Will U.S. companies face ESG reporting requirements in the EU?

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Some U.S. companies may well have to report on ESG—even if the SEC takes no action on climate or other ESG disclosure proposals!  How’s that?  According to this press release from the Council of the European Union, the Council and the European Parliament reached a provisional agreement last week on a corporate sustainability reporting directive (CSRD) that would require more detailed reporting on “sustainability issues such as environmental rights, social rights, human rights and governance factors.” The provisional agreement is subject to approval by the Council and the European Parliament. The press release indicates that the requirements would apply to all large companies and all companies listed on regulated markets, as well as to listed small- to medium-size companies (“taking into account their specific characteristics”). Importantly, for companies outside the EU, “the requirement to provide a sustainability report applies to all companies generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their ESG impacts, namely on environmental, social and governance impacts, as defined in this directive.”

(“‘Net turnover’ means the amounts derived from the sale of products and the provision of services after deducting sales rebates and value added tax and other taxes directly linked to turnover.”)

The European Financial Reporting Advisory Group (EFRAG) will be responsible for establishing European standards, with the European Commission expected to adopt the first set of standards in 2023, according to Bloomberg.  Reporting will be phased in, beginning in 2024 with companies already subject to the non-financial reporting directive, a delay from the original expectation of 2023.

The CSRD will also introduce a requirement for assurance of sustainability reporting. Reports must be certified by an “accredited independent auditor or certifier,” who must “ensure that the sustainability information complies with the certification standards that have been adopted by the EU.”  Assurance is also required for non-EU companies, whether by a European auditor or by one established in a third country. Bloomberg reports that countries in the EU will be permitted to accredit independent certification companies to provide assurance for sustainability reports, a move characterized by Bloomberg as “an effort to dilute big audit firms’ market power.”

According to Bloomberg, the European commissioner for financial services said “the sustainability rules would ‘take account of global standards, including the standards currently being developed by the International Sustainability Standards Board.’ The ISSB is developing a separate set of ESG reporting standards, aimed more narrowly at informing financial investors over the risks companies face from climate and other ESG issues.”

Of course, none of these standards is likely to be precisely on all fours with what the SEC has proposed or ultimately adopts on climate disclosure. In this article, Bloomberg reports on commenters urging the SEC to modify its proposal to more closely align with the ISSB so that multinational companies “can meet similar regulations under consideration in Europe and other markets.” One company, Bloomberg reports, asked the SEC to “ease the burden associated with the complexity of the current disclosure framework and to ensure that neither registrants nor investors are faced with a transition from a fragmented proliferation of voluntary standards, frameworks, and metrics to a fragmented proliferation of regulated standards, frameworks, and metrics.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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