Luxembourg’s new bill of law transposing CSRD submitted to Parliament

On 29 March 2024, the long-awaited Bill of Law 8370 transposing Directive (EU) 2022/2464 as regards corporate sustainability reporting (“CSRD”) into national law (“Bill”) was submitted to the Luxembourg Parliament. The Bill also transposes Commission Delegated Directive (EU) 2023/2775 as regards the adjustments of the size criteria for micro, small, medium-sized and large undertakings or groups, increasing by approximately 25% the existing thresholds for micro, small, medium-sized and large undertakings. Several existing legislative texts are amended.

Key takeaways

In line with the CSRD, the main objective of the Bill is to replace the legal regime established by the Law of 23 July 2016 transposing Directive (EU) 2014/95 as regards disclosure of non-financial and diversity information by certain large undertakings and groups (“NFRD”), in particular by strengthening and enhancing the existing rules on sustainability reporting and extending them to a greater number of undertakings.

• Scope of application

The NFRD reporting regime only targeted EU public interest entities (i.e. entities admitted to trading on a EU regulated market (“listed entities”), credit institutions, insurance companies and other companies designated by Member States to be of public interest) with more than 500 employees, which are large entities or parent companies of a large group. The Bill will progressively extend the scope of the sustainability reporting requirements to (i) all large entities and parent companies of a large group, (ii) all small and medium-sized entities whose securities are listed on a regulated market in the EU (“listed SMEs”), (iii) non-EU entities whose securities are listed on a regulated market in the EU, and (iv) non-EU parent companies generating net annual turnover above EUR 150 million in the EU and having a subsidiary or a branch exceeding certain thresholds. As a result, approximately 50,000 companies are expected to fall under the scope of the CSRD requirements.

• European Sustainability Reporting Standards 

CSRD in-scope entities will be required to disclose a broad range of datapoints covering their governance, environmental and social impact. The aim is to ensure that investors, consumers and other stakeholders have access to the relevant information to assess (i) companies’ impact on people and the environment, (ii) the financial risks arising from climate change and (iii) other sustainability issues. The sustainability information will have to be disclosed according to the European Sustainability Reporting Standards (“ESRS”) developed by the European Financial Reporting Advisory Group (EFRAG) and published on 22 December 2023 in Commission Delegated Regulation (EU) 2023/2772.

Reporting on the basis of the ESRS will be particularly relevant to entities subject to the SFDR as datapoints will be aligned to reporting requirements under the SFDR, notably in respect of the SFDR principal adverse impacts.

Under the ESRS, all in-scope entities will be required to comply with cross-cutting standards which consist of general principles and general disclosure requirements applicable regardless of the entity’s business sector (covering in particular  governance, strategy, impacts, risks, opportunity management, metrics and targets – the “ESRS 2”). Additional disclosures related to governance, environment and social topics will be required when they are considered material for the entity, depending on the entity’s sector. To this effect, the ESRS require in-scope entities to conduct an assessment in accordance with the principle of “double materiality” and to consider both impact materiality (inside-out approach: the entity focuses on the impact of its activities on sustainability matters) and financial materiality (outside-in approach: the entity focuses on whether a sustainability matter is material for its development, performance and position). It follows that the precise list of ESRS disclosure requirements will be determined based on the outcome of this materiality assessment.

• Assurance opinion on sustainability reporting

In order to ensure that the reported information is accurate and reliable, the Bill will require statutory auditors, on the basis of a limited assurance engagement, to issue an opinion on, the compliance of the (consolidated) sustainability information with CSRD requirements, in particular compliance with the ESRS, the process implemented by the entity or the group to which such entity belongs to determine the information to be disclosed in accordance with the ESRS, the requirement to mark up sustainability information, and publication requirements.

Based on the current Bill, Luxembourg has exercised the option offered by the CSRD, allowing the entity to appoint as the statutory auditor responsible for the limited assurance engagement on (consolidated) sustainability information (i) the statutory auditor of the company or group in charge of the statutory audit (réviseur d'entreprises agréé) or (ii) any other statutory auditor. At this stage, the limited assurance can only be performed by a statutory auditor, as Luxembourg has not exercised the option of allowing independent service providers to perform the limited assurance engagement on (consolidated) sustainability information.

• Enforcement of the CSRD requirements

In Luxembourg, the CSSF will be the competent authority supervising the (consolidated) sustainability information of listed companies falling within the scope of the CSRD requirements pursuant to the Bill. In order to support such entities in the implementation of the CSRD requirements, the CSSF published a gap analysis on 2 February 2024, providing a preliminary understanding of the gap that remains to be addressed by issuers with regard to the transition from the NFRD to the CSRD in terms of sustainability disclosures. In addition, the CSSF issued a communiqué describing its priorities in the area of sustainable finance on 22 March 2024.

In case of failure to comply with the provisions relating to (consolidated) sustainability information, listed companies falling within the scope of the CSRD may be subject to administrative sanctions by the CSSF and, where appropriate, to criminal sanctions. Other entities captured by the CSRD that are not subject to CSSF enforcement risk criminal sanctions if they fail to comply with their (consolidated) sustainability reporting obligations. In addition to the risk of criminal penalties, failure to comply with the above-mentioned requirements may entail a reputational risk for the entity, a market risk in relation to its value chain and a risk of interrupting access to sources of finance in relation to bankers and other lenders.

Timing

Member States have until 6 July 2024 to transpose the CSRD into national law and until 24 December 2024 to transpose Commission Delegated Directive (EU) 2023/2775. Based on the current Bill, the application of the sustainability reporting requirements to Luxembourg entities will be phased in over the years as follows:

For any questions, please refer to the members of our firm’s ESG team who authored this article, including Caroline Bocklandt, Katrien Veranneman, Pauline Bazin, Elisa Halm, and Giovanni Marenco.