ESRS Reporting for Subsidiaries

Under the Corporate Sustainability Reporting Directive (CSRD), in-scope companies must align sustainability reporting with the European Sustainability Reporting Standards (ESRS). This is generally straightforward for single large entities, but these obligations and requirements become less clear when companies with multiple subsidiaries come into the picture.

This article explores the ESRS requirements for sustainability reporting in parent companies and their subsidiaries, when consolidated reporting is required and entity-level reporting is permissible.

Group and entity-level reporting

Two main distinctions need to be made: group-level reporting and entity-level reporting. These are two options that companies have for ESRS-aligned sustainability reporting. Reporting at the group level means that a company consolidates data from across its subsidiaries and publishes only one report. Reporting at the entity level means that reporting is separate across the subsidiaries and done individually. More than one report is published, each specific to a different subsidiary.

Consolidated reporting for subsidiaries

If the reporting company is a parent company that is required to prepare consolidated financial statements for the group and its subsidiaries, the same consolidation should apply to the sustainability report.

Prudential consolidation calls for separate entities under the group to consolidate information in a single report. There are three types of consolidated reporting:

1. Parent company reports for all subsidiaries as part of the group report
2. EU holding prepares a separate report for all subsidiaries
3. Largest subsidiary consolidates information in a single report for all subsidiaries

Consolidated reporting for FY2024 is required if a company is the parent of a large group, a Public Interest Entity (PIE) as defined in the Directives 2013/34/EU (Accounting Directive), and has more than 500 employees. If a company does not satisfy all of these criteria but is the parent of a large group and has public-listed securities on the EU market, it has until FY2025 to prepare for consolidated reporting.

Entity-level reporting

If necessary, individual reporting may be helpful to ensure disclosures make sense. The ESRS provides for disaggregation with the following provisions:

• The reporting company may break down disclosures by country if there are notable differences in the material impacts, risks, and opportunities (IROs) between countries, or if reporting at the group level would obfuscate material information about IROs.
• Companies can disaggregate the data by significant site or asset in cases where the reported information is highly specific to a particular location or asset.
• The level of disaggregation in the double materiality assessment should also be considered to determine the proper degree of disaggregation for reporting.

In some of the above instances, disaggregation by subsidiary makes sense. If group-level reporting is chosen, the combined data should not lose context and specificity that are essential for understanding the data.

Generally, entity-level reporting is recommended for large companies that are not a parent company. If the company is a PEI with more than 500 employees, ESRS-aligned entity-level reporting is required from FY2024, or FY2025 for PEIs with less than 500 employees.

In the case of SMEs trading publicly on an EU-regulated market, individual sustainability reporting is required from FY2026. Micro SMEs or SMEs that are not publicly traded in the EU are exempt from reporting.

If a company has a turnover of more than EUR150 million in the EU and has one or more subsidiaries listed on EU-regulated markets, or has EU branches with a turnover of more than EUR40 million, ESRS-aligned reporting is required from FY2028 either through either entity-level reporting or consolidated reporting.

Which is the right approach?

For any consolidation of reporting for subsidiaries, the above ESRS requirements should first be considered. To determine if group or entity-level reporting is right for a company, here are five questions to consider:

1. Is the financial statement of the subsidiary consolidated at the group level?
2. Do the subsidiaries belong to different sectors?
3. Are the material IROs similar or vastly different across subsidiaries? Does consolidation blur the context for reporting specific IROs?
4. Which entity has reporting capabilities? How is the reporting budget distributed across the group and its subsidiaries?
5. What governance processes may help or hinder the reporting process between subsidiaries and the group, including audit and verification?

These are all important considerations that take into account ESRS provisions, materiality, reporting expertise, resource availability, and governance. Ultimately, there is no right answer or one-size-fits-all approach. A company that does not consolidate its financial statements and therefore qualifies for individual reporting may still find it necessary to report at the group level due to limited resources or capabilities for reporting. Another company may choose to consolidate the report across entities for comparability, even if it doesn’t have to.

Your choice would also depend on the ability to meet CSRD audit requirements. Subsidiaries that publish their own reports must engage the audit process individually, while consolidated reporting is an easier option for assurance. Governance-wise, consolidated reports must be approved by the parent company or the holding company that is responsible for reporting and presenting implications for governance processes. This would mean that the group can be held accountable for the consolidated information.