The European sustainability disclosure standard setter EFRAG, (the European, Financial Reporting Advisory Group), has published an exposure draft that outlines the reporting standards for non-EU groups to report against when applying the Corporate Sustainability Reporting Directive (CSRD).

The exposure draft is open for comment from stakeholders until 31 October 2026. 

Under Article 40a of the Accounting Directive, non-EU group requirements can be fulfilled using:

• European Sustainability Reporting Standards (ESRS),
• equivalent standards, or
• European Sustainability Reporting Standards for non-EU undertakings.

The latter is covered in the exposure draft, ESRS for Certain Non-EU Undertakings in Accordance with Article 40a of the Accounting Directive (ESRS-40a).

EFRAG estimates between 630 and 870 companies will fall within scope, with the largest numbers based in the US, UK, Switzerland and Japan. Companies from jurisdictions including China, Canada, the Republic of Korea, Hong Kong, India, Bermuda and the Cayman Islands, will also be affected.

The proposed ESRS-40a was published for a 100-day public consultation on 23 July and incorporates the recent ESRS revisions.

What’s in the proposed standards?

Disclosures under ESRS-40a are based on an impact materiality assessment. Companies would use this assessment to determine what information needs to be included within the ESRS-40a sustainability report. Like ESRS, they can use a top-down, bottom-up or hybrid approach.

EFRAG will take a similar approach to implementation as it is for European countries in scope for ESRS. As a result, some of the requirements will be phased in.

Like ESRS, climate change is assumed to be a material issue for in-scope entities, although if it is deemed not to be material, that must be explained.

ESRS-40a E1 requires disclosures around climate transition plans, human rights policies, emission reduction targets, energy production from fossil fuels and waste treatment, among others.

Due diligence conduct obligations are not imposed under ESRS-40a. Outcomes of any sustainability due diligence are expected to inform the assessment of material negative impacts.

The exposure draft states: “One of the steps of the due diligence process is the identification and assessment of negative impacts connected with the undertaking’s own operations, products or services, including through business relationships in the undertaking’s upstream and downstream value chain.”

Initial responses

Accountancy Europe has outlined its views in a letter to the European Commission. In the letter, the body has outlined its initial concerns about elements of the draft that was made public in June (which, at the time, was referred to as the Non-EU Group ESRS, or N-ESRS). It highlighted areas that it believes require greater clarity, including:

• the definition of “net turnover in the Union”;
• the objective of the standards;
• whether financial materiality is a factor in determining impacts; and
• whether the N-ESRS (now ESRS-40a) sustainability report is to be prepared on a consolidated basis.

Accountancy Europe also expressed concerns about the potential “mixed” approach for defining the perimeter of the disclosures. The mixed approach allows for limitations of some disclosures to impacts only linked to product or service sales in the EU, as opposed to a global approach, for which impacts across the whole non-EU group would be disclosed.

“The mixed approach may aim to limit the extraterritoriality reach of CSRD, but it is artificial, burdensome, raises assurance challenges, creates confusion in the systems (from different scopes/perimeters for different topics) and undermines comparability, both with international groups reporting using a different framework (e.g. ISSB Standards) and with EU companies reporting using ESRS,” warned Accountancy Europe in its letter.

ICAEW calls for views

ICAEW will be responding to the consultation and is looking for views from members. Its general position on sustainability disclosures is that any standards should:

• follow the International Sustainability Standards Board (ISSB) standards as a global baseline,
• be principles-based and straightforward to implement, and
• be aligned in technical interpretations with international standards.

In its response, ICAEW will consider issues, such as:

• the interaction between ESRS-40a and UK Sustainability Reporting Standards (UK SRS), the need for proportionality, and the risk of dual reporting;
• the practical application of an impact materiality assessment on UK entities using UK SRS;
• how a mixed approach might operate in practice; and
• the intended users of ESRS-40a sustainability reports.

In addition to the technical points raised in the consultation, ICAEW will also consider questions about what are ‘equivalent’ standards in Article 40a and the implications that additional reporting requirements can have on competition and attracting capital.

Ravi Abeywardana, ICAEW’s Director, Sustainability Reporting and Assurance, said: “ESRS-40a has the potential to become a key reporting framework for global businesses with substantial EU operations. Interoperability with the ISSB Standards and jurisdictional adaptations, such as the UK SRS will be critical to reduce reporting burden for non-EU groups.

“Greater alignment can support a more level playing field, improve reporting efficiency and provide investors and other stakeholders with high-quality, decision-useful sustainability information. EFRAG’s consultation provides an important opportunity to help shape a practical and globally connected reporting framework.”