The Corporate Sustainability Reporting Directive (CSRD) is a landmark regulation that will reshape how companies operating in the European Union (EU) report on their environmental, social, and governance (ESG) efforts. This directive expands the scope of existing ESG reporting requirements, making sustainability reporting more rigorous, detailed, and mandatory for a broader range of companies—including non-EU companies that meet specific criteria.
Why Is the CSRD Important, Even for US Companies?
Although the CSRD is an EU regulation, its impact is global, particularly for US companies with significant operations or revenue in the EU. As the global push for sustainability continues to accelerate, US companies must take this regulation seriously to maintain market access, adhere to stakeholder expectations, and avoid reputational damage. The CSRD aims to create transparency and ensure companies are fully accountable for their environmental and social impacts, making it essential for US businesses to understand and comply.
Key reasons why the CSRD matters for US companies:
- Access to the EU Market: Companies operating in the EU or generating significant revenue from EU operations will need to comply with CSRD requirements to continue their activities in the region.
- Investor and Stakeholder Expectations: Global investors and partners increasingly prioritize robust ESG performance. The CSRD aligns with global frameworks like the Global Reporting Initiative (GRI), making it a relevant benchmark for US companies seeking investment.
- Reputational Risks: Non-compliance with global ESG standards can hurt a US company’s brand and credibility, potentially leading to lost business opportunities and diminished consumer trust.
Who Does the CSRD Impact?
The CSRD applies to a broad spectrum of companies, including non-EU companies that meet specific criteria. For US businesses, here’s who the directive impacts:
- US Companies with EU Subsidiaries: Companies with subsidiaries in the EU that meet two of the following criteria must comply:
- More than 250 employees
- Net turnover of over €40 million
- A balance sheet total of over €20 million.
- Non-EU Companies with Significant EU Revenue: US companies generating over €150 million in revenue from EU operations, with an EU-based subsidiary or branch, are also required to comply with CSRD regulations.
When Does the CSRD Take Effect?
The CSRD will be phased in over several years. Here’s a timeline of when companies, including US-based businesses, need to begin reporting:
- 2024: Large public-interest companies already subject to the Non-Financial Reporting Directive (NFRD) will begin reporting.
- 2025: All other large companies, including non-EU companies that meet the thresholds, will start reporting.
- 2026: Listed small and medium-sized enterprises (SMEs) will begin reporting, though they may delay until 2028 if needed.
Key Topics Covered by the CSRD
The CSRD introduces several important topics that companies need to address in their sustainability reporting:
- Double Materiality: Companies must report not only on how sustainability issues affect their business but also how their activities impact society and the environment. This dual perspective is crucial for US companies with operations in Europe to understand their holistic impact on global ESG goals.
- Alignment with Global Standards: The CSRD aligns with established global ESG frameworks, such as the Global Reporting Initiative (GRI) and Task Force on Climate-Related Financial Disclosures (TCFD). For US companies that already align with these standards, complying with the CSRD could streamline their global reporting processes.
- Third-Party Audits: Companies will be required to undergo third-party audits of their sustainability reports to ensure the accuracy and credibility of the information.
- Digital Tagging: To improve accessibility and comparability, sustainability data must be digitally tagged, allowing for automated processing and analysis, which is especially important for US companies with complex, global supply chains.
Key Indicator Themes (ESRS – European Sustainability Reporting Standards)
The European Sustainability Reporting Standards (ESRS) lay out the indicator themes that companies should track and report. These include:
- Environment:
- Climate change mitigation and adaptation
- Water and marine resources
- Biodiversity and ecosystems
- Resource use and circular economy practices
- Social:
- Fair working conditions and employee well-being
- Diversity, inclusion, and equal opportunities
- Human rights in supply chains
- Community and stakeholder engagement
- Governance:
- Anti-corruption and bribery prevention
- Board diversity and oversight of sustainability
- Transparency on executive pay and sustainability incentives
Mandatory vs. Non-Mandatory Aspects of the CSRD
- Mandatory:
- US companies with significant EU operations must report on ESG factors, including environmental, social, and governance structures.
- Double materiality and third-party audits are required.
- Digital tagging of sustainability reports is compulsory to improve data comparability and access.
- Non-Mandatory:
- Listed SMEs, including US SMEs operating in the EU, can delay reporting until 2026 or 2028, allowing smaller companies more time to comply.
How US Companies Can Implement and Report on the CSRD
To stay compliant with the CSRD, US companies need to develop actionable strategies to meet these reporting requirements. Here’s how Falkor8 can help:
- Assess Your ESG Impact: Conduct a thorough assessment of how your company’s operations, particularly in Europe, align with the CSRD’s sustainability goals. Identifying potential gaps is key to staying compliant.
- Develop a Reporting Strategy: Falkor8 helps companies build a reporting framework that aligns with both US and EU ESG standards, ensuring that your sustainability efforts are not only compliant but also tied to your strategic goals.
- Cross-Department Collaboration: ESG reporting under the CSRD requires data collection from multiple departments, including finance, HR, and supply chain management. Falkor8 facilitates collaboration across global teams to ensure data accuracy and consistency.
- Prepare for Audits: Third-party audits are a cornerstone of the CSRD. Falkor8 supports your team in preparing for these audits by ensuring your sustainability data is accurate and verifiable.
- Leverage Technology for Reporting: The CSRD’s digital tagging requirement necessitates the right technological tools for data management. Falkor8 helps implement systems that streamline reporting and ensure compliance with global ESG standards.
What Happens if You Don’t Comply?
Non-compliance with the CSRD can result in significant consequences for US companies, including:
- Fines and Penalties: EU regulators can impose substantial fines on companies that fail to comply.
- Restricted Market Access: Companies that do not meet CSRD standards may face limitations on their ability to operate in the EU, leading to potential revenue loss.
- Reputational Damage: Failing to meet sustainability standards can erode a company’s brand reputation and diminish investor and consumer trust.
Why Is This Relevant for US Companies?
Even though the CSRD is an EU regulation, its impact on US companies with operations or significant revenue in the EU is undeniable. Compliance is not just about meeting legal requirements but also about aligning with global ESG trends and remaining competitive in international markets. Early compliance can position your company as a sustainability leader and build long-term trust with investors, stakeholders, and consumers.
Conclusion
The Corporate Sustainability Reporting Directive (CSRD) is a transformative regulation for companies operating in the European Union, including US companies with substantial EU operations. By understanding the key topics, indicator themes from the European Sustainability Reporting Standards (ESRS), and preparing now, businesses can ensure compliance, mitigate risks, and leverage sustainability as a driver of growth and innovation.
At Falkor8, we’re here to support US companies in meeting their global ESG responsibilities with a focus on innovation and long-term business growth. Contact us to learn how we can help you implement the CSRD and position your business as a sustainability leader.
Falkor8 is an impact innovation consulting firm that guides corporate leaders and founders in sustainability to achieve greater impact for their businesses, their communities, and the environment. Our services provide support in the areas of strategic planning, operations and data. Learn more about our approach and how we can support your sustainability journey at www.falkor8.com.
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