Overview
Although political sentiment against mandatory sustainability reporting by business entities has grown in Europe (similar to the anti-ESG backlash in the United States), the European Commission (EC) has not backed down. On September 25, 2024, the EC initiated formal proceedings against 17 EU Member States[1] for failing to timely transpose the European Union’s Corporate Sustainability Reporting Directive (CSRD) into their national laws by the July 2024 deadline, creating compliance uncertainty for entities that will be required to report under the CSRD.
The EC noted that without transposition of the CSRD throughout the EU, harmonization of sustainability reporting will be impaired, hurting the ability of investors to evaluate comparable metrics on the sustainability performance of companies when making investment decisions. The 17 noncompliant member states were given two months to respond and complete their transpositions.
As member states transpose the CSRD into their national laws, variations are enacted in the rules as adopted by each state. In some member states, the disclosure requirements are more rigorous than required by the CSRD.
While transposition efforts progress at varying paces, the European Financial Reporting Advisory Group (EFRAG) has issued several European Sustainability Reporting Standards (ESRS) and related implementation guidance that specify and clarify the sustainability information companies will need to report on in accordance with the CSRD. Despite the volume of guidance issued, companies face substantial uncertainty on numerous reporting issues.
Notwithstanding the delays in transposition, the first deadlines to meet the CSRD’s reporting requirements are fast approaching. Companies with a significant presence in the EU will need to evaluate the mechanisms they have in place for collecting and reporting sustainability information on a global scale. Certain large non-EU companies will need to make reports in compliance with the CSRD as soon as 2025, so data collection should have begun this year. Beginning in 2026, certain large EU subsidiaries of non-EU companies must report data for fiscal years beginning on or after January 1, 2025.
This advisory focuses on applying the CSRD to non-EU companies. Adopted in November 2022, the CSRD imposes disclosure obligations on companies organized within the EU Member States and on two categories of companies organized outside of the EU: companies with significant operations within the EU and companies listed on EU exchanges.
In Depth
WHO REPORTS
Categorization Based on Company Size
The CSRD will require reporting by certain companies based on their size. A company’s size – Large, Medium, Small, or Micro – is determined using balance sheet, revenue, and employee thresholds, all on a consolidated basis (as updated to account for inflation in late 2023):
| Balance Sheet Total | Revenue | Average Number of Employees During Financial Year | |
|---|---|---|---|
| Large company2 (meets two of three criteria) | Greater than €25 million | Greater than €50 million | Greater than 250 |
| Medium company3 (meets two of three criteria) | Less than €25 million | Less than €50 million | Less than 250 |
| Small company4 (meets two of three criteria) | Less than €5 million | Less than €10 million | Less than 50 |
| Micro company5 (meets two of three criteria) | Less than €450,000 | Less than €900,000 | Less than 10 |
EU Subsidiaries of Non-EU Companies
EU subsidiaries of non-EU companies that (i) are Large, (ii) have securities listed on an EU exchange, and (iii) employ more than 500 individuals are required to report data for fiscal years beginning on or after January 1, 2024. This means data collection should have begun this year and reports will be filed with the applicable authorities in 2025.
Other EU subsidiaries of non-EU companies that are Large must report data for fiscal years beginning on or after January 1, 2025. This means the first reports will be filed with the applicable authorities in the EU Member State of domicile in 2026 and data collection will need to begin as early as January 1, 2025. It is worth noting that the reporting and size determination occur on a consolidated basis and would sweep in activities of non-EU entities housed under an EU parent company. Accordingly, a holding company organized in an EU Member State (e.g., Ireland or Luxembourg) would include all its subsidiaries in its calculations to determine size and include information about the operations conducted by all its subsidiaries in its CSRD report.
As discussed below, the CSRD applies to Small and Medium “undertakings” (i.e., companies) only if they (i) have securities listed on an EU exchange or (ii) are “public interest entities.” Micro companies are not required to report under the CSRD.
Non-EU Companies With Significant EU Operations
The EU operations of non-EU companies will trigger CSRD reporting obligations (at the level of the ultimate parent on a consolidated basis) if the net turnover of those operations exceeds a multiyear net turnover threshold. For example, a US organized multinational corporation subject to CSRD reporting will be required to report the consolidated results of its global operations. When a non-EU company’s total net turnover generated in the EU on a consolidated basis exceeds €150 million in two consecutive fiscal years, the non-EU company will be subject to CSRD reporting requirements if the non-EU company has either an EU-domiciled subsidiary that is subject to CSRD reporting or a branch in the EU with net turnover of more than €40 million.
