Note EU CSRD Requirements for Non-EU Companies

On November 10, 2022, the European Union (EU) Parliament enacted the world’s most comprehensive environmental, social, and governance (ESG) legislation called The Corporate Sustainability Reporting Directive (CSRD). ?

Part of the new CSRD regulations makes the EU’s prior announced ‘Green Deal’ growth strategy of becoming climate neutral by 2050 legally binding.

Notably, U.S. companies, and other non-EU headquartered companies with EU operations, that generate annual revenue of more than $160M (€150M), in the EU will be required to follow sustainability reporting requirements. Moving forward non-EU companies must develop sustainability reports, that include both environmental and social financial and non-financial information in accordance with EU guidelines.

Past voluntary sustainability reporting standards in the EU were self-administered and self-regulated. Looking ahead sustainability reporting, and supporting standards, will be EU law. Leaders must now ensure accurate company sustainability reports and provide third-party certification of reports to comply with new governance requirements.

An April 21, 2021 EU commissioned audit report to determine the effectiveness of enacted sustainability regulations found that companies do not disclose material information on all major sustainability-related topics, including climate-related information such as greenhouse gas (GHG) emissions and factors that affect biodiversity. To address the sustainability information divide, part of the EU’s goal with CSRD is to prevent greenwashing and double counting by standardizing key performance indicators (KPIs) and outlining regulation intended outcomes.

The CSRD is 227 pages of lengthy but helpful information for leaders seeking to better understand the policy intent and reporting nuances of the upcoming regulations. Significant care was taken to incorporate a broad range of stakeholder feedback in the development of regulations.

Incorporate Preferences into Reports

At the micro level, there are many small but important changes, that if successfully adopted, will lead to smoother sustainability report development and compliance. Best practice adjustments to terminology such as preferring the use of ‘sustainability information’ in place of ‘non-financial information’ to better enforce the financial impact ESG information has on company financials, investor decisions, and natural capital.

Intangible resources e.g., internal company information about employees’ skills, competences, experience, loyalty to the undertaking and motivation for improving processes, goods and services, is sustainability social information that should be included in reports.

In addition, external supply chain information about the quality of relationships with suppliers and how the activities of the company affect broader value chain stakeholders, e.g., customers, and communities, is sustainability information relevant to both social and governance matters within reports.

Ensure Climate Change Alignment

At the macro level, the viewpoint from which company sustainability is defined has been expanded. The ‘double materiality perspective’ requires companies to not only report sustainability information 1) impacting the company but also 2) the company’s impact on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.

Further, leaders must ensure and disclose how the company’s strategy and business model are compatible with the 1) transition to a sustainable economy, 2) objectives of limiting global warming to 1.5 °C in line with the United Nations Paris Agreement, and 3) achievement of climate neutrality by 2050.

Prepare and Partner Now

The new CSRD laws will officially be enforced on June 30, 2024, to allow a grace period for companies to assemble the necessary data, processes, and tools to deliver ongoing compliance. Considering the task at hand and fast-approaching deadline, companies are planning to gather, develop and provide sustainability reports for financial year 2023 to allow for invaluable leadership and team learnings.

The time required to gather and analyze the necessary underlying data required for sustainability KPIs can be cumbersome, particularly scope 3 GHG emissions data, from company’s extended value chain. Close collaboration and resource support for suppliers, especially small to medium sized companies, will play an important role for data gathering efficiency and effectiveness. ??

As we look to the near future, large companies are not the only ones effected by the CSRD. Small to medium-sized companies with revenues of $43M (€50M) up to $160M (€150M), will be required to provide corporate sustainability reports starting on or after January 2026.?

Due to the CSRD regulation depth and breadth and audit requirements, it is advised that non-EU companies operating in the EU secure a trusted services partner in 2023 to assist with preparing, developing, and certifying sustainability reports.?