What Can Indian Firms Do to Comply with the EU’s New Green Regulation?

The European Union's (EU) recent regulation on environmental, social and governance (ESG) reporting, the Corporate Sustainability Reporting Directive (CSRD), has implications for Indian companies with subsidiaries or operations within the EU. Currently, several Indian companies disclose sustainability information using globally recognised standards like the Global Reporting Initiative (GRI) and the Business Responsibility and Sustainability Reporting (BRSR) regulation issued by the Securities and Exchange Board of India (SEBI). However, these companies, if eligible, must comply with CSRD. For most eligible companies, compliance begins next year, necessitating immediate preparations.

Who Needs to Comply?

Indian company with at least one subsidiary that is a large company in the EU meeting at least two out of three criteria will have to report in 2026 for 2025.

·250 employees and/or

·€50mn turnover and/or

·€25mn balance sheet

An Indian company that generates over €150mn a year in the EU and that has in the EU either a branch with a turnover exceeding €40mn or a subsidiary that is a large company or a listed small and medium-sized enterprise (SME) will have to report on sustainability impacts at the group level from the financial year 2028, with the first sustainability statement aligned to CSRD published in 2029.

How Can Companies Prepare?

Decoding CSRD eligibility: Many Indian companies have EU holding companies or subsidiaries for ease of doing business. The complexity to determine the eligibility might increase if there are cross holdings between subsidiary entities in EU or even outside. Additionally, companies must choose which reporting structure to opt for—individual entity reporting, subgroup reporting, artificial consolidation and global consolidated reporting.

Decoding eligibility involves understanding the applicability of CSRD to the entity and the reporting structure.

Designate accountability and ensuring a budget: Since reporting is an annual exercise, there must be a clear governance structure to comply with. Under CSRD, it is the responsibility of the administrative, management or supervisory body of the reporting company to ensure that the report is prepared and published in compliance with the directive. The report must also be signed off by the governing body, affirming its accuracy and completeness. This requirement underscores accountability at the highest level of the organisation for corporate sustainability disclosures. To ensure this, the reporting process should be well laid-out with appropriate responsibilities.

The estimated initial cost is €1.7bn and €1.9bn annually in recurring costs for large companies reporting under the CSRD. Moreover, companies need to have the reports assured, leading to additional yearly expenses. While estimates will differ by country, companies need to allocate an appropriate budget for CSRD implementation.

Double materiality: CSRD requires companies to adopt a ‘double materiality’ perspective around sustainability.  Double materiality requires companies evaluate materiality from a financial and an impact perspective.

The process of double materiality involves engaging with stakeholders and determining the threshold to identify materiality across both dimensions. The outcome will be in the form of impacts, risks and opportunities. This is the backbone of what an organisation will report. The process and the outcome also need to be agreed on with the assurance agency.  This will be a time-consuming exercise and organisations will have to plan for it.

Deciphering European Sustainability Reporting Standards (ESRS): The outcome of the double materiality process will be an input for determining what is to be reported. It also requires a full comprehension of ESRS to determine the scope and boundary of reporting.   

Devising a CSRD core group: After deciphering ESRS, it is imperative for companies to set up a comprehensive cross-functional governance framework for enabling the CSRD reporting process. This is due to the scale and nature of information that has to be disclosed. A core group involving all key functions to ensure executive control over the reporting process is critical. This will also give more confidence to the highest governance body that is accountable for the content of the report.

Developing skills: Establishing governance structures without investing to improve skills will have challenges. Capacity building is critical for people to own their responsibilities inside the governance framework. They need to know what to do and why they are doing it to get a reliable output. The intent behind each disclosure is critical to ensure that the process is designed to get the right information.

Data that can be trusted: Each disclosure requirement has a specific purpose and for comparability, the regulation defines the requirement. Companies must therefore establish robust systems for data validation to ensure that the information collected is accurate, relevant, reliable and auditable.

Deploy an assurance provider: CSRD requires data to be assured. Companies are required to have their sustainability information assured by an independent third-party auditor. Currently, the requirement is for a limited level of assurance.

Each new reporting requirement brings challenges but understanding their intent aids in compliance. The goal is transparency in sustainability information for stakeholder decision-making, contributing to a sustainable economy. It helps to embrace digital workflows for effective CSRD compliance. Preparing for CSRD can also facilitate compliance with other regulations as regulatory sustainability reporting evolves.

The writer is general manager—corporate sustainability, HCLTech. Views are personal.