Operating Through a Branch
Non-EU companies operating in the EU through a “branch” office (i.e., without a subsidiary organized within the EU) will trigger reporting obligations if the branch achieved a net turnover of €40 million in the most recent fiscal year.
Operating Through One or More Subsidiaries
Non-EU companies operating in the EU through one or more subsidiaries will trigger reporting obligations if one or more subsidiaries is a Large, Medium, or Small company in which there is a public interest.[6] There is a public interest in (i) entities traded on the regulated market of any EU Member State, (ii) credit institutions, (iii) insurance companies, and (iv) entities designated as a public interest entity by any EU Member State because of the nature of its business, size, or number of employees.
What Needs to Be Reported and When
Where CSRD reporting is triggered for a non-EU company with significant EU operations, consolidated reporting at the ultimate parent level is required for fiscal years starting on or after January 1, 2028, meaning data collection would need to begin in 2028 with reports due in 2029. The CSRD requires that management reports contain “information necessary to understand” the company’s impact on sustainability matters and “information necessary to understand” how sustainability matters impact the company’s growth, performance, and market position.[7] These reports must contain the same information as the reports prepared by non-EU companies with securities listed on an EU exchange (discussed below), but non-EU companies with significant EU operations reporting under the CSRD may omit certain items related to the resilience of the business regarding sustainability risks and sustainability-related opportunities.[8]
This information must be reported based upon short-, medium-, and long-term time horizons and comply with the forthcoming sustainability reporting standards for non-EU companies (NESRS).[9] The deadline for NESRS to be adopted is June 30, 2026, with public comment expected to begin in early 2025. Discussion drafts were published by EFRAG on November 18, 2024.
Non-EU Companies With Securities Listed on an EU Exchange
When Do Reporting Obligations Begin?
The CSRD requires reporting for non-EU organized companies with securities listed on an EU-regulated exchange. These companies must prepare reports in accordance with the CSRD and the ESRS. The timeframe for reporting is determined by the “size” of the company (see the table above regarding size classifications), using the criteria below.
| Compliance Timeline for Non-EU Organized Companies With EU Listings | ||
|---|---|---|
| Compliance Begins: January 1, 2024 Initial Reports Due: 2025 Issuers that are Large companies (on a consolidated basis) and have more than 500 average employees during the fiscal year |
Compliance Begins: January 1, 2025 Initial Reports Due: 2026 Issuers that are Large companies (on a consolidated basis) with fewer than 500 average employees in the prior fiscal year |
Compliance Begins: January 1, 2026 Initial Reports Due: 2027 Issuers that are Small or Medium companies (except Micro companies)Issuers that are Small, noncomplex credit institutions, captive insurance companies, or captive re-insurance companies that are (i) Large companies or (ii) certain Small or Medium companies in which there is a public interest |
WHAT SUSTAINABILITY INFORMATION MUST BE REPORTED
The CSRD requires that management reports contain information “necessary to understand the company’s impact on sustainability matters, and information necessary to understand how sustainability matters” impact the company’s development, performance, and position.[10] This information must be reported based upon short-, medium-, and long-term time horizons and comply with applicable ESRS.[11] At a minimum, reports must contain certain information required by the CSRD, such as:
- A brief description of the company’s business model and strategy, including:
- The resilience of the business model and strategy concerning risks related to sustainability matters
- Opportunities for the company related to sustainability matters
- The company’s plans, including implementing actions and related financial and investment plans, to ensure its business model and strategy are compatible with the transition to a sustainable economy. The company’s plans should also align with the limiting of global warming to 1.5°C in line with the Paris Agreement, the goal of achieving climate neutrality by 2050 (as established in Regulation (EU) 2021/1119) and, where relevant, the exposure of the company to coal-, oil- and gas-related activities
- How the company’s business model and strategy take into consideration the interests of the company’s stakeholders and the company’s impact on sustainability matters
- How the company’s strategy has been implemented as it relates to sustainability matters
- A description of the time-bound targets related to sustainability matters set by the company, including (where appropriate) absolute greenhouse gas (GHG) emission reduction targets for 2030 and 2050, a description of the progress the group has made toward achieving said targets, and whether the company’s targets related to environmental factors are based on conclusive scientific evidence, including GHG emissions[12], as set forth below:
| Emission | Content |
|---|---|
| Scope 1 GHG emissions |
|
| Scope 2 GHG emissions |
|
| Scope 3 GHG emissions |
|
| Total GHG emissions |
|
- A description of the role of the administrative, management, and supervisory bodies with regard to sustainability matters, as well as a description of their expertise and skills in relation to fulfilling said role or the access such bodies have to such expertise and skills
