Published: November 21, 2023
The Corporate Sustainability Reporting Directive (CSRD) represents an evolution in sustainability reporting regulations within the European Union, significantly extending the scope laid by the Non-Financial Reporting Directive. This research explores the CSRD's far-reaching implications for companies beyond Europe.
The CSRD introduces a comprehensive sustainability reporting mandate for EU and international companies. Over the coming years, certain EU subsidiaries of international companies will need to disclose sustainability-related information detailed in the regulation’s technical standards within their annual reports. Even further than this, the CSRD mandates that companies disclose material environmental, social and governance impacts and risks within their upstream and downstream value chains, resulting in a surge of sustainability-related information requests from supply chain partners striving to comply with CSRD requirements.
Leveraging the S&P Global Sustainable1 Environmental dataset, an analysis of US and Middle East companies' greenhouse gas emissions disclosures underscores the room for improvement. The analysis reveals three key findings: larger companies tend to disclose more than smaller ones; US companies exhibit a higher rate of disclosures compared to those in the Middle East; and direct emissions (Scopes 1 and 2) are reported more frequently than indirect emissions (Scope 3).
To prepare for CSRD disclosures, companies — including those outside the EU that have significant subsidiaries in the EU or strong economic ties with suppliers in the EU — can proactively address their sustainability reporting practices to meet regulatory demands and enhance transparency.
Authors
Tiziana Maria Antonietti | S&P Global Market Intelligence, Sustainability Solutions Associate
Josef Fink | S&P Global Market Intelligence, Sustainability Solutions Associate Director
Michael Taschner | S&P Global Market Intelligence, Sustainability Solutions Executive Director
The Corporate Sustainability Reporting Directive1 (CSRD) introduces a comprehensive sustainability reporting mandate for EU companies and beyond. It does so primarily through amending the Non-Financial Reporting Directive2 (NFRD), bringing the number of companies in the EU required to report from 11,700 based on the NFRD to almost 50,000. These amendments introduce stipulations for sustainability reporting and sustainability reporting standards. Below, we provide an overview of the critical aspects of the new framework.
The NFRD requires public-interest companies3 with more than 500 employees to report. The CSRD significantly extends this to cover nonlisted companies and small and medium-sized listed enterprises. The reporting requirements will be phased in over time. EU member states are required to in principle as follows:
Reporting to start based on the financial year 2024: Large public-interest companies (scope of the NFRD).
Reporting to start based on the financial year 2025: Large companies.
Reporting to start based on the financial year 2026: Small and medium-sized public-interest companies.
The thresholds for defining company sizes (e.g., large, medium) are described in the NFRD. Among listed companies, only so-called micro undertakings are out of scope.
According to the CSRD, a company must disclose information necessary to understand (a) how sustainability matters affect the company's development, performance and position and (b) its impacts on those sustainability matters in its management report. This dual consideration encompasses materiality assessments from both financial and impact perspectives. As a result, companies need to conduct a “double materiality assessment” to capture both the financial and impact materiality perspectives. This requirement was already present within the NFRD, but through the CSRD, reporting requirements are becoming more granular.
The CSRD stipulates several overarching sustainability reporting requirements and includes detailed technical standards. These standards are developed by the European Financial Reporting Advisory Group (EFRAG). In a first step, EFRAG published sector-agnostic standards. Later, there will be standards for specific sectors (e.g., oil and gas, motor vehicles), for small and medium-sized companies, and for third-country undertakings. The sector-agnostic standards are split into cross-cutting standards and topical standards. Cross-cutting standards describe overarching principles and contain mainly qualitative disclosures. Topical standards are divided into environment (E1-E5), social (S1-S4) and governance standards (G1), each with a detailed set of disclosures both qualitative and quantitative.
These topics within standards are typically further broken down into subtopics and individual data points. In the next section, we will dive into greenhouse gas emission disclosures of companies in the US and the Middle East to shed light on the current disclosure readiness of non-EU companies.
While the CSRD's reach encompasses more EU-based companies, its impact ripples beyond the EU's borders. An overseas parent company with a subsidiary or branch within the EU may find itself obligated to prepare a sustainability report at the group level of that parent company. The triggering condition is that the third-country parent generated a net turnover of more than €150 million in the EU for each of the last two consecutive financial years. In addition, the parent company needs a subsidiary in the EU that would fall within the scope of the CSRD (large companies or small and medium-sized public-interest companies) or a branch with more than €40 million turnover in the preceding year.
While third-country companies can be directly affected by the CSRD via their operations in the EU, there is also the potential for an indirect effect. The CSRD, as outlined in its technical standards, mandates that companies report on the material impacts, risks and opportunities stemming from their direct and indirect business relationships. This encompasses the entirety of the value chain, spanning upstream and downstream activities. Upstream components of the value chain consist of suppliers that provide products or services to the company. Downstream elements include parties that receive products or services from the company, encompassing entities such as distributors and customers.
For non-EU companies, this means they may be indirectly affected by the CSRD if they have a business relationship with an EU company falling within the scope of the CSRD. As a supplier to an EU company, a third-country company may be asked to provide information to their EU customer regarding their impacts on sustainability matters or risks arising to them and their supply chain concerning sustainability matters. Conversely, as a customer of an EU company, a third-country company may be asked to provide information to their EU supplier regarding the use of their procured products or services and the resulting impact on sustainability matters, including end-of-life considerations.
