Global Korean Practice Newsletter ESG Reporting in EU
I. CSRD
1. Overview
The 2016 Paris Agreement set an objective to limit global warming to "well below 2 degrees Celsius". As the world shifts towards this goal, accounting frameworks for environmental, social, and governance (ESG) topics have emerged as important regulations. The EU's introduction of the Corporate Sustainability Reporting Directive (CSRD) has given voice to this global paradigm shift. The CSRD was adopted in November 2022. It significantly expands existing sustainability reporting requirements – both in terms of the number of companies in scope and the increased level of detail and information required. The scope covers almost 50,000 companies based in the EU, including foreign subsidiaries, which will need to report on a wide range of ESG topics. Although the CSRD is an EU Directive, there are considerable ESG reporting implications for non-EU based companies.
Why is this relevant for Korean companies in the EU?
Most Korean companies have a considerable amount of ESG information available at the group level, in accordance with the TCFD, GRI, and other ESG-reporting frameworks. With the introduction of the CSRD, sustainability reporting is also becoming relevant for their European subsidiaries. Detailed ESG information will now need to be reported on a European level. For most Korean subsidiaries in Germany, the first reporting under the CSRD will be due for fiscal year-end December 2025/ March 2026.
The CSRD is just one component of several sustainability-related regulations under the European Green Deal
I. CSRD
1. Overview
Page 10
2. Companies in Scope
Page 11
3. Double Materiality
Page 11
4. Requirements
Page 12
5. Assurance
Page 12
6 Exemption Rules
Page 13
II. EU Taxonomy
1. Overview
Page 14
II I . Status Quo
1. Our Observations
Page 15
I V . Flash News
1. Update June 2023: Publication of the draft delegated act on the ESRS
Page 16
that include reporting obligations – e.g., EU Taxonomy disclosures (see II. EU Taxonomy).
2. Companies in Scope
The CSRD includes different scoping requirements for EU versus non-EU based companies. Whereas the general scoping depends on listing status or size, the non-EU scoping is based on a combination of physical presence in the EU and net turnover generated in the EU. This interplay of requirements, plus related reporting exemptions, can make the scoping analysis complex.
General scoping
The CSRD will apply to all companies operating in the EU and their subsidiaries that meet the following general scoping requirements.
• Large companies or large groups (i.e., a company including all its subsidiaries on a consolidated level) that meet at least two of the following:
> 250 employees;
> €40M net turnover (revenue);
> €20M total assets.
• Companies with listed securities in the EU other than ‘micro companies’. A micro-company meets at least two of the following (including subsidiaries):
−
≤ 10 employees;
≤ €700,000 net turnover;
≤ €350,000 total assets.
This scoping includes large subsidiaries of non-EU parents – i.e., all EU companies are subject to testing under the above criteria regardless of the origins or domicile of their ownership.
Additional non-EU parent scoping
Irrespective of the general scoping described above, an ultimate non-EU parent company is subject to the CSRD starting January 1, 2028, if it has:
• substantial activity in the EU – i.e., it generated net turnover greater than €150M in the EU for each of the last two consecutive years; and
• one of the following:
one subsidiary that meets the general scoping of the CSRD; or
one branch (in general, a physical presence) that generated net turnover greater than €40M in the preceding year.
Why is this relevant for Korean companies in the EU?
Although most Korean subsidiaries in Europe are sales companies, most entities are still large enough to fall under the CSRD scoping requirements. Even if a Korean company does not have a subsidiary that is considered a large EU company under the general scoping, the CSRD can still have consequences if their subsidiary or branch falls under the non-EU parent scoping.
Additionally to this single-entity perspective, the consolidated view needs to be considered when determining the scoping requirements. According to Article 29a, large groups that file consolidated CSRD reports in relation to the whole EU group would need to extend their scope to include non-EU subsidiary companies that are included in such consolidated reports (see 6. Exemption Rules).
3. Double Materiality
Issues that affect a company's cash flow, earnings, or financial position are material because they are relevant to investors' decisions. Other stakeholders have different informational needs than investors – they seek a broader understanding of a company's impact on society, the environment, and the economy. This broader informational need is addressed by the CSRD. Accordingly, companies must report in a way that meets the informational needs of investors and enables appropriate decision-making, but also more generally meets the transparency needs of business partners, customers, policymakers, and citizens who want to understand the company’s positive and negative contributions to sustainable development.
Companies must therefore report on all matters that are either financially material (relevant to investors) or have a material impact on people and the environment (relevant to affected stakeholders); this is called Double Materiality. Double Materiality is a materiality concept that encompasses two dimensions that are equally relevant for assessing which information shall be included.
Why is this relevant for Korean companies in the EU?
The definitions of materiality have been closely aligned with existing international frameworks. Financial materiality is closely aligned with the definition used by the ISSB, while impact materiality is more closely aligned with the definition used by the Global Reporting Initiative (GRI). Many Korean companies already report ac-