EU Sustainability Regulations Will Affect Foreign Companies

Analysis has revealed that of the companies subject to the forthcoming EU regulations, of which approximately one-third are American, 13% are Canadian, and 11% are British.

The European Union is presently developing new guidelines for EU businesses to report their sustainability practices. This effort is part of a continuous push to improve the regulation of environmental, social, and governance (ESG) factors.

In the next few years, European Union regulations will require thousands of American, Canadian, and British companies to increase their sustainability reporting. This move is aimed at improving transparency regarding various aspects, such as companies’ greenhouse-gas emissions and gender pay disparities.

Financial data firm Refinitiv has estimated that the Corporate Sustainability Reporting Directive (CSRD) will necessitate a minimum of 10,000 non-European Union (EU) companies to make sustainability disclosures. Roughly one-third of these companies are based in the United States, as reported by The Wall Street Journal.

The initial phase of ESG reporting standards concentrates on publicly traded companies, while the EU plans to extend these regulations to small and medium-sized businesses (SMEs) once the reporting standards are established. European officials have projected that over 50,000 European companies will need to report, but they haven’t officially specified how many non-EU businesses will be subject to these rules.

Businesses located outside the EU will also be subject to these rules. The affected business include the following:

• Companies with securities, such as stocks or bonds, listed on a regulated market within the European Union.
• Companies generating an annual revenue of over €150 million (about $163 million) within the EU.
• Companies that have an EU branch with net revenue exceeding €40 million.
• Companies with an EU subsidiary that qualifies as a large companies, which means having more than 250 employees in the EU, a balance sheet exceeding €20 million, or generating local revenue of over €40 million.

The regulations will be enforced by regulators at the country level, and penalties for noncompliance may vary. Companies that are publicly listed and fail to comply with the rules may face fines equal to a percentage of their annual revenue within the bloc.

Several other sustainability reporting requirements are scheduled to take effect in the coming years. The Securities and Exchange Commission (SEC) is currently in the process of finalizing regulations that will require U.S.-listed companies to disclose specific climate-related data, such as their greenhouse-gas emissions, as early as 2025. The International Sustainability Standards Board (ISSB) is also currently developing a set of guidelines for companies on what climate-related information they should disclose to their investors.

Multinational corporations may confront a set of diverse requirements if the mandatory climate reporting standards differ notably among the standard-setting organizations. The EU’s rigorous regulations have become the prevailing global standard for areas such as chemicals and data privacy, but it’s uncertain whether the same will apply to the bloc’s climate reporting rules.

Companies both inside and outside of the EU are now asking, what exactly is the Corporate Sustainability Reporting Directive?

What Is the Corporate Sustainability Reporting Directive?

On 21 April 2021, the EU Commission declared that they approved the Corporate Sustainability Reporting Directive (CSRD) as part of their promise to the European Green Deal.

The draft proposal contains 82 yearly disclosure obligations, each with distinct metrics and explanations. The regulations mandate reporting on greenhouse-gas emissions and strategies consistent with the Paris Agreement of 2015 to decrease those emissions, alongside data on matters such as water pollution and gender pay disparities. The required data to be reported will vary depending on industry-specific criteria still being formulated. Additionally, companies must have their data audited by a third-party entity.

Companies must reveal their sustainability goals and any plans they have in place to transition to a business model and strategy that aligns with:

• Moving toward a sustainable economy.
• The goal of keeping global warming below 1.5°C as per the Paris Agreement.
• Reaching climate neutrality by 2050 as set by the EU’s objectives in the European Climate Law.

You can find the complete text and obligations of the CSRD online. It is important to note that even though it was approved by the European Union, foreign businesses that operate in Europe will also be impacted by it.

How Will the CSRD Affect U.S. Companies?

Companies headquartered in the United States should take note of this development, and it should be on the radar of top-level executives.

The sustainability regulations imposed by the European Union are anticipated to be more rigorous compared to the frameworks currently being devised by the SEC and the International Sustainability Standards Board.

Foreign companies with listings in the EU that have more than 500 employees within the EU will have to report the required disclosures starting in 2025. Large non-EU companies with listings in the EU will have to comply starting in 2026, while small and mid-sized enterprises with listings in the EU will have to comply starting in 2027. Companies not listed in the EU but that are subject to the regulations through other criteria will have until 2029 to make their disclosures.

Companies headquartered in the EU that complied with the previous sustainability regulations must adhere to the new requirements starting in 2025.

EU companies are already familiar with mandatory ESG disclosure regulations. In contrast, most U.S. companies lack this experience. As a result, implementing these regulations will be a more challenging and steep learning curve for them.

It is currently recommended to monitor the reporting standards in the European Union. These regulations will not only provide insight into what the SEC may implement in the United States but American companies may also be required to comply with EU reporting requirements in the near future.

Right now, it’s not clear if U.S. or U.K. companies and their EU branches will be allowed to use “substituted compliance” because the rules for revealing information differ between countries.