The European Union (E.U.) has proposed its own set of required disclosures covering Environmental, Social, and Governance (ESG) reporting. The scope of organizations under this proposal extends well beyond those proposed by the Securities and Exchange Commission’s (SEC) greenhouse gas requirements for public companies.
Europe’s proposal is expected to impact roughly 50,000 organizations operating in E.U. member countries, substantially expanding the current scope of organizations subject to ESG disclosures from approximately 11,000 under the previous regulations.
Under the Corporate Sustainability Reporting Directive (CSRD), the E.U. is proposing mandatory disclosure requirements to drive ESG initiatives as organizations must report targets and progress towards achieving their goals. This aligns with Europe’s goal of achieving climate-neutrality by 2050.
This will have an impact on E.U. subsidiaries of U.S. companies. The current proposal would cover most companies publicly traded on E.U. exchanges as well as all large private E.U. companies. However, the large threshold is lower than might be expected; defined as meeting two of the following thresholds:
- Total assets over €20m for two consecutive years end
- Revenue (net turnover) over €40m for two consecutive fiscal years
- Average employees exceeding 250 for two consecutive fiscal years
This threshold includes subsidiaries of companies with global headquarters outside the E.U. In addition, subsidiaries below the individual reporting thresholds would also need to assess if they are part of a consolidated group that is deemed a public-interest entity. Public-interest entities with more than 500 average employees in consolidation would be required to comply with CSRD disclosures.
Subsidiaries may be exempt from separate reporting if their parent company is reporting ESG matters in a manner considered equivalent to CSRD. However, it is unknown how CSRD will determine equivalency and if the SEC’s proposed disclosure requirements would qualify. The new standards are also being developed in conjunction with the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board. This will help to ensure consistency and comparability between CSRD and IFRS requirements.
CSRD would include a double materiality concept, which would require reporting on the impact the company has in driving sustainability matters and how sustainability matters are impacting the company’s performance. The company would need to consider both sides separately and then disclose matters deemed material.
CSRD is expected to be approved by the European Council and Parliament in the coming months, with the initial adoption of the standards expected by the end of the year. Standards for small and medium-sized companies are expected during 2023. Initial reporting under CSRD is anticipated for the fiscal year ended 2023, with reporting occurring during 2024. The organization’s audit committee would be responsible for overseeing the CRSD internal control, reporting and assurance process. CSRD will initially require limited assurance. The European Commission will then review the assurance requirement after three years to determine if reasonable assurance would be required for fiscal years ended in 2026, with reporting in 2027. Assurance services could be provided by the organization’s statutory auditor or another assurance provider.
Schneider Downs provides assurance and advisory services for international organizations.
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About Schneider Downs ESG Consulting
With our industry expertise and extensive knowledge of the risk advisory landscape, the Schneider Downs team can help your organization develop an ESG program, comply with ESG regulatory requirements and evaluate ESG risks and opportunities within the context of your ESG strategy.
For more information, please visit our ESG Consulting page or contact us at [email protected].
