Clifford Chance

Following extensive negotiation, the European Commission's technical adviser on corporate reporting releases draft standards for certain non-EU parent companies of global groups with European branches or subsidiaries above a certain size threshold.

The European Union's ("EU") Corporate Sustainability Reporting Directive ("CSRD"), see our briefing, has inaugurated a new era of sustainability reporting for companies operating in Europe and beyond. Within the next two years, more than 40,000 companies operating worldwide will fall within the CSRD's reporting scope.

On November 7, 2024, following several rounds of meetings, the European Financial Reporting Advisory Group ("EFRAG") published draft reporting standards for certain non-EU parent companies ("NESRS") of global groups with European branches or subsidiaries above a revenue threshold per CSRD article 40a (see below). EFRAG is the independent, technical adviser to the Commission, responsible for developing and overseeing corporate reporting standards, including the environmental and social reporting required under the CSRD.

The release of the draft NESRS follows EFRAG's official December 22, 2023, publication of the European Sustainability Reporting Standards, ("ESRS"), which describe the sustainability information that in-scope companies must report under the CSRD per articles 19a and 29a. However, CSRD article 40a permits the establishment of a separate reporting category (i.e., the NESRS) for non-EU parent companies that meet several threshold requirements. Namely, pursuant to article 40a, the NESRS will uniquely apply to non-EU (i.e., third-country) parent companies that generate more than €150 million within the EU and have either 1) an EU branch with more than €40 million in annual revenue, or 2) a large subsidiary that itself qualifies as "large" enough to be in-scope under the CSRD per article 19a.

Requirements, Timing, and Scope for U.S. and Other Non-EU Parent Companies

The draft NESRS clarify that the reporting requirements for qualifying non-EU parents will closely mirror the ESRS, with a few key exceptions.

The CSRD requires in-scope parent companies to report on, among other items, their business model and strategy, time-bound sustainability targets (including greenhouse gas emissions), human rights and environmental due diligence processes, and compliance with other EU law, such as the incoming EU Corporate Sustainability Due Diligence Directive ("CSDDD") and the EU Batteries Regulation. Non-EU parent reporting per CSRD article 40a will become mandatory in 2028, with first reports coming due in FY2029.

Following EFRAG's public meetings in November 2024 to approve the draft NESRS, the standards will become subject to public consultation in January 2025, requiring further approval from the European Council later that year. The European Council has delayed the publication of the final, binding NESRs from 2024 to June 30, 2026. Once finalized, these standards will become binding on qualifying non-EU parent companies that, as mentioned above, generate more than €150 million in the EU annually and have either 1) an in-scope EU branch (itself netting more than €40 million annually) or 2) large subsidiary that would be independently in-scope.

In addition, during the first week of November, EFRAG published draft implementation guidance for ESRS transition plans for climate change mitigation.

The Optional Exclusion (Proposed)

Generally, non-EU parent companies will be subject to the same reporting standards under the NESRS as companies that are subject to the ESRS. However, the current draft NESRS contains an "optional exclusion," which would enable qualifying non-EU parents to limit reporting to only their European operations.

The optional exclusion would not be available to non-EU parents under NESRS E1 concerning climate change mitigation. As a result, qualifying non-EU parents would still be expected to consider their global operations when reporting on climate change. Further, for a non-EU parent to avail itself of the optional exclusion, that choice must be explicitly stated in the parent's sustainability report.

The NESRS' proposed optional exclusion would allow the following two exceptions to the CSRD reporting standards for qualifying non-EU parent companies:

• direct or indirect sustainability‑related “impacts connected with operations and revenues other than those connected with EU customers;” and
• financial materiality reporting at the group level.

Although the default would be for qualifying non-EU parent companies to provide full reporting under NESRS, this proposal would allow non-EU parents not to report on impacts, other than those connected with EU customers. The optional exclusion is likely to feature in the forthcoming public consultation on the NESRS, with various members of the EFRAG Sustainability Reporting Board abstaining or voting against its inclusion in the November meetings.

Regulatory Streamlining Ahead?

In a November 8, 2024, statement, Commission President Ursula von der Leyen announced a new initiative designed to reduce the "often overlapping" requirements of the CSRD, CSDDD, and EU Taxonomy Regulation. The initiative is aimed at streamlining the requirements for in-scope companies, with a proposal for a new, omnibus regulation due to be published in 2025. The initiative emanates from the November 8, 2024 Budapest Declaration, a twelve-point EU plan to increase Europe's competitiveness. In line with point four of the Declaration which advocates for a "simplification revolution," President von der Leyen seeks to harmonize regulatory ESG frameworks on the continent without affecting substantive requirements. However, should the Commission table such a proposal, the usual legislative path would allow the EU Parliament and Council of the EU to table further amendments.

Post-Election Implications?

The re-election of President-elect Donald Trump may challenge EU efforts to compel in-scope U.S. parent companies of EU subsidiaries to report under the CSRD. As discussed in a previous briefing, Republican Members of the U.S. House of Representatives, led by ESG Working Group leader, Subcommittee Chairman Bill Huizenga, passed H.R. 4790, a Bill entitled “Prioritizing Economic Growth Over Woke Policies Act,” that would compel the U.S. Securities and Exchange Commission ("SEC") to report on the negative implications of both the CSDDD and CSRD for U.S. companies. This proposal follows several bills passed at the federal, state, and local level designed to curb public sector ESG investing.

As the new Trump Administration's legislative agenda begins to take shape, U.S. companies operating in Europe should prepare to comply with the CSRD and CSDDD, while also tracking how U.S. and EU geopolitical developments impact U.S. companies.

Our global team will continue to monitor these developments.