what the ESG reporting buzz from Europe means for US companies

Dec 14

published 12.14.22

If your business has operations beyond US shores, you may be wondering how all the new reporting directive and set of sustainability reporting standards in Europe will affect you. Here’s a roundup of the latest developments EU-side.

What’s changing?

As part of the European Commission’s (EC) goal to ensure companies operating in the EU market are fully accountable for their economic, environmental, and social impacts, the EC has been developing a Corporate Sustainability Reporting Directive (CSRD), which was adopted by the European Parliament earlier this month (November 2022) and is due to enter into force in 2023.

The CSRD is basically a more extensive replacement of the EU’s Non-Financial Reporting Directive (NFRD) introduced in 2018. The NFRD targeted the largest companies operating in Europe, with around 11,000 required to report. The CSRD will extend coverage to around 50,000 companies, together with more rigorous disclosure requirements.

Who will be affected?

Large EU companies (including large EU subsidiaries of non-EU parent companies) with securities listed on an EU-regulated market, and exceeding at least two of the following criteria:

More than 250 employees;
Turnover of more than €40 million;
Total assets of more than €20 million.

Non-EU undertakings with annual EU-generated revenues in excess of €150 million and which also have either a large or listed EU subsidiary or a significant EU branch (generating more than €40 million in revenue) will also be impacted.

When will companies be required to adhere to the new regulation? Companies that were already required to report under the NFRD must transition to the CSRD for their financial years beginning on or after January 1st, 2024. Other large firms that weren’t required to report under the NFRD, but now meet at least two out of three of the new criteria have been given a grace period until their financial years beginning in 2025. There are also plans to have listed SMEs report from their 2026 financial years onwards, based on a modified version of the CSRD, however there will be an option for SMEs to defer until 2028.

For the non-EU undertakings mentioned above — those with annual EU-generated revenues in excess of €150 million and either a large or listed EU subsidiary or a significant EU branch — the EU subsidiary or branch will need to publish a CSRD-style sustainability report at a consolidated level from 2028 onwards.

What ESG aspects are covered by the CSRD?

The range is broad, but in summary, companies will be required to disclose data on the impact of their activities on people and the planet and any sustainability risks they are exposed to. Other information required will include the process to select material topics, forward-looking information and targets, and reporting information on “intangibles”, which include social, human, and intellectual capital.

Impacts within the value chain are another key focus area under the CSRD. Companies will need to identify, prevent, address, and mitigate any possible human rights violations and adverse effects on the environment that could occur in their value chains. There is also a grace period here: if information regarding the value chain is not readily available, companies can choose to omit such information (with an explanation of why), for the first three years of the CSRD coming into effect.

Anything notable or different about the CSRD?

A key focus of the CSRD is on double materiality — how a company is affected by external factors that influence its position, development, and performance (inward-looking materiality) and the extent to which the company generates significant impacts on the environment and society (outward-looking materiality).

In comparison with existing frameworks, the GRI Standards, for example, are more focused on impact reporting (outward materiality), while SASB is more focused on financial impacts (inward materiality). As a result of the broader and deeper focus under the CSRD, the reporting requirements will be more extensive, so companies should expect a somewhat heavier lift compared with the current NFRD requirements or other frameworks.

How are companies expected to report under the CSRD?

The European Commission, supported by a range of groups — a Project Task Force, the European Financial Reporting Advisory Group (EFRAG), the Sustainability Reporting Board (SRB) of EFRAG, and a Technical Expert Group — have been developing a set European Sustainability Reporting Standards (ESRS) to guide companies in adhering to the CSRD. The first set of draft standards were submitted to the European Commission for review in November 2022.

When reporting under the CSRD, companies will need to ensure they use xHTML format and digital tags in accordance with European Single Electronic Format (ESEF) to enable standardization and easier verification. This is similar to the existing requirements for financial reports and is hoped will help deter greenwashing. Companies will also need to obtain assurance on the information they disclose. At first, this will be limited assurance, but there is a clear ambition to move towards more extensive assurance in the future.

Where will the ESRS sit with other reporting frameworks?

The European Commission has clearly stated that it intends the ESRS to be globally applicable, and that it doesn’t want to reinvent the wheel with these standards. GRI has been working with EFRAG to ensure the two Standards are as aligned as possible to ease reporting burden on companies. The ESRS are also expected to align with SASB when the sector-specific ESRS are developed.

The ESRS will incorporate existing EU regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy (a classification of a company’s economic activities which are considered environmentally sustainable), to avoid unnecessary duplication of reporting.

The ESRS will also follow the TCFD for climate-related information, therefore requiring reporting in line with the GHG Protocol for company emissions, which will likely involve reporting on all three scopes. Companies will also need to disclose their sustainability targets and transition plans aligned with the 1.5°C goal of the Paris Agreement to achieve climate-neutrality by 2050.

Clearly, there is a lot of momentum behind the ESG reporting movement in Europe which will have ripple effects in the US. As qb. associate Sofia Liszka pointed out in her recent blog post on corporate activism, the only constant in the ESG space is change, and change is sure happening apace right now!

If you have specific questions about how the CSRD will impact your disclosure strategy, don’t hesitate to reach out. We’re here to help.