Sovereigns and the CSRD

Contemplating sovereign entities and their relation to the Corporate Sustainability Reporting Directive ("CSRD") can seem like gazing at Escher’s labyrinth of staircases, crisscrossing endlessly without a final destination. While the application of the CSRD to various sovereign entities depends on a complex analysis and specific circumstances, there are some signposts to guide the way through the CSRD labyrinth.

The CSRD

The CSRD was published in the Official Journal of the European Union on 16 December 2022¹, having been formally adopted by the European Parliament and Council of the European Union in November. The CSRD entered into force 20 days after its publication, on 5 January 2023. The CSRD requires in-scope entities to report on sustainability-related issues in line with the detailed set of disclosure standards developed by the European Financial Reporting Advisory Group ("EFRAG"). Furthermore, the CSRD also requires in scope entities to recalibrate their strategies and governance structures to align with the Paris Agreement and other international environmental and human rights treaties.

The CSRD will extend mainly to large and listed EU companies, as well as to large third country companies which do substantial business in the EU or have securities listed on EU regulated markets.

Scope

The CSRD revises sections of Directive 2013/34/EU (the "Accounting Directive")² relating to non-financial disclosures that were introduced by the Non Financial Reporting Directive (the "NFRD"). The new sustainability reporting requirements under Article 1 of the CSRD will apply progressively from 2024–2028 to five categories of company:

• Large EU 'public interest entities’
• Issuers (both EU and Non-EU) of debt or equity securities listed on EU regulated markets
• Large EU undertakings and EU parent undertakings of large groups (other than those in category 1 above)
• EU small and medium-sized undertakings ("SMEs") that are listed on EU regulated markets (and which are not micro-undertakings)
• Non-EU parent companies with: (i) an EU-established large subsidiary or a listed SME subsidiary; or (ii) a large EU branch

Sovereigns

Where a sovereign has listed securities on an EU regulated market, the sovereign would be caught by the requirements of the CSRD if it would also fall under the definition of an ‘undertaking’. Sovereigns would not fall within the types of ‘undertakings’ covered by the CSRD as defined in Annexes I and II of the Accounting Directive³ as these are types of companies and partnerships.

Third Country Sovereigns 

While some EU Sovereigns may decide to lead by example by opting in to reporting under CSRD in relation to their securities offerings to demonstrate their wider commitment to the EU Green Deal⁴, it may be a tall order for third country issuer sovereigns to opt in to such reporting obligations if they are not already providing similar disclosure under their home regulations. Therefore, it seems unlikely that such third country sovereigns would voluntarily opt in to the CSRD at least in the early days of implementation.

State Owned Enterprises (“SOEs”) 

The position for SOEs under the CSRD compared to the position of sovereigns is often likely to be quite different. SOEs are those companies where the state exercises some degree of control. The ownership arrangements and the governance structures vary across countries and sectors. SOEs often combine commercial and non-commercial objectives. Where and SOE operates mainly as a commercial enterprise, it may be deemed an ‘undertaking’ for CSRD purposes. Further, where an SOE:

• has securities admitted to trading on an EU regulated market; or
• is defined as a ‘large undertaking’ under the Accounting Directive, 
• it may well be subject to the CSRD.

Third Country SOEs

If a third country SOE has securities listed on an EU regulated market, it will be in scope of the CSRD. Where a third country SOE has no securities listed on a regulated market in the EU, if the third country SOE has generated more than EUR 150,000,000 turnover in the EU for the last two consecutive financial years at group level and has a subsidiary in the EU which is classified as a large company or ‘large undertaking’ under the Accounting Directive it may be subject to the CSRD⁵.

Multilateral Development Banks (“MDBs”)

An MDB is a financial institution where the owners are governments and other international institutions and organisations. As MDBs are established by multiple member countries and/or international institutions, they fall under international law, but they can also be subject to local market laws and regulations.

Where an MDB takes a form comparable with a limited liability partnership or company as contemplated in Annexes I and II of the Accounting Directive, they fall within scope of the CSRD, subject to satisfying the financial de minimis thresholds.

The Relative Applicability of the CSRD to Sovereign and Quasi-Sovereign Entities

Whether and when various sovereign and quasi sovereign entities are in scope of the CSRD can seem like an impenetrable labyrinth of never-ending staircases. If the focus is shifted to the fundamental purpose of the CSRD then the path through becomes clear and the flexibility for sovereign entities to opt in to the CSRD brings even greater opportunity for greater transparency in the fight against climate change.

_{1Directive (EU) 2022/2464 of the European Parliament and the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, OJ L 322, 16.12.2022, pp. 15-80
2 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013L0034
3 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX%3A32013L0034
4 https://www.consilium.europa.eu/en/policies/green-deal/
5 Article 5(2) Directive (EU) 2022/2464, Article 3(4), Directive 2013/34/EU
6 Article 5(2) Directive (EU) 2022/2464, Article 3(4), Directive 2013/34/EU 
7 Recital (27), Directive (EU) 2022/2464}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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