UPDATE FEBRUARY 2025: Proposed exclusion for global businesses reporting under CSRD gets watered down
The EU Omnibus initiative is underway, where the European Commission is seeking to streamline sustainability regulations in the European Union, including the Corporate Sustainability Reporting Directive (“CSRD”). Pending these potential changes, the EFRAG Sustainability Reporting Board (SRB), with responsibility for moving forward CSRD reporting standards, was unable to formally approve for public consultation the CSRD global reporting standards (the N-ESRS Exposure Draft or “NESRS”) on 15 January 2025 as had been intended. However, to conclude the technical work, the EFRAG SRB Chair requested members to express their support for the technical content of the draft.
As we outlined in our previous alert below, the draft NESRS introduces an option to limit disclosures to impacts linked to products and services intended for EU customers. However, in this latest draft the NESRS confirms this option is not available for climate-related matters. In other words, for non-EU headquartered global groups there will be a requirement to cover all global group operations in relation to climate-related impacts connected to the group’s products or services across the value chain, whereas this can be assessed reported for all non-climate areas to impacts linked to products and services connect with EU customers only. While a majority of members supported the technical content of the NESRS, several expressed concerns regarding the feasibility and auditability of this option.
The latest EFRAG newsletter sets out that that the next steps include incorporating the editorial changes to the NESRS (including with regards to the lack of proposed optional limitation for climate-related impacts), preparing the consultation package to be sent for review and finalization, and to carry out the public consultation upon receival of the green light from the European Commission.
For further information and background, please see our previous alert below.
On 30 October 2024, the Corporate Sustainability Reporting Directive ("CSRD") standards for global groups with a significant European footprint took a notable public step forward. The European Financial Reporting Advisory Group’s ("EFRAG") Sustainability Reporting Board ("SRB"), who are responsible for overseeing the CSRD reporting standards, met and discussed the non鈥慐U standards, first in private and then set out the direction of travel in an open, public meeting[1] and published draft non-EU Reporting Standards (“NESRS”)[2].
There has been a trend towards revisiting and assessing the proportionality and appropriateness of the EU Green Deal’s requirements on businesses recently and this was captured in the overview provided by the EFRAG SRB on the non鈥慐U standards. Some notable examples of this trend include:
- Maria Luis Albuquerque, the new EU Commissioner for Financial 51黑料, Financial Stability and the Capital Markets Union committed to working towards “streamlining requirements to alleviate unnecessary burdens without compromising on our common European Green Deal objectives”[3].
- Mario Draghi's recent Report to the European Commission on the future of European Competitiveness set out that the CSRD is “a major source of regulatory burden” with estimated compliance cost of CSRD鈥憆eporting ranging from EUR 150,000 for non鈥憀isted businesses to EUR 1 million for listed companies.[4]
- Tom Dodd, a team leader with the European Commission’s sustainability reporting unit is reported at a conference to have urged CSRD to be applied in a “proportionate” and “pragmatic” way.[5]
Following this theme of calls for proportionality, we set out the proposed EFRAG SRB optional exclusion in the NESRS for global group reporting under CSRD that will be subject to public consultation and approval by the European Council in 2025.
What is the optional exclusion to be proposed in the draft non鈥慐U standards?
The EFRAG SRB discussed that generally non鈥慐U companies, where they are the non鈥慐U parent of a global group, will be expected to follow the same CSRD reporting standards as EU companies, however, with one significant optional exclusion. The EFRAG SRB will propose in its consultation in Q1 2025 (with an aim for January) on the draft NESRS limiting language to allow such global groups to exclude:
- sustainability鈥憆elated “impacts connected with operations and revenues other than those connected with EU customers”, whether indirect or direct; and
- reporting on financial materiality at group level.
Therefore, for non鈥慐U headquartered global groups in scope of CSRD, the default position will be to provide global reporting under CSRD. This would cover all global group operations and sustainability鈥憆elated impacts connected to the group’s products or services, across their value chain. However, these groups may choose to exclude non鈥慐U operations, revenues, products or services across their value chain from CSRD reporting ("Proposed Optional Exclusion").
The EFRAG SRB had a majority vote in favour of proposing the draft NESRS with the Proposed Optional Exclusion for consultation.
Did the EFRAG SRB unanimously agree to the Proposed Optional Exclusion to certain of CSRD’s European Sustainability Reporting Standards (ESRS)?
The EFRAG SRB set out their intention that the NESRS 1, covering the general requirements of CSRD reporting and NESRS 2, on the general disclosures, would apply to global groups as the ESRS to EU entities and groups. Therefore, a global group report would have to cover the overall sustainability鈥憆elated approach to governance, strategy, risk management metrics and targets and other mandatory reporting requirements under NESRS 2.
However, SRB members were divided in the public session with some setting out that the topical reporting standard E1 on Climate Change should also be mandatory for a global group and we note that the draft NESRS currently published do no provide for the Proposed Optional Exclusion to cover E1 on Climate Change This means that sustainability-related impacts connected to climate change would need to be assessed and, where deemed material, disclosed for the entire operations of the group.
Further division and votes of abstention were cast by members of the EFRAG SRB on the Proposed Optional Exclusion, for reasons including:
- Potential to undermine the aim to have a “level playing field” between EU and non鈥慐U entities (which is set out in a CSRD recital);
- Reduced transparency on sustainability鈥憆elated matters for non鈥慐U headquartered groups;
- Practical implementation issues where there are global policies and procedures; and
- Overstepping the EFRAG SRB mandate as CSRD by law does not provide this optionality.
Despite these concerns, the Proposed Optional Exclusion was voted through to be included in the public consultation on the NESRS.
What is the timing of the non鈥慐U CSRD standards?
Following direction from the European Council, EFRAG delayed the publication of NESRS from 2024 to 2026. With EU parliamentary elections in July 2024, there has also been further delay from EFRAG to await expectations on the NESRS from the reshaped EU leadership.
This 30 October 2024 meeting of the EFRAG SRB and publication of the draft NESRS is therefore a positive sign of movement for the NESRS, with a commitment to consult the public in Q1 2025 (with an aim for January). Following the consultation period, EFRAG will consider responses and any amendments to the NESRS before submitting the standards to the European Council for approval in November 2025. The deadline for the adoption of NESRS is June 2026.
Which non鈥慐U groups are in scope of CSRD?
To recap, there is a phasing in of CSRD from 2024 to EU entities depending on the size and the EU entity type, which we set out in our alert here. Non鈥慐U companies are in scope of CSRD if they generate a minimum of €150 million net turnover derived in the EU, and the non鈥慐U entity has either:
- an EU subsidiary in scope of CSRD; or
- an EU branch with a minimum of €40 million turnover.
In the draft NESRS there is also an exclusion of the transitional provisions that apply to the first three reporting years on the basis that this would provide global groups substantially more time to prepare their CSRD reports in comparison to in-scope EU entities and groups.
What are the next steps for global groups on CSRD?
Affected businesses are advised to review and provide feedback on the NESRS to help shape their development following the launch of the consultation. This review could include assessing the practicality of global group versus European-only reporting and evaluating the potential use of the Proposed Optional Exclusion if finalized. If the Proposed Optional Exclusion was relied upon, it would mean that EU subsidiaries in-scope of CSRD would still need to report on CSRD more broadly on a standalone basis.
Ahead of the consultation, global groups should also, if not carried out already, scope their international structures to determine which entities are in scope of CSRD and when the reporting obligation would apply, including ongoing monitoring of CSRD thresholds.
For further CSRD support, please reach out to ukreg@proskauer.com.
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