Assessing the Proposed ESRS-40a for CSRD Reporting – Considerations for US-based Multinationals

Exposure drafts of the reporting standards for non-EU entities required to report under the EU’s Corporate Sustainability Reporting Directive – formerly known as the N-ESRS and now styled ESRS-40a – were recently released for public comment. With the release of the ESRS-40a exposure drafts, many US-based multinationals in particular are revisiting and reconfirming their reporting approach. The European Commission estimates that as many as 450 US-based multinationals will be picked up by 40a reporting.

In this post, we take a look at how ESRS-40a reporting differs from full ESRS reporting and discuss key considerations that will drive the reporting approach of US-based multinationals. Spoiler alert: most US-based multinationals are likely to stick with global parent-level, full ESRS reporting, starting with the 2027 financial year. 

Reporting Thresholds Post-Omnibus I

US-based multinationals can be scoped into the CSRD at either or both of the EU undertaking level and the global parent level. The EU’s Omnibus I simplification increased the CSRD reporting thresholds for both EU and non-EU entities, substantially reducing the number of reporting companies.

EU-organized “Wave 2” entities are required to report under the CSRD if, in their prior financial year, they had more than 1,000 employees on average and more than €450 million net turnover. These entities can be scoped in under Article 19a if they individually meet the threshold or under Article 29a as a parent of a group that meets the threshold on a consolidated basis.

A multinational based outside the European Union – a third-country parent undertaking in CSRD parlance – also can separately have a reporting obligation if it had net turnover in the European Union of more than €450 million for each of its last two financial years and an EU subsidiary or branch (the obligation to have the parent produce a report technically falls on the relevant EU subsidiary or branch, but it effectively requires the parent to produce a report) with net turnover of more than €200 million in the last financial year (there is a limited exemption for non-EU financial holding undertakings that is not discussed in this post). In contrast to the reporting requirement for EU-organized Wave 2 entities, there is no employee threshold. This requirement is pursuant to Article 40a(1), hence the new name of the draft reporting standards for these companies. 

Reporting Options for US-based Multinationals

US-based multinationals and other third-country undertakings that have a reporting obligation at the parent level and at the EU-organized subsidiary level have two principal reporting options:

• They can prepare both an ESRS-40a parent-level report and one or more EU undertaking reports under Article 19a or 29a as applicable using the full ESRS required to be used by EU undertakings. 

• Alternatively, they can report at the parent level using the full ESRS. Subject EU subsidiaries are exempt from separate reporting if they come within the reporting boundary of a non-EU parent that reports on a consolidated basis using the full ESRS.  

ESRS-40a reporting requirements are less extensive than the full ESRS and reporting begins later:

• ESRS-40a reporting does not require a “double-materiality” analysis – reporting is generally limited to material impacts. Reporting on financially material risks and opportunities is not required at the parent level under ESRS-40a. However, the ESRS-40a single materiality approach is different than that used in US public company reports, which are anchored in financial materiality. Although ESRS-40a reporting is focused on impact materiality, EFRAG has noted that financial information could be required when needed to provide context for understanding impacts. (EFRAG is the technical advisor tasked with developing the ESRS-40a for the European Commission.) 

• Taxonomy Regulation reporting is not required at the parent level.

• ESRS-40a reporting starts with the 2028 financial year, with the first reports due in 2029. A large percentage of the US-based multinationals that will be picked up by 40a have Wave 2 EU undertakings. These EU undertakings will need to first report a year earlier, starting with the 2027 financial year. 

The ESRS-40a exposure draft proposes an optional “mixed approach” to reporting. Rather than reporting on all material impacts at the global level, for all topics other than climate, an ESRS-40a reporter would be able to limit its reporting to EU-related impacts. EU-related impacts would include both customer-based impacts, which would be those related to products and services that were or can reasonably be expected to be sold or provided in the EU market, and location-based impacts, which would be those relating to activities carried out in the European Union. The mixed approach could be applied at the topic or sub-topic level or to particular groups of impacts related to a topic or sub-topic. 

In many other key respects, ESRS-40a follows the same approach as the full ESRS. Both the ESRS-40a exposure drafts and the full ESRS:

• Consist of two cross-cutting and ten topical standards covering the same topics and requiring reporting on (1) governance, (2) strategy, (3) impact management through policies and actions and (4) metrics and targets;

• Pick up the upstream and downstream value chain. EFRAG has indicated that an ESRS-40a EU-impact-based approach to reporting would still require the reporter to take into account its upstream and downstream value chain outside the European Union;

• Allow for the same generally applicable reliefs, such as relating to undue cost or effort;

• Have the same transition provisions; and

• Have the same user scope of both primary users of general-purpose financial reports and other users of general-purpose sustainability reports.

The Fork in the Road for US-based Reporters

As we noted at the top of this post, we expect most US-based multinationals to stick with parent-level, full ESRS reporting. We are not seeing much enthusiasm for separate CSRD reporting at each of the parent (40a) and EU undertaking (19a or 29a) levels (and we are seeing even less enthusiasm for the temporary artificial consolidation reporting accommodation for EU undertakings).

The reasons being cited are consistent with those we were hearing a couple years back, when US-based multinationals landed on their reporting approach pre-Omnibus. These reasons include, among others:

• Supporting processes already are in place, or are at least stronger, at the parent level, while in many cases processes would need to be built from scratch for subsidiary-level reporting;

• Current parent-level voluntary reporting and pending mandatory reporting overlaps with some full ESRS disclosure requirements, in particular relating to climate;

• It is more complex and costly to prepare and obtain assurance of multiple reports;

• It is difficult (and in many cases impossible) to separate out EU-related impacts in supply chains, limiting the utility of the ESRS-40a mixed approach; and

• The timetable for finalizing the ESRS-40a creates uncertainty and makes it difficult to later pivot to full ESRS reporting if that turns out to be a more attractive alternative.

There is however one subset of US-based CSRD reporters that is embracing and planning on reporting under 40a: US-based multinationals that expect to be scoped in at the parent level, but not at the EU undertaking level. Some US-based multinationals will fall into this group, primarily because they do not meet the higher post-Omnibus 1,000 employee threshold for 19a and/or 29a reporting.    

Next Steps for ESRS-40a

The ESRS-40a exposure drafts were released by EFRAG in July.

Shortly thereafter, EFRAG launched a 100-day call for public feedback on the drafts, which is open until October 31. 

Among other things, EFRAG is seeking feedback on the mixed reporting approach. EFRAG Sustainability Reporting Board members have concerns with this approach, which was included in the ESRS-40a exposure draft at the Commission’s request. Concerns include (1) creation of an un-level playing field, (2) whether there is a legal basis for the mixed approach, (3) that the use of different reporting scopes for different topics may impair understandability, (4) that the loss of relevant information will create greenwashing risk, in particular relating to human rights impacts and environmental impacts, and (5) lack of compatibility with the Corporate Sustainability Due Diligence Directive’s global approach. Of more interest to most reporters will be EFRAG’s concerns regarding the feasibility of separating EU-related impacts and limitations for external assurance.

EFRAG plans to deliver its technical advice on the ESRS-40a to the European Commission in January. The Commission is expected to adopt the final ESRS-40a in mid-2027.

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