I. Introduction
Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 on corporate sustainability reporting (the CSRD) applies to a wide range of entities, including credit institutions and insurance companies, large EU and non-EU large companies, parent undertakings of a large group, listed small and medium-sized enterprises (SMEs) (except micro-businesses).
The CSRD applies progressively to the different in-scope entities, starting with "large undertakings"1 with securities admitted to trading on a regulated market (the Issuers), which are required to publish their first sustainability report in accordance with the European Sustainability Reporting Standards2 (ESRS) (the Sustainability Report) as part of their annual report for the financial year 2024. Large companies that do not have securities admitted to trading on a regulated market are required to prepare their first Sustainability Report for the financial year 2025.
In this context, the Commission de Surveillance du Secteur Financier (the CSSF) conducted a study entitled "Transition plans: Preparing for climate change impacts: Fact-Finding Exercise on Issuers' Sustainability Reporting" (the Study) to:
- draw Issuers' attention to key issues to consider when reporting on transition plans in their Sustainability Report; and
- to highlight the challenges faced by Issuers in developing their transition plans and their level of awareness and readiness for the publication of their first Sustainability Reports.
The Sustainability Report required by the CSRD includes a transition plan. In this respect, Issuers need to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5°C, in line with the Paris Agreement under the United Nations Framework Convention on Climate Change adopted on 12 December 2015 and the objective of achieving climate neutrality by 2050 as set out in Regulation (EU) 2021/1119 of the European Parliament and of the Council, and, where relevant, the undertaking's exposure to coal, oil and gas-related activities, including implementing measures.
In addition to disclosing key figures and challenges, the study provides additional points of attention and recommendations for Issuers to consider when preparing their Sustainability Reports.
II. Key figures and main challenges
(a) Materiality Assessment: the materiality assessment, being the first necessary step towards the preparation of the Sustainability Report, has only been performed by 42% of the correspondents and only 9 Issuers, out of 15, have done so for the Sustainability Report of the year 2024. Most correspondents consider climate change to be a material issue.
(b) Setting Targets: whereas 78% of the correspondents (31 Issuers) set climate-related targets, mainly for greenhouse gas (GHG) emission reduction either in absolute value or in intensity or both, only 19% had targets validated by Science-Based Targets Initiative (SBTi).
The majority disclosed targets for Scopes 1 and 2, with some planning to separate out Scope 3 targets next year. In addition, 74% disclosed climate-related targets for 2030 and 39% of respondents disclosed climate-related targets for 2050.
(c) Decarbonisation levers and actions: Whereas a vast majority of the correspondents described key actions taken and planned for the future, only 15% (6 Issuers) of the correspondents disclosed financial resources allocated to the transition plan and none of the Issuers reports on the locked-in emissions.
Despite complying with the reporting requirement, Issuers face difficulties in implementing a transition plan with science-based targets and disclosing progress.
Key challenges reported by the Issuers relate to the monitoring of the transition plan over time. It should also be noted that for the vast majority of issuers the transition plan has not been approved by the administrative, management or supervisory bodies, which may explain the difficulties in implementing it. However, almost half of the respondents have taken climate-related considerations into account in management remuneration practices.
III. CSSF attention points and recommendations
Content of the sustainability disclosures
In the Study, the CSSF reminds that transparency is a key element when implementing a transition plan and recommends Issuers to be transparent about the scopes covered when reporting on their emission reductions targets.
The CSSF expects that most efforts will be made to comply with the ESRS requirements and to meet investors' expectations. In this context, Issuers must explain any potential differences between the KPIs presented under ESRS and those disclosed under the EU Taxonomy Regulation3.
Regarding the transition plans, the CSSF recommends the Issuers to provide (i) an explanation of how the transition plan is embedded in and aligned with their overall business strategy and (ii) whether it has been approved by the management.
Issuers whose remuneration policies do not take climate-related issues into account will still need to explicitly state this.
Finally, the CSSF stresses that the Issuers should not only disclose the result of the materiality assessment but also explain the process itself.
Form of the sustainability disclosure
The CSSF recalls that the Sustainability Report must cover the same scope of consolidation as the financial statements.
Issuers using alternative presentation formats must ensure that their sustainability disclosures are consistent with the overall presentation objectives.
Finally, it is important to stress that the CSSF is aware that compliance with the requirements of the CSRD requires skills and experience and that Issuers may need time to build up the necessary skills and expertise to fully comply with the requirements set out in the CSRD.
Footnotes
1. a large undertaking is defined as an entity that meets any two of the three following criteria: (i) total assets exceeding EUR 25 million, (ii) annual net turnover exceeding EUR 50 million, or (iii) an average workforce of more than 250 employees during the financial year.
2. Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards.
3. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