Practically, this means that third-country companies need to prepare relevant information to provide to their business partners in the EU that fall within the scope of the CSRD. Third-country companies looking to engage with EU business partners may also proactively work on their sustainability reporting readiness to facilitate such relationships.
Globally, a stronger push toward sustainable business practices can be observed, fuelled by the increasing number of sustainability-related regulations and standards. Examples outside the CSRD include the EU’s Sustainable Finance Disclosure Regulation (SFDR) and new sustainability standards released in summer 2023 by the IFRS Foundation’s International Sustainability Standards Board (ISSB). Increasingly, these rules and standards aim at alignment and interoperability. In anticipation of new regulations, corporations may have incentive to comply with the most stringent standard in the market, thereby pre-empting the need to upgrade disclosures over time.
In summary, the CSRD has far-reaching implications for companies worldwide. Companies outside of the EU will be affected via these three dimensions:
Direct impact: Companies must comply directly with CSRD regulations if they fall within scope.
Value chain impact: Companies need to disclose material environmental, social and governance risks and opportunities stemming from their direct operations and from their upstream and downstream value chains. EU companies may require information from non-EU stakeholders to fulfil their reporting duties under the CSRD.
Shifting market expectations: Even if non-EU companies are not directly or indirectly affected, global sentiment is shifting toward more sustainable business practices, and the comprehensive CSRD may serve as a benchmark for non-EU corporations and regulators.
Undoubtedly, the CSRD will impose requirements that extend their impact far beyond the EU’s borders. As a result, the assessment of the readiness of companies likely to be affected by these disclosures becomes exceedingly timely. GHG emissions constitute a substantial part of an organization's environmental footprint. Understanding how companies disclose these emissions offers valuable insights into the market's preparedness for potential legislative compliance. Therefore, we assess the readiness to report on GHG emissions as a proxy for understanding their CSRD-readiness (ESRS E1: Climate change).
We focused this analysis on companies in the US as it is the largest economy in the world and US companies are likely to trade with EU companies. We also chose to focus on the Middle East due to the upcoming UN climate conference, COP28, that will begin in Dubai, United Arab Emirates, on Nov. 30. The region’s approach to sustainability and climate have been in the global spotlight in the run-up to this event.
Our sample of 1,000 publicly listed companies in the US and the Middle East, respectively, reveals several insights, depicted on the two heatmaps shown below. The sample includes only the biggest companies by revenue because they are the ones most likely to have subsidiaries in, or economic ties to, the EU.
Methodology
Sample universe includes the 1,000 largest public companies in the US and the 1,000 largest public companies in the Middle East, based on S&P Global Market Intelligence data. Disclosures of GHG emissions are based on the S&P Global Sustainable1 Environmental dataset, which covers emissions of companies representing 99% of the global market capitalization. Direct disclosures to the global climate disclosure nonprofit CDP, annual reports, corporate social responsibility reports, sustainability reports or data derived from other such sources is counted as “disclosed.” Data estimated due to nondisclosure or incomplete disclosure is counted as “not disclosed.”
Most importantly, disclosure is far from perfect even within those companies surpassing $50 billion in revenue. At most, 89% of US-based sample companies disclose Scope 1 emissions, a number that drops to 58% for Scope 3 downstream emissions and 23% for Scope 3 upstream emissions for the very biggest US-based companies. For the Middle East, the biggest companies by revenue have significantly lower disclosure rates, reflecting less stringent regulatory environments, among other factors.
This finding is significant as those large, publicly traded companies are the most likely to be affected by the CSRD either directly, through the presence of subsidiaries in the EU, or indirectly, as they need to provide information to their supplying companies, which will need to comply with the CSRD. The finding underscores the need for improved sustainability disclosure practices among companies worldwide to meet the regulatory requirements of the CSRD and ensure transparency within their sustainability reporting.
Taking a more in-depth view, three additional trends warrant close attention:
The EU CSRD regulation carries extensive implications for companies worldwide. The required disclosures span a wide range of environmental, social and governance dimensions. The CSRD also encompasses considerably more companies than previous regulations. Moreover, the influence of the CSRD extends beyond EU borders, affecting companies outside the European Union.
With approximately 60% of the 1,000 biggest US companies disclosing Scope 1 and 2 emissions, there may be a gap in information availability. This number drops to approximately 7% for the biggest companies in the Middle East, showing further potential information gaps. The large companies in our sample may experience a significant increase in disclosure and information-sharing obligations with their business partners.
Third-country companies may be directly affected with their EU subsidiaries but potentially also on group-level. Aside from direct impact, there is also an indirect influence through considerations related to value chains. Hence, transparency, sustainability and accountability become part of a European benchmark to which even non-European companies may be subject.
This research was prepared by and reflects the views of S&P Global Market Intelligence, which is separate and independent from other businesses/divisions of S&P Global, including S&P Global Ratings.
Bibliography
1EU Directive 2022/2464.
2EU Directive 2013/34.
3Public-interest companies: Banks, insurance companies or companies listed on an EU stock exchange.
