American companies with operations in Europe are paying close attention to the Corporate Sustainability Reporting Directive (CSRD) from the European Union (EU), which took effect on January 5, 2023. Going far beyond the sustainability data many U.S. companies now track and report – and beyond the rule changes proposed by the U.S. Securities and Exchange Commission (SEC) for climate-related disclosures – the new directive will create additional ESG reporting requirements for U.S.-based companies with European operations.
How does CSRD compare to the SEC’s proposed climate disclosure rule
The CSRD and the proposed U.S. SEC rule share a common purpose. They both aim to standardize corporate sustainability disclosure and ensure that investors and stakeholders have access to consistent, reliable, and transparent information on corporate ESG practices.
The proposed rule from the SEC, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” focuses on “climate-related risks” that are reasonably likely to have a material impact on a company’s business, results of operations, or financial condition. Under the proposed rule certain climate-related financial metrics would be required in audited financial statements.
Similarly, CSRD is intended to provide relevant, comparable, reliable, and accessible sustainability information for investors and stakeholders (European Commission). However, in comparison to the proposed SEC rule, the new EU directive strengthens the emphasis on rules concerning the social and environmental information that companies, including U.S.-based companies with significant EU operations, must report. In particular, CSRD requires disclosures from a “double materiality” perspective, which means that companies have to report how sustainability issues affect their business as well as how their business impacts people and the environment.
Additionally, CSRD mandates third-party audits of sustainability information, requiring that companies back up their sustainability claims with verifiable data.
In other words, CSRD goes far beyond what many U.S.-based companies currently include in sustainability reports and exceeds the reporting scope planned in the SEC rule.
The purpose of both rules is to ensure investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues.
The first EU companies will have to apply the new rules for the first time in the 2024 financial year for reports published in 2025.
Why CSRD matters to U.S. companies
CSRD applies to non-EU companies if they have substantial activity in the EU, including a physical presence. This stipulates that CSRD applies if the company has a net turnover of €150 million euros in the EU ($161 million USD) for each of the last two consecutive years and has either:
- A large or listed EU subsidiary; or
- An EU branch that generated a net turnover greater than €40 million euros ($43 million USD) in the preceding year.
However, it is particularly important to note that CSRD reporting covers the organization at a consolidated level, not just at the EU-based subsidiary or branch level. This means that U.S. companies with significant turnover in the EU will need to publish sustainability information that covers their entire operations, including its non-EU operations. U.S. companies with as few as a single EU operation will have to apply the new rules for the 2028 financial year.
These sustainability reports will need to be prepared according to one of the following:
- Standards applicable to the EU companies within the scope of CSRD – the European Sustainability Reporting Standards (ESRS)
- Separate sustainability standards for non-EU companies yet to be published. It is expected these standards will be adopted by the European Commission by the end of June 2024
- Standards that are deemed equivalent by the European Commission
Out of these three options available to U.S. parent companies, only the draft ESRS disclosure requirements have been published so far. The European Commission has yet to decide which sustainability reporting standards used outside of the EU are equivalent to it. At this time, the ESRS requirements go further than any other existing or proposed regulation, including the SEC, specifically in the area of double materiality.
Consequently, companies required to report under the CSRD, will have to disclose how sustainability risks and opportunities affect financial performance, position, and development (financial perspective) but also how the company’s performance, position, and development affect people and the environment (impact perspective). Conversely, the SEC’s proposed rule emphasizes investor materiality (financial perspective) only, not double materiality. For U.S.-based companies this likely means that steps they take to comply with the SEC rule, once it is finalized, might not be sufficient to meet the CSRD requirements.
There are still many unknowns about the exact CSRD reporting requirements for U.S. companies with significant operations in the EU market, and the next twelve months will bring some answers to this much awaited question.
Important dates and reporting information for U.S. companies
November 28, 2022 – The EC and the European Parliament approved the final text of CSRD for the European Union that will apply to U.S.-based companies with EU operations.
January 5, 2023 – CSRD entered into force.
June 30, 2024 – By this date, CSRD sustainability reporting standards for non-EU companies will be adopted by the EU. There will also be the option to report in accordance with ESRS or standards that are deemed to be equivalent.
January 1, 2028 – The date CSRD takes effect for EU-based large and listed subsidiaries or branches of non-EU companies that meet the criteria for CSRD reporting. Non-EU firms with 150€ million annual revenues in the EU and that have at least one subsidiary or branch in the EU will have to start reporting according to the ESRS standards at a consolidated group level (including non-EU activity). CSRD requires that:
- The sustainability report provides consolidated information of the non-EU-based parent company at an enterprise level, and
- The EU-based subsidiary or branch obtain the information necessary to issue the report and is responsible for publishing the sustainability report. According to an analysis provided in “Global Reach of the E.U. Corporate Sustainability Reporting Directive and the Impact on U.S. Companies,” this appears to bring the entire global operations of the non-EU parent within the scope of CSRD.
Questions to ask yourself now
If you are responsible for collecting sustainability data or creating sustainability reports for a U.S.-based company, here are some questions to ask yourself:
- How will your organization be impacted by CSRD and supporting ESRS requirements?
- Have you assessed your company’s currently established materiality data points with CSRD’s double-materiality requirements?
- Do you have the right data solutions, controls, and partners in place to start collecting the required sustainability data and provide an audit of the sustainability information that you report?
- Are you ready to meet the reporting requirements of CSRD? Now is the time to put tools in place to collect the required sustainability information, even though the implementation date is January 1, 2028.
- Is your company prepared to pull sustainability reporting into its financial reporting cycle that is even more comprehensive than that required by the SEC, and includes an audit of the sustainability information you report and incorporates disclosures from a double materiality perspective?
By exploring these questions now and putting solutions in place to meet the reporting requirements found in CSRD, U.S. companies with EU operations will set themselves up for success.
How Enablon can help you get ready for CSRD
Enablon’s ESG Excellence solution can help you proactively manage and execute ESG strategies, so you can prepare for the reporting demands of CSRD and make headways towards your sustainability targets. Drive the sustainability transformation with capabilities that matter, including:
- Collect data across the enterprise, track metrics, and report them against multiple standards without duplicating efforts.
- Identify, assess, and mitigate ESG and climate risks across your enterprise.
- Perform comprehensive materiality assessments to identify and prioritize economic, environmental, and social programs that are important to your stakeholders.
- Facilitate dual accounting for Scope 2 GHG emissions and meet the requirements of the most demanding reporting regimes.
- Track granular emissions from field assets and lower your environmental impact across the entire enterprise.
- Facilitate deep collaboration across sustainability, operations, risk management, and finance.
- Get audit-ready with confidence and back your disclosure reports with traceable, investor-grade data.
Enablon’s ESG Excellence solution complements our best-in-class Health and Safety, Process Safety Management, and Control of Work software, bridging gaps between departments so you can build a shared understanding of your ESG performance across the organization, quantify the impact of ESG on your bottom line, and meet your targets sooner.
Empower your organization on the path to sustainability. Talk to an Enablon ESG expert to get started.