What do the new European CSRD rules mean for US companies?

• What this means for US and other non-EU companies

• How the CSRD compares to US reporting regulations

• How to prepare your company

What is the CSRD?

The EU's “Corporate Sustainability & Reporting Directive” (CSRD) is a set of laws, created to help businesses operating in the EU to provide the government with sustainability information across 13 different areas known as the “European Sustainability Reporting Standards” (ESRS). The 12 ESRS standards are divided into 4 main categories: General Standards, Standards on environment, Social Standards, and Business Governance. 

The overall aim of the CSRD is to create a common language for businesses to report on their emissions, and improve the accuracy and continuity of the data that's being used in those reports.  

Compared to its predecessor, 2014’s Non-Financial Reporting Directive (NFRD), the CSRD is not only expanding its requirements for reporting but also its reach - from 11,000 to well over 50,000 companies throughout Europe. This means that more businesses are affected and will need to meet those reporting standards. 

Who will be affected?

The CSRD impacts three groups of companies:

• Large companies based in the EU
  • Over 250 employees
  • Over €40M turnover
  • Over €20M balance sheet assets
    
    
• Small and medium sized enterprises (SMEs) in the EU
  • Less than 250 employees
  • Less than €40M turnover
  • Less than €20M total assets
    
    
• Certain Non-EU parent companies doing business in the EU
  • One branch or subsidiary in the EU
  • €150M net turnover in the EU
    
    
    

How will the CSRD be phased-in?

What does it mean for US and non-EU companies?

The CSRD won't just affect EU-based companies. Like many of the new EU climate laws, the CSRD aims to push not just the EU, but the whole world to take meaningful action and create a common framework to share ESG data. This means that if your non-EU based company does a lot of business in the EU, there is a chance that the CSRD will apply to you too. In the coming years, an estimated 10,000+ non-EU companies, with another 3,000 or more U.S-based companies will be affected, according to Deloitte. 

The EU is not alone in setting higher standards for transparency in company climate reporting. The new US Securities and Exchange Commission (SEC) reporting requirements share a lot of similarities with the EU's rules. However, there are some key differences in what they are asking companies to share, how many companies are affected and when these rules will come into force.

SEC vs. CSRD: A closer look at the climate disclosure requirements 

Let's dive into how the SEC and CSRD approach reporting on climate impact and risk.

Compared to the SEC's proposed rule on climate, the CSRD and ESRS has a more holistic approach to ESG and Sustainability than the SEC’s proposed rule on climate-related disclosures and assurance. 

The SEC’s proposed rule on climate-related disclosures only requires businesses to report on their own climate impact and risk (e.g how they impact the environment, and the associated risks of that impact).

The CSRD on the other hand, embraces "double materiality". This means that companies need to take both an outside-in perspective (called "financial materiality") but also an inside-out aspect (called "impact materiality"). In a nutshell, companies have to report on how climate change may affect their business but also how their business impacts people and the environment. 

What to consider as a U.S-based company with operations in the EU

If we had to get one point across about the CSRD and ESRS to U.S-based companies, it would be to take action sooner rather than later. Compared to the SEC’s proposed rule on climate-related disclosures, the CSRD and ESRS will be implemented much quicker, with more detailed requirements, so you'll need a head start to collect all the data you need.

Another important thing to note is that no other current regulation, including SEC’s proposed rule on climate-related disclosures, is comparable to the CSRD. The reporting standards set by the ESRS are extensive, (with an estimated 84 disclosure requirements), and will most likely require more detailed information than what you have been used to report as a U.S. based company.

So how do you prepare your company for this new way of reporting? A great place to start is to:

• Look at how you are reporting on "materiality": Compare your company’s current material sustainability topics with the CSRD’s double-materiality requirements, to see what kind of insights are missing, for example:
  
  If your company's primary revenue source relies on in-person meetings with potential clients or visiting production sites abroad, then financial materiality data will indicate if climate-risk will prevent your company from traveling to these destinations in the near future. 
  
  Using double-materiality reporting though, the company would also likely report on how its own activities - like frequent air travel - are having an environmental impact, leading to changed conditions in the countries you are visiting.
  
  
  
• Streamline your data processes: Make sure you have data processes in place to be able to get all the sustainability information you need for reporting. This is a great time to automate data collection everywhere you can. Having reliable automated data ready to plug-in to your upcoming report will ease the transition and save you a lot of time and resources.
  
  

Keep an eye out, even if you’re not affected yet

While you may not be in-scope for the CSRD right now, staying ahead of the curve is key. A smart move for any company is to keep a close eye on EU frameworks and regulations, as they are usually a great predictor for company reporting and accountability worldwide. That said, regulations like the CSRD will likely also boost investor expectations, regardless of whether you’re required to report as extensively as the companies in-scope for the CSRD.

Suppliers in the value chain will be affected as well
The CSRD rules dictate that organizations must now take responsibility for all of their upstream suppliers. For the companies in-scope for the CSRD who have extensive value chains, this will have a direct impact on their suppliers as well.

In practice this means that companies have to request their tier 1 suppliers (suppliers you directly conduct business with) to perform environmental footprint measurements of their products. This is called a ‘product footprint’, which can then be included in the main CSRD-compliant company’s own reporting.

This is not surprising, since a company's impact hotspots are often found in it's value chain. In fact, companies' supply chains often account for more than 90 percent of their greenhouse gas (GHG) emissions, according to the EPA.