The European Financial Reporting Advisory Group (EFRAG) is finalizing draft sustainability reporting standards for non-EU parent companies (NESRS).
Subject to public consultation, the draft NESRS mirrors the First Set of ESRS adopted by the European Commission, but has some key differences.
For example, the CSRD requires EU and non-EU companies with activities in the EU to file annual sustainability reports, prepared in accordance with applicable standards and assured by an independent third-party provider. However, non-EU parent companies subject to the CSRD from FY28 are waiting for clarity on drafting their disclosures.
The draft NESRS, which follows the structure of the First Set of ESRS, covers the same sustainability topics as the First Set. It includes two cross-cutting standards and 10 topical standards covering climate change, pollution, water and marine resources, biodiversity, circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, and business conduct.
Entity-specific disclosures are required when assessing whether a matter is not covered by an existing NESRS or is covered but with insufficient granularity, opine Beth Sasfai, Emma Bichet, and Jack Eastwood from Cooley LLP who penned a memorandum titled What to Expect from the Mandatory Sustainability Disclosure Standards for Non-EU Companies for the Havard Law School Forum on Corporate Governance.
As per the paper, the draft NESRS maps exactly to the First Set of ESRS, allowing companies to use EFRAG’s existing Q&A explanations to help navigate the NESRS and leverage existing interoperability guidance. However, the draft NESRS only focuses on impacts, not financial risks and opportunities. Compliance with the draft NESRS would not require businesses to undertake a double materiality assessment, which evaluates both the financial effects of sustainability matters on the company and the company’s impacts on society and the environment.
The draft NESRS also has a range of reporting boundaries, with non-EU companies having the option to exclude information about the impacts of sales of goods or provisions of services to natural and legal persons located outside the EU. This has been criticized for creating a confusing dual-track system and unnecessary complexity for companies operating globally and subject to environmental, social and governance (ESG) reporting requirements in other jurisdictions, the writers observe.
