E.U. ESG Disclosure Requirements Will Affect Many U.S. Companies
The SEC’s climate-change proposal and the new California climate disclosure laws are not the only ESG disclosure requirements to which U.S. public companies may be subject. The European Union’s ESG reporting regime will also affect many U.S. companies. To provide basic guidance on the application of the E.U.’s Corporate Sustainability Reporting Directive (CSRD) to companies based in the United States, Deloitte has released #DeloitteESGNow - Frequently Asked Questions About the E.U. Corporate Sustainability Reporting Directive.
Adopted in 2022, the CSRD replaces the E.U.’s Non-Financial Reporting Directive. The CSRD aims to improve the quality and consistency of sustainability reporting by companies subject to E.U. disclosure requirements. The CSRD is part of the EU’s efforts to achieve its climate and environmental goals and to foster corporate transparency and accountability. The CSRD is broad in scope, and many U.S. companies that have affiliates, or do business, in the European Union will be subject to its requirements. In addition, U.S. companies that are not directly subject to CSRD disclosure have customer or supplier relationships with reporting entities and may be asked to provide information so that the reporting entity can comply.
On July 31, the European Commission adopted the European Sustainability Reporting Standards (ESRS). These standards provide guidance for companies that are required to make ESG disclosures under the CSRD. The ESRS specifies the content and format of CSRD sustainability reports, which must include both qualitative and quantitative information, as well as forward-looking and historical data. The standards also introduce a materiality assessment process for companies to identify the most significant sustainability issues for their business and stakeholders. The ESRS covers 12 topics that are relevant for sustainability reporting, including climate change, biodiversity, human rights, workers in value chain, and business conduct. The reporting requirements will be phased in over time for different companies, depending on their size and previous reporting obligations.
Deloitte’s paper addresses thirteen questions related to the application of the CSRD to U.S. companies. Six examples of these questions, along with a brief overview of Deloitte’s responses, include –
Question 1: How does the CSRD affect U.S. companies? Deloitte describes the criteria for determining whether a U.S. companies will be subject to CSRD. These criteria are complex and will require careful analysis in many cases. In very broad terms, the CSRD will apply to “large” (as defined) non-E.U. companies (including subsidiaries of non-E.U. parents) with securities listed on an E.U.-regulated market and to certain companies based outside of the E.U. that generate “net turnover” in the EU exceeding specified thresholds.
Question 2: When will U.S. companies be affected by the CSRD, and what if a company is on an off-calendar reporting timeline? The CSRD will apply to in-scope U.S. companies in stages. In 2024, only large U.S. companies that are listed on an E.U.-regulated market and that have more than 500 employees will be subject to the CSRD. Starting in 2025, all large U.S. companies that are listed on an E.U.-regulated market will be subject to the CSRD. In 2026 and 2028, additional U.S. companies will come into the CSRD, including those captured by the net turnover test.
Question 5: How does the CSRD compare with the SEC’s proposed climate disclosure requirements? “The CSRD will require disclosure and assurance on a much broader suite of ESG topics than would the SEC’s proposed rule on climate-related disclosures. The CSRD will include requirements for non-climate-related environmental topics and various social topics, while the SEC’s proposed rule on climate-related disclosures would only mandate disclosures specific to climate impacts and risk.”
Question 6: Will non-E.U. companies be permitted to use other standards instead of the ESRS? Which sustainability reporting standards are most likely to be deemed “equivalent” to ESRS for use by non-E.U. companies? Is the proposed SEC climate disclosure rule expected to be eligible for equivalence? The Europe Commission has indicated that it will allow in-scope non-E.U. companies to use sustainability standards equivalent to the ESRS. However, no decisions have yet been announced as to which standards will be deemed equivalent.
Question 10: Which disclosures will be subject to assurance, and what level of assurance is required? Companies within the scope of the CSRD will be required to seek limited assurance over their compliance with the sustainability reporting standards from an independent third-party assurance provider. Reasonable assurance may be required in the future.
Question 13: What are some initial steps that companies can take to start preparing for CSRD compliance? U.S. companies should assess whether they are within the scope of the CSRD and, if so, their reporting timeline. These determinations may require the assistance of legal counsel. Companies that will be subject to CSRD disclosure “should evaluate and strengthen their processes and controls over sustainability information so they can be ‘assurance ready.’”
Comment: Audit committees of companies with any level of contact with the E.U. should make sure that management is considering how the CSDR may affect the company. Even if the company is not within the scope of the directive, thought should be given to whether customers that are subject to the directive are likely to request information to aid in their compliance. Companies that will be subject to CSRD reporting should begin considering how their controls and disclosure procedures will need to be modified to generate the necessary information and to permit their financial statement auditor, or some other independent third party, to provide the required assurance. Deloitte’s Q&A paper provides a good introduction to the complex issue of the CSRD’s impact on U.S. companies.