Legal development

CSRD: EFRAG provides further detail on reporting for non-EU groups

12 December 2024

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    The European Financial Reporting Advisory Group (EFRAG) has published working drafts of the sustainability reporting standards for non-EU parent entities (NESRS) required under the Corporate Sustainability Reporting Directive (CSRD). These standards differ from the sustainability reporting standards required for EU-Groups (the European Sustainability Reporting Standards (ESRS)), with some certain matters relating to "financial materiality" excluded from the requirements under the NESRS. The NESRS will be subject to a review and consultation process before finally being submitted to the European Commission. Firms may want to review the documents ahead of the implementation deadline for the requirements.

    Background

    The CSRD enhances the non-financial reporting requirements on companies reporting requirements of in scope entities, requiring them to report annually on a number of sustainability matters. It has a staggered implementation, with entities becoming subject to requirements based on a number of factors (such as size and turnover). Relevant entities are required to report on sustainability matters according to the ESRS adopted by the European Commission. Non-EU companies may report under ESRS or under the NERS.

    EFRAG aims to serve the European public interest in both financial and sustainability reporting by developing and promoting European views in the field of corporate reporting. The EFRAG Secretariat supports and coordinates all activities of EFRAG under the responsibility of the EFRAG Reporting Sustainability Reporting Technical Expert Group (SR TEG) Chair and EFRAG CEO. EFRAG acts as an adviser to the European Commission and is mandated to develop the ESRS.

    The purpose of the NESRS is to provide sustainability information, especially on their impacts on social and environmental matters, in order to ensure that third-country undertakings are accountable for their impacts on people and the environment and that there is a level playing field for companies operating in the internal market. The EFRAG Secretariat notes that "especially" is a specification and that the inclusion of information pertaining to financial materiality is not, per se, strictly excluded.

    The NESRS state that where:

    • a third-country undertaking generates a net turnover of more than EUR 150 million in the EU (for each of the last two consecutive financial years); and
    • has a subsidiary in the EU that is subject to Articles 19a/29a of the Accounting Directive (AD); or
    • a branch in the EU that generated a net turnover of more than EUR 40 million (in the preceding financial year),

    the subsidiary or the branch will have to publish and make accessible sustainability information at the group level of the third-country parent undertaking.

    Key requirements

    Under Article 40a of the AD, third-country undertakings will have to produce a "sustainability report" rather than a "sustainability statement" as found within Article 29a AD for EU undertakings. The NESRS report will exclude certain information required under Article 29a AD. However, Article 40a requires the NESRS to contain a significant number of the requirements applicable to the ESRS under Article 29a AD.

    What will need to be covered?  What is excluded? 

    A brief description of the group's business model and strategy, including:

    • the plans of the group, including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1,5 °C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050 as established in Regulation (EU) 2021/1119 and where relevant, the exposure of the group to coal-, oil- and gas-related activities;
    • how the group’s business model and strategy take account of the interests of the group’s stakeholders and of the impacts of the group on sustainability matters; and
    • how the group’s strategy has been implemented with regard to sustainability matters.

    A description of the time-bound targets related to sustainability matters set by the group, including, where appropriate, absolute greenhouse gas emission reduction targets at least for 2030 and 2050, a description of the progress the group has made towards achieving those targets, and a statement of whether the group’s targets related to environmental factors are based on conclusive scientific evidence.

    A description of the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills in relation to fulfilling that role or the access such bodies have to such expertise and skills;

    A description of the group’s policies in relation to sustainability matters.

    Information about the existence of incentive schemes linked to sustainability matters which are offered to members of the administrative, management and supervisory bodies.

    A description of:

    • the due diligence process implemented by the group with regard to sustainability matters, and, where applicable, in line with Union requirements on undertakings to conduct a due diligence process;
    • the principal actual or potential adverse impacts connected with the group’s own operations and with its value chain, including its products and services, its business relationships and its supply chain, actions taken to identify and monitor those impacts, and other adverse impacts which the parent undertaking is required to identify pursuant to other Union requirements to conduct a due diligence process; and
    • any actions taken by the group to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts, and the result of such actions

    The resilience of the group's business model and strategy in relation to risks related to sustainability matters.

    The opportunities for the group related to sustainability matters.

    A description of the principal risks to the group related to sustainability matters, including the group's principal dependencies on those matters, and how the group manages those risks.

     

    Proposed Optional Exclusion (POE)

    There is a POE in the NESRS. This gives a non-EU parent reporting entity the option to exclude from its report information about the materiality impacts of sales of goods/provision of services to natural/legal persons outside the EU.

    This option would be available for disclosures under all topical standards except for climate change. The only caveat is that where an undertaking exercises this option, i.e. to exclude certain materiality impacts, it must clearly state that it is doing so in its sustainability report.

    However, there was division and votes of abstention cast by members of the EFRAG Sustainability Reporting Board (SRB) on this exemption. In any event, it was voted through to be included in the public consultation but could therefore reasonably change/be removed altogether before the final NESRS are published. With the current focus on competitiveness, it is conceivable that there may be pushback on this proposed exemption which would subject third-country undertakings to a less burdensome requirements that EU-companies, potentially leading to an unlevel playing field.

    Next steps

    Concerning the public consultation phase, the current plan indicated by EFRAG is for the "Basis for conclusions" and consultation questionnaire to be sent to the EFRAG SRB and EFRAG SR TEG before Christmas and request written approval/feedback by 2 January 2025.

    The public consultation will follow as soon as possible thereafter, unfortunately a precise date cannot be provided at present, but it is expected to be Q1 2025 and, most likely, in January. EFRAG must submit the draft NESRS to the Commission for approval by the end of 2025.

    The European Commission is required to adopt the reporting standards by 30 June 2026. The requirement takes effect from 2028 financial year (with the report published in 2029).

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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