo for further details.