Defining Issues | March 2022

 

Insight

Proposed EU ESG directive would impact US companies

An update on EU proposals that would significantly expand the scope of sustainability reporting and impact US companies.

Julie Santoro

Julie Santoro

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-1086

Maura Hodge

Maura Hodge

IMPACT ESG Audit Leader, KPMG US

+1 803-606-8370

In April 2021, the EU proposed the Corporate Sustainability Reporting Directive (CSRD), which would amend and significantly expand the existing EU requirements for sustainability reporting. In February 2022, the EU released targeted revisions to these proposals, including deferring the effective date.

Applicability

  • EU-listed companies, and other companies – including US companies – operating in the EU that meet the scoping requirements

Proposal development

  • April 21, 2021 – Initial EU Directive proposals issued
  • February 22, 2022 – Targeted revisions to the EU Directive proposals issued
  • The final standards will be adopted by the EC:
    • no later than October 31, 2022 for the general standards; and
    • no later than October 31, 2022 for sector-specific and standards for small and medium-sized listed companies

Proposed effective dates

Company type
Effective date Year of initial application

Companies subject to the existing Non-Financial Reporting Directive (NFRD)                                                                                    

January 1, 2024

2025 (i.e. companies would have to issue their 2024 sustainability report in 2025)

Large companies not currently subject to the NFRD     

January 1, 2025

2026

Small and medium-sized listed companies (includes small and non-complex credit institutions and captive insurance entities)

January 1, 2026

2027

 

Key impacts

These are some of the primary changes from the original proposals issued by the EC in April 2021:

Effective dates deferred

  • The proposed effective dates would be deferred (see above table).
  • In March 2022, Members of the European Parliament on the Legal Affairs Committee discussed and confirmed the proposed deferral. However, the deferral is not yet approved. As a next step, discussions with the European Council and Commission will begin.

Expectation of reasonable assurance standard within six years

  • The original proposals included mandatory limited assurance of sustainability reporting (including the processes followed in preparing it); this remains unchanged.
  • However, the EU now expects to adopt a standard for reasonable assurance no later than six years after the CSRD becomes effective.
  • In March 2022, Members of the European Parliament on the Legal Affairs Committee discussed and agreed to preclude the existing statutory auditor from performing any required assurance over sustainability reporting. However, the preclusion is not yet approved. As a next step, discussions with the European Council and Commission will begin.

Some relief for smaller companies

  • Without any relief, companies in scope would be required to report sustainability information about their whole value chain – e.g. Scope 3 greenhouse gas emissions. 
  • Certain smaller companies would be able to exclude information related to third parties in their value chain (due to lack of data) for the first three years of reporting.

Impact on US companies

  • Many US companies would be in the scope of the proposed CSRD. For US companies with operations in the EU, and US subsidiaries of EU domiciled companies, now is the time to understand the implication of these proposals.

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