Sustainability is a fervent topic within Europe at the moment. As the EU looks to cultivate a circular economy within its member states and empower them towards net zero, much of its sustainability reporting practices have come under heavy scrutiny in recent years.
The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD), which came into effect in January 2023, marks a pivotal milestone in sustainability reporting.
This is not to be confused with the EU Corporate Sustainability Due Diligence Directive (CSDDD) – these two directives are not mutually exclusive and apply to companies that fall under the scope of both. This article purely focuses on the CSRD, companies under the jurisdiction of which are required to report on their material sustainability impacts. By comparison, the CSDDD mandates that companies conduct environmental and human due diligence concerning adverse impacts.
While the CSRD primarily targets entities and businesses based in and trading within the EU, those outside of the EU will be affected as well. Those businesses in non-EU countries but that trade in the region will likely be affected by CSRD directive rules and standards.
Some forward-thinking companies based in non-EU countries are leading the way in sustainability reporting, such as Quadratech Diagnostics, a UK-based carbon-neutral supplier of specialist medical testing kits and equipment to European clients. This firm is forthcoming about its carbon offsetting and eco-friendly choices to minimise environmental impact, without providing any ambiguity. So how can you ensure you meet the CSRD criteria?
To avoid any complications, we have decided to break the CSRD down to help non-EU businesses understand the implications it could have for them. The guidance below will outline the key CSRD requirements, compliance strategies, and the broader impact on global sustainability reporting processes.
Understanding the CSRD
The CSRD builds upon and expands the existing Non-Financial Reporting Directive (NFRD), introducing a set of more comprehensive and standardised sustainability reporting requirements.
In a nutshell, the CSRD’s goals are to:
- Make sustainability reporting more transparent.
- Align EU sustainability reporting standards with globally recognised frameworks.
- Make cross-sector and cross-organisational sustainability reports easier to compare.
- Encourage companies to be more accountable for environmental, social, and governance (ESG) risks.
The CSRD introduces the European Sustainability Reporting Standards (ESRS), which have been developed by the European Financial Reporting Advisory Group (EFRAG), to make sustainability reporting across the EU more standardised and less ambiguous.
These standards are designed to align with leading international sustainability frameworks, such as those from the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).
So what does this mean for companies that are based in the UK but ship internationally to countries in Europe that fall under the CSRD?
The Concept of Double Materiality
To prepare for the CSRD, understanding the concept of double materiality is vital for non-EU entities. Double materiality broadens the traditional view of materiality in corporate reporting by considering two sub-types:
- Financial materiality (i.e. how sustainability issues affect a company’s financial performance and value)
- Impact materiality: (i.e. how a company’s activities impact society and the environment)
For non-EU companies, implementing double materiality assessments will be vital to avoid breaching CSRD. This involves:
- Evaluating ESG risks that could affect operations, financial security or company reputation.
- Assessing the broader environmental and societal impacts of business activities.
- Integrating financial and impact assessment considerations into strategic decision-making processes.
Scope of the CSRD for Non-EU Companies
The CSRD predominantly applies to entities and companies based in the EU, but its requirements are relevant for certain non-EU-based businesses too.
A non-EU company falls under the scope of CSRD if it meets certain criteria such as below:
- It is listed on a regulated market in the EU with securities such as shares, stocks, or bonds.
- It generates annual EU revenues exceeding €150 million and has an EU branch with an annual net turnover of at least €40 million.
- It generates annual EU revenues surpassing €150 million and owns an EU subsidiary that qualifies as a large company, meeting at least two of these criteria:
- More than 250 EU-based employees
- A balance sheet total exceeding €20 million
- Local revenue exceeding €40 million
It’s important to note that the CSRD also applies to companies in European Economic Area (EEA) states that are not part of the EU, such as Norway, Iceland, and Liechtenstein.
Similarly, the CSRD impact extends just beyond large corporations with even smaller businesses, sole traders, and self-employed professionals involved in cross-border transactions, within and outside of the EU, likely finding themselves indirectly affected by CSRD.
For example, UK-based business owners interested in relocating to an EU country, such as Spain, will not only have to abide by Spanish employment laws but may need to consider the sustainability practices of suppliers, intermediaries and partners as far as company operations are concerned.
How to Prepare for CSRD Compliance as a Non-EU Company
If your non-EU business is covered by the CSRD, taking proactive steps to meet the reporting requirements outlined in the directive is vital.
Here are some critical steps to take:
- Get acquainted with the ESRS
Study the general requirements outlined in the latest update to the standards ESRS 1 and ESRS 2, and align this with any sector-specific standards that may apply to your business.
- Analyse your current reporting practices
Take the time to objectively scrutinise your current sustainability reporting processes and identify areas for improvement.
- Undertake double materiality assessments
Develop strategies for evaluating financial and impact materiality. Engage with stakeholders and other relevant personnel to guide your assessments.
- Stay informed and updated
Monitor updates regarding supplementary guidelines by the European Commission (EC), which are expected by June 2026. Prepare for potential adjustments in reporting along the way. - Collaborate with your value chain
Consolidate your data collection from all your suppliers and partners to ensure transparent information-sharing, even if reporting deadlines vary between entities.
Reporting Accommodations for Non-EU Companies
The CSRD recognises the complexities for non-EU companies with subsidiaries within the EU.
Under the CSRD, if your organisation is based outside of the EU but has EU-based subsidiaries, you can create a single consolidated report to streamline the process.
The Benefits of the CSRD
The CSRD is vital in steering sectors and industries across Europe to cultivate a more transparent and sustainable future.
The CSRD ensures that ESG considerations are firmly a part of core business operations for companies sector-wide. While the short-term effects are yet to truly be discovered, given the CSRD is relatively new, the long-term impact of this directive promises greater innovation and efficiency across a broad spectrum of sectors and supply chains.
Sharing comparable sustainability data may also influence buying and investment decisions, leading to more focused investment in sustainable businesses. In turn, this may inspire companies to adopt more eco-friendly initiatives to improve performance and remain competitive in their markets.
Embracing the CSRD as an Opportunity
For non-EU companies, navigating the CSRD may initially seem challenging and daunting. However, it’s crucial to understand the reporting requirements and prepare for compliance, but a key to overcoming this barrier is to view it as an opportunity, rather than a tick-box exercise.
Achieving CSRD compliance allows you to enhance transparency and build trust with stakeholders and suppliers, improve risk management, stand out from the crowd, and contribute to global efforts in reducing carbon emissions. Doing so will also position your non-EU company as a shining example of corporate sustainability reporting, driving positive change and cultivating long-term business success in Europe and beyond.
