A sneak peek into the draft NESRS: What sustainability reporting standards may non-EU parent companies expect?

Introduction

Once the Corporate Sustainability Reporting Directive (“CSRD”) is fully implemented, between 50,000 – 75,000 companies may be expected to produce sustainability statements or reports that comply with the CSRD requirements. The publication of sustainability statements by large undertakings and large (sub)groups established in the EU is governed by the European Sustainability Reporting Standards (“ESRS”) and revolves around the mandatory double materiality assessment identifying the impacts, risks and opportunities. 

The CSRD & (N)ESRS: Background & Scope

The ESRS is a delegated act (regulation 2023/2772) adopted by the European Commission on the basis of a proposal by the European Financial Reporting Advisory Group (“EFRAG”) containing detailed disclosure standards to help implement the CSRD’s requirements in practice. The ESRS relate to reporting requirements for EU-based companies in scope of the CSRD. 

For the next phase, reporting standards will have to be set for global companies with significant activities in the European Union. Non-EU parent companies, which will be subject to CSRD reporting for their global activities as of the financial year starting in 2028, have been awaiting the release of reporting standards for their global CSRD disclosures. This is particularly relevant for global groups, which have entities in the EU that are in scope of CSRD and are required to report in accordance with the ESRS, but do not yet know how these standards relate to the lighter regime of global reporting standards. 

Non-EU (i.e. third-country) parent companies will be required to issue sustainability reports if they meet the requirements of having a significant business presence in the EU set by Article 40a CSRD. These requirements include generating at least EUR 150 million at a group level within the EU for two consecutive years. Apart from this, there are two alternative qualification categories to fall within scope. Firstly, the company may be the ultimate parent of large EU undertakings or SMEs listed on an EU regulated market (excluding micro-undertakings) with securities admitted to trading. Secondly, the company may have an EU branch with a net turnover above EUR 40 million generated within the EU.

On 18 November 2024, the EFRAG published its working draft for specific ESRS for non-EU parent companies (“NESRS”). The draft NESRS offer insight into the anticipated CSRD reporting requirements for in-scope non-EU parent companies and their subsidiaries of branches. In essence, the draft NESRS follow the ESRS structure but with some notable differences.

Key Takeaways: Similarities

The first draft NESRS largely mirror the structure and content of the ESRS for in-scope EU-based companies, which includes two cross-cutting standards and 10 topical standards that cover various sustainability topics in the categories E (Environment), S (Social) and G (Governance). Similarly to EU-based companies reporting in accordance with the ESRS, non-EU parent companies will be required to report on general requirements (NESRS 1) and general disclosures (NESRS 2). As for the topical standards, the draft NESRS include identical ESG topics – i.e. climate change, pollution, water and marine resources, biodiversity, and more. The similarities in structure and content between the ESRS and NESRS suggest that non-EU parents could potentially make use of EFRAG's current Q&A explanations to help navigate the NESRS, thereby facilitating their understanding of the upcoming requirements.

Given the similarities between the ESRS and draft NESRS, the definitions provided in the draft NESRS may be interpreted by referring to the glossary of the ESRS, as there is no separate glossary of definitions for interpreting the NESRS.

Key Takeaways: Differences

Materiality assessments 

• One of the primary differences between the ESRS and draft NESRS is the approach to the materiality assessment. This contrast in assessment techniques may reduce the reporting obligations for non-EU parent companies relating their global operations. For the avoidance of doubt, EU-based entities or sub-groups that are in scope of Articles 19a or 29a CSRD remain subject to reporting sustainability statements in accordance with the ESRS.
  
• Under the ESRS, EU-based entities are required to conduct a double materiality assessment while disclosing their annual sustainability information. This assessment entails both an impact materiality assessment of the entity’s impact on people and the environment (inside-out) as well as a financial materiality assessment evaluating the financial implications of sustainability related factors on the company’s business (outside-in). The scope of this double materiality assessment encompasses the entity’s operations, value chain, products and services, and business relationships. 
  
• Contrary to the ESRS, the draft NESRS proposes the use of a single materiality assessment, only the impact materiality assessment (inside-out). At a group level, non-EU parent companies will only be required to assess the impact of their business on society and the environment, but they will not be required to report on the financial implications of sustainability-related matters for the group. The impact materiality assessment under the draft NESRS and ESRS do not differ. Moreover, the impact materiality assessment includes an evaluation of the upstream and downstream value chain. Ultimately, the absence of the financial element in the impact materiality assessment of the NESRS creates an additional obstacle for EU subsidiaries within its scope. These subsidiaries may be unable to fulfill their own disclosure obligations when they rely on their non-EU parent company's report.

(Optionally) Amending the perimeter of disclosure

• The general structure of the draft NESRS mirrors the scope of disclosure of the ESRS, meaning that non-EU parent companies are primarily required to report on behalf of their entire consolidated group, including the group's entire upstream and downstream value chain. However, the current draft NESRS offers non-EU parent companies an option to limit certain aspects of the reporting to their European business operations only. 
• Using this optional limitation of the sustainability report, the non-EU parent company may exclude information about the impacts of sales of goods or provisions of services to natural or legal persons outside the European Union. Notably, this optional exclusion does not appear to apply to the general cross-cutting disclosures (NESRS 1 and 2), but only applies to the disclosure requirements in the topical standards other than the climate change topic (NESRS E1). If a non-EU parent company decides to limit the sustainability report, it must clearly state this in the report (NESRS 2 BP 2).

Next steps

In conclusion, the first draft NESRS appears essentially similar to the ESRS except for two key distinctions. Firstly, it proposes a less broad materiality assessment, and secondly, it provides the opportunity to modify the extent of information that requires reporting. However, it is important to note that the NESRS is currently in its earliest drafting phase and may be subject to (many) changes. The EFRAG expects to launch a public consultation of four months in January 2025 and aims to deliver the final draft to the Commission by November 2025. This should enable the Commission to meet the official deadline for the adoption of the NESRS by 26 June 2026.