The European Financial Reporting Advisory Group (EFRAG) announced the release of its new Exposure Draft of the European Sustainability Reporting Standards for certain non-EU undertakings (ESRS-40a ED), outlining proposed sustainability reporting requirements for non-EU companies included in the scope of the EU’s Corporate Sustainability Reporting Directive (CSRD).

While based largely on the European Sustainability Reporting Standards (ESRS) for EU companies, the non-EU ESRS draft focuses reporting requirements exclusively on companies’ impacts, removing the ESRS’ broader focus on areas that also include sustainability-related risks and opportunities.

The draft also introduces a controversial “mixed approach” to its sustainability reporting requirements for non-EU companies, allowing them the option to report either on impacts within the EU or globally. Notably, EFRAG members expressed concerns with this approach, and stated that it was included due to an explicit request by the European Commission.

The ESRS sets out the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s CSRD, which began applying from the beginning of 2024. The CSRD also includes a requirement for large non-EU companies that operate in the EU to provide sustainability reporting based on ESRS for third country undertakings, with reporting requirements currently scheduled to begin in 2029 on the 2028 financial year.

Under the initial CSRD regulation, non-EU companies within the scope of the CSRD included those with revenues greater than €150 million, and with an EU-based subsidiary or branch with revenues of €40 million. The EU Commission’s Omnibus simplification process revised the scope to only include companies with net revenue in the EU greater than €450 million for two consecutive years, and with an EU subsidiary or branch with revenues greater the €200 million.

In a recent presentation, EFRAG estimated that the new rules would reduce the number of non-EU companies in the CSRD scope by around 88%, from approximately 10,000 to around 1,200.

The primary difference between the ESRS for EU companies and the new proposed standard for non-EU companies is the focus of the latter standard exclusively on companies’ sustainability-related impacts on people and the environment, removing the former’s requirements for reporting on risks, opportunities, resilience and dependencies.

The new draft standard also introduces an option, described by EFRAG as the “mixed approach” for non-EU companies to report on impacts, other than those related to climate, either on a global basis, or limited to “EU-related impacts,” reporting only on impacts of products or services sold in the EU or on the impacts of the company’s activities in the EU.

Within the proposed mixed approach, the standard also allows companies to report on some impacts on a global basis, and some on an EU-related basis. As an example provided by EFRAG, companies could report on microplastics on a global basis, while reporting on air pollution on an EU-only basis.

In a “Basis for Conclusions” document published alongside the exposure draft, EFRAG notes a series of concerns that were raised by its members regarding the inclusion of the mixed approach in the non-EU ESRS draft. These included concerns that the mixed approach would not support a level playing field between EU companies and their international peers, that using different scopes for different topics would impair understandability, and uncertainty relating to the feasibility of separating EU-related impacts. Additionally, one of the key concerns raised by EFRAG members about the mixed approach was that “Relevant information may be lost, with a consequential risk of greenwashing, in particular as regards human rights impacts and environmental impacts, the latter of which cannot be confined to a specific geography.”

In addition to the listing of the concerns, the document noted that approval of the draft standard by EFRAG’s sustainability reporting technical experts group required “an acknowledgment that the inclusion of the mixed approach in the consultation is an explicit request from the EC to EFRAG.”

EFRAG announced that it is launching a 100-day consultation to gather feedback on the new draft standard, which will run through October 31. Key feedback areas highlighted by EFRAG include views on the removal of risks, opportunities, resilience and dependencies, whether the mixed approach is workable and results in relevant information, and on interoperability with reporting standards based on the IFRS sustainability reporting standards. EFRAG also noted that the consultation is open to all interested stakeholders, both within and outside the EU.

Chiara Del Prete, EFRAG Sustainability Reporting Technical Expert Group Chair, said:

“This Exposure Draft is the last piece of the CSRD to come into effect. It brings transparency on the impacts of the largest international groups around the world when they have significant EU activities. It will support a level playing field for EU companies. We understand the challenges these groups face, particularly for topics other than climate, which are covered by mandatory reporting in only a few jurisdictions. For this reason, we plan an extensive dialogue with them through the field test, the public consultation, and several outreach events, including to facilitate seamless reporting for those that already report based on financial materiality.”

EFRAG said that it aims to have the final standard ready in January 2027, after which the European Commission will subsequently launch its own consultation before adopting the non-EU ESRS in a delegated act.

Kerstin Lopatta, EFRAG Sustainability Reporting Board Chair, said:

“Getting this right requires input from those who will use and apply the standard, which is why this public consultation is open to all stakeholders worldwide. At stake are both a level playing field and genuine transparency in the EU Single Market.”

Click here to access the exposure draft, basis for conclusions and consultation.