Corporate partner Susanne McMenamin and associate Michael Sinnott provide an update on how CSRD will impact US companies.
It has been six months since the EU enacted new, ground-breaking ESG disclosure legislation, which will require many EU and non-EU-incorporated companies to publicly report extensive sustainability information, that will need to be audited on a limited assurance basis. Globally, companies now starting to starting to grapple with how CSRD will affect their businesses – both inside and outside the EU. This article outlines, in particular, how US corporates (in addition to their EU subsidiaries) can be subject to the demanding requirements of the new regime.
What is CSRD?
The Corporate Sustainability Reporting Directive ("CSRD") is part of a package of EU legislation arising out of the European Green Deal. CSRD introduces a new requirement for in-scope companies to include a dedicated section in their annual report on sustainability matters (ie, environmental, social, human rights and governance factors). The new sustainability section is required to include an extensive range of sustainability related disclosures, which must be made in accordance with sustainability reporting standards that are currently being finalised by the EU. The disclosures under CSRD will need to be audited; initially audits will be to a limited assurance standard but over time it is expected this will progress to a full audit.
Who does CSRD apply to?
Subject to certain exceptions and derogations, the new rules will require the audit and disclosure of sustainability information in respect of:
- all EU-incorporated "large" companies or EU-incorporated parent companies of a "large" group (ie, companies / groups that meet two of the following three criteria, calculated on a worldwide, consolidated basis: (i) balance sheet of greater than €20 million; (ii) net turnover of greater than €40 million; and / or (iii) more than 250 employees);
- all companies (including US-incorporated companies) with debt or equity listed on an EU regulated market (excluding micro undertakings);
- non-EU incorporated parent companies that have EU-incorporated subsidiaries or EU branches, where they exceed certain turnover thresholds in the EU; and
- certain EU-regulated banks and insurance companies.
Application to US-incorporated companies
Aside from EU-incorporated subsidiaries which may be directly in-scope for CSRD, sustainability information relating to US-incorporated companies may also need to be audited and reported if:
- the US-incorporated company has debt or equity listed on an EU-regulated market; or
- the US-incorporated company has:
(a) any "large" subsidiary in the EU;
(b) a branch in the EU that itself generates net turnover of more than €40 million; or
(c) an EU-incorporated SME subsidiary that has debt or equities listed on an EU-regulated market or is a regulated insurance undertaking or credit institution,
and that US-incorporated company generates (on a group level) net turnover of over €150 million in the EU.
If a US-company is brought 'in-scope' for CSRD, the reporting must be conducted on a global basis for all of the US-company's subsidiaries – not just in respect of subsidiaries or operations in the EU.
Timelines
The disclosure and audit requirements of CSRD will come into effect on a phased basis, starting in respect of financial years starting in 2024 for large companies with debt or equity listed on an EU regulated market and certain EU-regulated banks and insurance companies that have more than 500 employees. In 2025, other large EU-incorporated companies / parents of a large group (greater than 250 employees) will need to report. In 2026, SMEs with debt or equity listed on an EU regulated market or which are EU-regulated banks or insurance companies will come into scope. In the final phase, which applies to financial years starting in 2028 onwards, EU subsidiaries and branches will need to report sustainability information in respect of their non-EU parent.
Recognition of equivalent reporting standards
CSRD includes mechanisms to allow for the EU to recognise other reporting standards as equivalent to those under CSRD and therefore to allow, in certain circumstances, reporting to be conducted under those equivalent standards. However, at this early stage, it is not clear what standards may be deemed equivalent and what the timeline might be for recognising any equivalence.
Preparations and next steps
The first step for any business that may be subject to CSRD is to undergo a scoping analysis to determine what entities are in-scope and on what timeline. Preparing for CSRD can be a daunting task for companies, involving stakeholders from across the business, with project lead-in times of 12 – 18 months in many cases. We recommend that all companies that may be affected by CSRD to engage as soon as possible with what will be a significant journey for all affected.
Matheson LLP held a hybrid Knowledge Insights Event entitled "CSRD: A Discussion on the Legal and Reporting Requirements and Practical Recommendations" on 31 May 2023. A recording of the event if available on our Knowledge Hub. Please email KnowledgeHub@matheson.com or your usual Matheson contact for access.
If you have any queries or would like to discuss any of the above or CSRD more generally, please contact: Susanne McMenamin or Michael Sinnott.