At Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules
Introduction:
In a significant regulatory move to enhance transparency and accountability, the European Union (EU) is implementing the Corporate Sustainability Reporting Directive (CSRD). This directive will require thousands of American, Canadian, and British companies to elevate their sustainability reporting efforts. By focusing on key areas such as greenhouse gas emissions and gender pay disparities, the EU aims to improve visibility on various aspects of corporate sustainability. With the CSRD also encompassing non-EU companies, it is essential to understand the implications and the potential challenges faced by global businesses.
Expanding Reporting Requirements:
The CSRD will introduce substantial changes to sustainability reporting practices. Estimates by financial data firm Refinitiv, provided to The Wall Street Journal, suggest that at least 10,000 companies outside the EU will need to produce and independently verify sustainability disclosures under the new directive. Notably, approximately one-third of these companies are based in the United States. While EU officials have estimated that over 50,000 European companies will be subject to the reporting requirements, the specific number of non-EU businesses covered by the rules has not been disclosed.
Scope of the Reporting Requirements:
The CSRD will apply to businesses based outside the EU under specific conditions, including:
Companies with listed securities on a regulated market in the EU.
Companies with annual EU revenue exceeding €150 million (approximately $163 million) and an EU branch with net revenue exceeding €40 million.
Companies with an EU subsidiary that qualifies as a large company, meeting at least two of the following criteria: employing more than 250 EU-based employees, possessing a balance sheet above €20 million, or generating local revenue above €40 million.
According to Refinitiv, there are nearly 10,400 foreign companies with EU stock listings and over 100 companies without EU listings but with local revenue exceeding €150 million. The breakdown of identified companies reveals that 31% are American, 13% are Canadian, and 11% are British. It is important to note that these estimates exclude foreign companies subject to reporting requirements due to other conditions.
Stringent Requirements and Disclosure Areas:
The CSRD draft, released in November, includes 82 annual disclosure requirements, each with separate metrics and explanations. These rules encompass various aspects such as greenhouse gas emissions, alignment with the Paris Agreement, pollution entering waterways, and gender pay differences. Industry-specific standards, still under development, will determine the specific data that companies must report. Additionally, companies will be required to have their data audited by a third party.
Comparatively, the European requirements are expected to be more demanding than those being developed by the U.S. Securities and Exchange Commission and the International Sustainability Standards Board. The EU draft goes beyond financial materiality, demanding companies to include information deemed important from a sustainability perspective.
Timelines for Compliance:
Companies with EU listings will be required to report the disclosed information starting in 2025 if they have more than 500 employees in the EU. Large non-EU companies with EU listings will need to comply with the rules by 2026, while small and midsize enterprises with EU listings will have until 2027. Non-EU companies subject to reporting requirements under other criteria have until 2029 to make the necessary disclosures. EU-based businesses that previously reported under the bloc’s sustainability rules must adhere to the new requirements starting from 2025.
Challenges and Learning Curve for Non-EU Companies:
The CSRD poses both challenges and learning opportunities for non-EU companies. While EU companies have experience with mandatory Environmental, Social, and Governance (ESG) disclosure requirements, the majority of U.S. companies are relatively new to this aspect and may view ESG as more of a communication and public relations exercise than a regulatory disclosure. Consequently, non-EU companies may face a steeper learning curve and find compliance more challenging. However, this process also presents an opportunity for organizations to deepen their sustainability efforts and gain a competitive advantage in the market.
Conclusion:
The implementation of the Corporate Sustainability Reporting Directive reflects the EU’s commitment to driving sustainable practices and promoting transparency. As the directive extends its reach to thousands of non-EU companies, global businesses must adapt and embrace the call for enhanced sustainability reporting. While the requirements may be more demanding than other international frameworks, compliance with the CSRD offers the chance to demonstrate commitment to sustainability, foster stakeholder trust, and access new markets. By embracing sustainable practices, organizations can contribute to building a resilient and responsible business landscape that addresses pressing global
