As the EU’s Corporate Sustainability Reporting Directive takes shape, multinational companies outside Europe must prepare for comprehensive sustainability disclosures, with the first reports due as early as 2024.
The European Union’s (EU’s) ambitious Corporate Sustainability Reporting Directive (CSRD) is set to cast a wide net beyond European borders, requiring thousands of non-EU companies to make extensive sustainability disclosures about their environmental and social impacts.
The CSRD, which was enacted in January 2023, significantly expands the EU’s previous sustainability reporting requirements. While EU-based companies are the primary focus, the directive’s scope will extend beyond European borders, capturing international businesses—from US multinationals to Asian conglomerates—that have substantial European operations.
According to the European Commission’s requirements, non-EU companies will fall under the directive’s scope if they generate €150 million in net turnover in the EU and either have a subsidiary or a branch with turnover exceeding €40 million in the EU. These companies will need to start reporting under the new rules from 2028.
However, some international companies may need to comply much sooner. Non-EU entities with securities listed on EU-regulated markets must begin reporting as early as 2024 if they meet certain thresholds, with the first reports due in 2025.
“The new rules will ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues,” the Commission said.
The reporting requirements are comprehensive, covering environmental, social, and governance (ESG) topics through the European Sustainability Reporting Standards (ESRS). The standards were published in the EU’s Official Journal in December 2023 and introduce the concept of “double materiality,” requiring companies to report both their impact on sustainability matters and how sustainability issues affect their business.
“Many non-EU entities have EU holding companies that may have been established for tax purposes,” noted EY in its January 2024 technical analysis. “The CSRD applies to any EU holding company, including its EU and non-EU subsidiaries, that meets any of the criteria… even if the EU holding company does not meet the criteria on a standalone basis.”
Companies have several options for compliance. They can report at different levels–either through individual EU subsidiaries, a consolidated report at the EU level, or a group-wide report at the parent company level. Until 2030, companies can also use a transitional provision to consolidate all their EU operations under one EU subsidiary for reporting purposes.
The requirements go beyond simple sustainability reporting. Companies subject to the CSRD must also comply with the EU Taxonomy Regulation, which requires them to classify their economic activities according to their environmental sustainability. This includes reporting the percentage of their revenue, operating expenses, and capital expenditures derived from sustainable activities.
Additionally, all sustainability reports will require external assurance. Initially, this will be limited assurance, with a planned transition to reasonable assurance after the European Commission conducts a feasibility analysis.
The implementation timeline is phased as such:
- 2024: Large listed companies currently become subject to the Non-Financial Reporting Directive.
- 2025: Other large companies should comply.
- 2026: Listed SMEs come under the Directive (with an option to delay until 2028).
- 2028: Non-EU companies meeting the turnover thresholds need to comply.
While EU member states were required to incorporate the CSRD into their national laws by July 6, 2024, the European Commission recently initiated infringement procedures against 17 member states for failing to transpose the Directive fully. According to the Commission’s September 2024 announcement, the delay in implementation could hinder the achievement of harmonised sustainability reporting across the EU.
The affected states, including Germany, Spain, and the Netherlands, have been given two months to respond and complete their transposition. For multinational companies, the patchwork of implementation adds another layer of complexity to compliance planning, making it crucial to monitor developments in relevant EU jurisdictions.
As the deadline approaches, affected companies are advised to evaluate their existing systems and processes to gather sustainability information. Many may need to implement new or enhanced processes, systems, and controls to meet the comprehensive reporting requirements.
For international businesses, particularly those with complex corporate structures involving EU entities, the immediate priority should be carefully evaluating whether they fall within the scope of the CSRD and, if so, determining their optimal reporting approach given their specific circumstances and existing sustainability reporting capabilities.
