New EU Reporting Rules to Impact US Companies' Sustainability Disclosures

The Corporate Sustainability Reporting Directive (CSRD) is a new regulatory framework enacted by the European Union (EU) to replace the existing non-financial reporting directive (NFRD).

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The CSRD is aimed at enhancing the transparency and comparability of sustainability information provided by companies within the EU, and is part of the EU's broader efforts to promote sustainable finance and corporate sustainability.

Under the proposed CSRD, companies listed on EU regulated markets will be required to disclose more detailed and standardized sustainability information in their annual reports, including information on environmental, social, and governance (ESG) factors. The CSRD aims to create a more consistent and harmonized approach to sustainability reporting across the EU, which will make it easier for investors, stakeholders, and the public to compare and assess the sustainability performance of different companies.

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EU officials have estimated more than 50,000 European companies will have to submit CSRD reports

The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report. In addition, it provides for the digitalization of sustainability information.

The European Union (EU) has proposed a new regulatory framework, the Corporate Sustainability Reporting Directive (CSRD), which aims to enhance the transparency and comparability of sustainability information provided by companies listed on EU regulated markets. If approved by the European Parliament and the Council of the European Union, the CSRD will replace the existing non-financial reporting directive (NFRD) and came into effect in 2023, with the first reports due in 2024.

Under the proposed CSRD, EU companies will be required to disclose more detailed and standardized sustainability information in their annual reports, including information on environmental, social, and governance (ESG) factors. The CSRD aims to create a more consistent and harmonized approach to sustainability reporting across the EU, which will make it easier for investors, stakeholders, and the public to compare and assess the sustainability performance of different companies.

However, the impact of the CSRD is not limited to EU companies alone. The directive also has significant implications for US companies listed on EU regulated markets or subsidiaries of EU companies, as they will also be required to comply with the new reporting requirements. This means that US companies operating in the EU will need to review and update their sustainability reporting practices to ensure they meet the new standards set by the CSRD.

The CSRD has been welcomed by sustainability advocates, who see it as a positive step towards greater corporate sustainability and transparency. However, some business groups have raised concerns about the potential costs and administrative burdens associated with the new reporting requirements, particularly for smaller companies.

US companies listed on EU regulated markets or with subsidiaries in the EU will have to disclose more information on their ESG performance under the CSRD. The new directive will require companies to report on a wider range of sustainability factors, such as greenhouse gas emissions, water and resource use, employee diversity, and supply chain sustainability. This information must be presented in a standardized format using common sustainability reporting standards, making it easier for stakeholders to compare and evaluate companies' sustainability performance.

The CSRD will also introduce greater assurance and verification requirements for sustainability reporting, with independent auditors required to review and verify the information disclosed by companies. This will increase the credibility of sustainability reporting and ensure that investors and other stakeholders can have greater confidence in the accuracy and reliability of the information presented.

US companies operating in the EU should start to prepare for the potential impact of the new reporting requirements. Companies will need to review their existing sustainability reporting practices and systems to ensure that they are able to collect and report on the additional data required by the CSRD. They will also need to ensure that they are using the appropriate sustainability reporting standards and formats to meet the new reporting requirements.

In addition to complying with the CSRD, US companies may also face increasing pressure from investors and other stakeholders to disclose more information on their sustainability performance. In recent years, there has been growing demand for companies to report on their ESG performance, as investors and other stakeholders recognize the importance of sustainability in creating long-term value and managing risks.

In response to this demand, some US companies have already started to voluntarily disclose more information on their sustainability performance. However, the CSRD will raise the bar for sustainability reporting and increase the pressure on companies to report on a wider range of sustainability factors. US companies that fail to keep up with the changing expectations around sustainability reporting risk falling behind their peers and losing out on investment opportunities.

The costs of compliance with the Corporate Sustainability Reporting Directive (CSRD) will vary depending on the size, sector, and sustainability performance of individual companies. However, it is clear that the CSRD will require companies to invest more resources into their sustainability reporting practices to comply with the new reporting requirements.

According to the European Commission's impact assessment, the total cost of compliance with the CSRD for EU companies is estimated to be between €3.6 billion and €8.8 billion over a period of ten years. These costs include the costs of collecting and verifying sustainability data, updating internal systems and processes, and engaging with stakeholders on sustainability issues.

For US companies operating in the EU or with subsidiaries in the EU, the costs of compliance with the CSRD will depend on the extent to which they are already reporting on their sustainability performance and the degree to which their existing reporting practices align with the new reporting requirements. Companies that have already invested in robust sustainability reporting practices are likely to face lower costs of compliance, while those that are starting from scratch may face higher costs.

In addition to the direct costs of compliance with the CSRD, there may also be indirect costs associated with the reputational risks of failing to comply with the new reporting requirements. Companies that are seen as lagging behind their peers in sustainability reporting may face criticism from investors, customers, and other stakeholders, which could have negative impacts on their brand and reputation.

Despite the potential costs of compliance with the CSRD, some companies may also see opportunities to create value through improved sustainability reporting. By providing more transparent and credible information on their sustainability performance, companies may be able to attract more responsible investors, differentiate themselves from their competitors, and enhance their long-term value creation potential.

The costs of compliance with the CSRD will depend on a range of factors, including the size, sector, and sustainability performance of individual companies. While compliance may require significant investments in sustainability reporting practices, companies that embrace the new reporting requirements may also be able to create value through improved transparency and accountability.