The European Union (EU) flag at the European Parliament’s Louise Weiss building in Strasbourg, … [+] France, on Tuesday, Sept. 12, 2023. Photographer: Stefan Wermuth/Bloomberg
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After delays, the European Union is moving forward with drafting sustainability reporting standards for non-EU based businesses. The standards, mandated by the Corporate Sustainability Reporting Directive, will require companies to disclose greenhouse gas emissions and other climate related actions and policies. The independent body delegated the authority to draft the standards has indicated a desire to limit their scope for non-EU based companies. The first draft will be released in early 2025, to go into effect in 2028.
Initially proposed in April 2021, the CSRD increases existing reporting requirements for businesses operating in the EU. The proposed directive replaced the existing Non-Financial Reporting Directive, greatly expanding the scope of the reporting and the number of impacted businesses. The new reporting requirements go beyond traditional financial reporting to include environmental, social, and governance actions of businesses.
The drafting of the actual reporting requirements to be used by businesses under the CSRD was delegated to the European Financial Reporting Advisory Group. EFRAG completed the first set of the European Sustainability Reporting Standards from June 2021 to April 2022. The proposed ESRS were open to public comment from April to August 2022. The first round of ESRS were adopted by the European Commission in July 2023, going into effect January 1, 2024, for reports filed in 2025.
Under Article 40(a) of the CSRD, reporting will be required for non-EU based companies that meet certain requirements. Those requirements include a branch of subsidiary in the EU and more than EUR 150 million in net turnover generated in the EU. Reporting is set to start in 2028.
At the direction of the European Council in 2023, EFRAG delayed beginning work on non-EU ESRS to focus on bringing clarity to reporting requirements for EU companies. In April 2024, the delay became official when the European Parliament moved adoption date two years, from 2024 to 2026. The work was further delayed by the EU Parliament elections in July, as EFRAG waited on clarity from the incoming EU leadership as to which direction they should take the ESRS.
At the October meeting of EFRAG’s Sustainability Reporting Board, non-EU ESRS made the first official appearance on the public agenda since delays. The SRB met in a closed-door debate prior to the public meeting, then used the public meeting to announce the “direction of travel” EFRAG will be taking on non-EU ESRS.
Generally, non-EU companies will follow the same standards as EU companies, excluding financial risks and financial opportunities related to climate change. This narrows the focus on actual GHG emissions by the company, as well as the policies and actions relating to climate change. EU based companies will need to calculate the financial risks associated with climate change, like the cost of natural disasters, and the financial opportunities, like investing in green initiatives. Those calculations are typically reported in the company’s home jurisdiction, if that jurisdiction requires sustainability reporting.
The risk exclusions are from the original text of the CSRD. EFRAG’s SRB is looking to further limit the scope. While a business’ global carbon emissions and climate change activities will still be disclosed in a global sustainability statement, EFRAG is proposing a reduction in the reporting requirements for other environmental, social, and governance factors.
They are looking to add language to allow companies to exclude topical “impacts connected with operations and revenues other than those connected with EU customers.” Those connections may either be direct or indirect.
Topical ESRS are divided into the three ESG categories as follows. Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems, and circular economy. Social: Own workforce, worker in the value chain, affected communities, consumers and end-users. Governance: Business conduct.
During the meeting, SRB member Laurence Rivat voiced opposition to the proposed reduction of changes, saying that it would give an advantage to non-EU based companies who have a lower reporting requirement. SRB member Filip Gregor echoed those concerns and questioned the legal authority of EFRAG to reduce standards beyond the text of the CSRD.
EFRAG will begin drafting the initial non-EU ESRS through a taskforce. The first draft will be made available sometime in Q1 2025, then be open to public feedback. Following the consultation period, EFRAG will make changes to the draft. It will be sent to the Council for approval by November 2025. Final approval is set for 2026.
One thing to keep an eye on is action by the Council to reduce the overall scope of the CSRD. The Commissioner-Designate for Financial Services and the Savings and Investments Union, Maria LuĂs Albuquerque, recently expressed a desire to streamline reporting requirements. This echoes sentiments made by conservative leaders throughout the EU. It is highly likely the Council will give further direction to EFRAG to reduce the scope.