EU Corporate Sustainability Reporting Directive: Implications for U.S.-based multinationals

The EU Corporate Sustainability Reporting Directive (CSRD) will take effect from January 5, 2023. Building on the current EU Non-Financial Reporting Directive, the CSRD will require detailed qualitative and quantitative sustainability disclosures from a substantially expanded universe of companies, as set out in this in this Alert.

Importantly, the CSRD will require sustainability disclosures by many EU subsidiaries of U.S.-based multinationals and, in later years, for many U.S.-based multinationals for their consolidated operations. The good news for most U.S.-based multinationals and other privately held companies (including subsidiary undertakings) is that they will have a fairly long runway before compliance with the CSRD is required. Nevertheless, there are a number of near-term compliance steps that should be considered, since CSRD compliance will in many cases be a big lift:

• As an initial matter, there should be an assessment of whether there are any in-scope undertakings. For most U.S.-based multinationals, the threshold question will be whether any of their EU subsidiaries are large undertakings. Larger U.S.-based multinationals also will need to assess whether they might be subject to reporting as a non-EU undertaking. U.S.-based multinationals that determine they currently do not meet a CSRD compliance threshold should consider whether their EU growth strategy necessitates ongoing compliance threshold testing or preparation for compliance with the CSRD.
• Subject or potentially subject U.S.-based multinationals (at the parent or subsidiary level) should determine where primary responsibility for CSRD compliance will sit. Over the last few years, we have seen increasing centralization of responsibility for sustainability disclosures to ensure consistency across mandatory and voluntary disclosures and reduce compliance costs. The march toward centralization continues, with new sustainability-related disclosure requirements across a range of subjects coming in several jurisdictions, including proposed climate-risk disclosure rules in the United States. For U.S.-based multinationals, in almost all cases, it will make the most sense for primary responsibility for sustainability disclosure globally to sit in the United States (whether with the sustainability, legal, compliance, finance or another team). Of course, regional and local personnel in other parts of the world also have an important part to play and will need to be integral to data collection and reporting.
• Subject or potentially subject U.S.-based multinationals also should conduct a preliminary CSRD gap assessment. The gap assessment should focus on gaps between expected required CSRD disclosures and other current and expected voluntary and mandatory sustainability disclosures (including those expected to be required by the SEC’s climate risk disclosure rules if applicable). Although the ESRS and SEC climate risk disclosure rules have not been finalized, there is enough detail in the proposals for an initial disclosure gap assessment. The gap assessment also should focus on the processes, procedures, controls and IT systems that will be needed to support reporting and assurance. For U.S. public companies, in most cases, it will likely make sense to integrate their CSRD gap assessment with their gap assessment under the SEC’s proposed climate risk disclosure rules.
• As discussed in this Alert, the adoption of the CSRD is just one step towards enhanced mandatory EU sustainability reporting. The CSRD will need to be transposed into Member State national law. In addition, the ESRS need to be finalized, which will occur in stages. Subject or potentially subject U.S.-based multinationals should set up a process for ongoing monitoring of the significant number of CSRD-related developments that will occur over the next few years.
• In parallel to increasing sustainability disclosure requirements, requirements relating to the substantive management of sustainability issues are increasing. In the adopted column, there is, for example, the U.S. Uyghur Forced Labor Prevention Act (Alert here), the German Due Diligence in the Supply Chain Act (Alert here) and the Norwegian Transparency Act (Alert here). Proposed legislation includes the EU Corporate Sustainability Due Diligence Directive (Alert here), the EU Forced Labor Regulation (Alert here) and the New Zealand Modern Slavery Act (Alert here). Many of these instruments also have a disclosure requirement, which in some cases is expected to ultimately be subsumed into CSRD reporting. In addition, stakeholder expectations – including institutional investor expectations – around substantive management of sustainability issues continue to increase. As U.S.-based multinationals continue to build out their teams and processes to address the CSRD and other new sustainability disclosure requirements, these other substantive sustainability requirements and considerations should be integrated.

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