- A description of the company’s policies in relation to sustainability matters
- Information about the existence of incentive schemes linked to sustainability matters, which are offered to members of the administrative, management, and supervisory bodies
- A description of:
- The due diligence process implemented by the company with regard to sustainability matters and, where applicable, in line with EU requirements on companies to conduct a due diligence process
- The principal actual or potential adverse impacts connected with the company’s own operations and value chain, including its products and services, business relationships, and supply chain, actions taken to identify and monitor said impacts, and other adverse impacts the company is required to identify pursuant to other EU requirements to conduct a due diligence process
- Any actions taken by the company to prevent, mitigate, remediate, or bring an end to actual or potential adverse impacts and the result of such actions
- A description of the principal risks to the company related to sustainability matters, including the company’s principal dependencies on those matters, and how the company manages those risks
- Indicators relevant to the disclosures referred to in the points above.[13]
ESRS and Double Materiality
The ESRS, as promulgated by EFRAG, forms the backbone of the reporting framework with which CSRD reports will need to comply. The first set of ESRS is sector agnostic, consists of two cross-cutting standards – ESRS 1 and ESRS 2 – and applicable to all subject matters and 10 standards covering specific ESG subject matters:
- ESRS E1 (Climate Change)
- ESRS E2 (Pollution)
- ESRS E3 (Water and Marine Resources)
- ESRS E4 (Biodiversity and Ecosystems)
- ESRS E5 (Resource Use and Circular Economy)
- ESRS S1 (Own Workforce)
- ESRS S2 (Works in the Value Chain)
- ESRS S3 (Affected Communities)
- ESRS S4 (Consumers and End-Users)
- ESRS G1 (Business Conduct).
EFRAG intends for the ESRS to be interoperable with sustainability reporting standard promulgated by both the Global Reporting Initiative[14] and the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB).[15] EFRAG is currently in the process of drafting sector-specific sets of the ESRS and the NESRS.
Undergirding the application of the ESRS is the concept of double materiality set forth in ESRS 1, which applies across all ESRS (other than ESRS 2, which requires certain matters to be reported irrespective of materiality). This double materiality is either “financial materiality” or “impact materiality.”
ESRS 1 defines a sustainability matter as financially material “if it triggers or could reasonably be expected to trigger material financial effects on the undertaking.” While “[a] sustainability matter is material from an impact perspective when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- or long-term.”
The double materiality standard set out in ESRS 1 is a break from more investor-focused materiality standards used in other sustainability reporting frameworks (e.g., those of the ISSB’s Sustainability Accounting Standards Board). Accordingly, EFRAG has published additional guidance in the form of EFRAG IG 1 (Materiality Assessment) on the application of double materiality.
Forthcoming Assurance Requirements
The CSRD contemplates requiring assurance of sustainability reports prepared in accordance with the CSRD and applicable sustainability reporting standards. The CSRD requires the EC to adopt delegated acts setting standards for “limited” assurance of sustainability reports by October 1, 2026, and for reasonable assurance of sustainability reports by October 1, 2028.
HOW NON-EU COMPANIES SHOULD PREPARE
Assess Applicability and Follow Transposition
Applicability of CSRD reporting requirements and the timeframe for filing an initial report is based on the financial performance and legal structure of the non-EU parent and on the subsidiary or branch office. While financial performance is never guaranteed, companies can use their current financial performance to determine whether reporting requirements are likely to apply to any entities within their organizational structure. EU Member States were given until July 2024 to transpose CSRD requirements into their national laws, with the ability to add additional requirements. As noted at the outset, several EU Member States have not yet transposed the CSRD requirements into national law. Identifying where your EU operations exist (both the physical presence and the jurisdictions of holding companies) and which EU Member State’s national laws to follow will prove useful in complying with the forthcoming requirements. With the initial reports for Large EU companies without an EU listing due in 2026 (with data collection needing to begin in 2025), timing is key.
Build Competency Now
Non-EU companies that trigger reporting requirements under the CSRD may also trigger reporting requirements in the United Kingdom, California, and other jurisdictions across the globe. To successfully align reporting across varying jurisdictions and different reporting frameworks, knowledgeable, cross-functional teams will need to collect, refine, and produce the underlying information necessary to comply with these reporting requirements.
Align Assurance Providers and Other Advisors
Non-EU companies will be required to make their reports under the CSRD with the opinion of a third-party assurance provider. These providers must be authorized by the national law of the non-EU company’s jurisdiction of organization or of an EU Member State to give an opinion on sustainability information.[16]
