CSRD Update: EFRAG Launches Public Consultation on Reporting Standards for Non-EU Undertakings

Last week, the European Financial Reporting Advisory Group (EFRAG) launched a public consultation on its Exposure Draft of the European Sustainability Reporting Standards (ESRS) for certain non-EU undertakings, known as ESRS-40a. The consultation will close on 31 October 2026. 

The EU’s Omnibus changes (defined below) may bring sharper focus to ESRS-40a reporting, particularly for non-EU parent companies with a large EU turnover but whose subsidiaries do not meet the amended turnover and headcount requirements for individual reporting, as they may now only fall into scope of the narrower ESRS-40a regime. 

Background 

The Corporate Sustainability Reporting Directive (CSRD), as amended by the EU’s sustainability omnibus simplification measures (Omnibus), requires non-EU ultimate parent undertakings that generate more than EUR 450 million net turnover in the EU for the last two consecutive financial years, and have an EU subsidiary or branch with more than EUR 200 million net turnover in the preceding financial year, to produce group-level sustainability reporting. The rules apply from 2029 (reporting on FY 2028); this timing has not been amended by the Omnibus. 

Earlier this month, the European Commission adopted legislation revising and simplifying the main ESRS, which EU undertakings and non-EU issuers must report against, along with voluntary standards for smaller companies outside the scope of the CSRD. We blogged about the consultation on the final drafts of these in May. These will apply after two months’ scrutiny by the European Parliament and Council (with the possibility for a two-month extension), provided there are no objections. The revised ESRS will apply to reporting on FY 2027, although entities can choose to apply it earlier. The draft ESRS-40a should therefore be seen in the context of the EU’s broader CSRD simplification efforts (and indeed, their launch has been delayed by the wider Omnibus revisions).

ESRS-40a reporting explained

According to EFRAG, the objective of ESRS-40a reporting is to level the playing field for undertakings operating in the EU, and to ensure that in-scope non-EU undertakings are transparent about the impacts of their activities on people and the environment.

Significantly, ESRS-40a reporting only requires reporting on sustainability-related impacts, and not risks, opportunities, resilience and dependencies. This does not exclude reporting where impact and financial materiality interact, for example where impacts result in sustainability-related risks and opportunities. The legal basis for this can be found in Article 40a of the Accounting Directive. 

ESRS-40a has the same structure as the ESRS (12 standards) and the same general disclosure areas (strategy; governance; impact management through policies and actions; metrics and targets). The same content is used as a starting point, with exclusions for risk and opportunities reporting and EU taxonomy reporting, which is not directly applicable to non-EU companies falling under the scope of Article 40a.

A focus point during the development of ESRS-40a has been the “mixed scope” approach. Mixed scope reporting means that non-EU undertakings can limit their reporting, other than for climate-related impacts, to EU-related impacts only. However, this is only possible where a meaningful identification of the EU-related impacts can be achieved. The consultation draft specifies that when assessing whether a “meaningful identification” is possible, undertakings can consider factors such as the existence of a separate business segment dedicated to serving the EU-market, products or services specifically designed for the EU-market, and separate management of EU-related impacts.

The Commission requested that EFRAG consult on this option, but members of the EFRAG technical committee working on the standards have expressed concerns, namely that the mixed scope undermines efforts to establish a level playing field between EU and non-EU undertakings, and that it would be difficult to separate out impacts in practice given the global nature of human rights and environmental impacts. 

The consultation will also consider challenges arising from using terms and concepts derived from EU law, given that not all operations reported on will be in-scope of those laws, and the age old question of interoperability, i.e., how to avoid double reporting for companies in scope of multiple reporting regimes. A challenge here is the ESRS-40a’s focus on impact reporting. International Sustainability Standards Board reporting, the reporting regime of choice in jurisdictions such as Hong Kong and England and Wales, focuses on financial materiality, which is specifically carved out from ESRS-40a reporting. Whilst this could have the advantage of reducing explicit overlaps between the two, it makes equivalence harder given the fundamentally different focuses of the standards. 

Our view on what comes next

The clock is now running for engaging in the consultation. Once it closes, EFRAG will use the feedback to finalise its technical advice to the Commission, expected to be delivered in January 2027. The Commission will then launch its own consultation before adopting the final version of ESRS-40a.

Given the Commission’s push to include the mixed scope approach, and the broader context of sustainability simplification efforts, it seems unlikely that the mixed scope will be jettisoned at this stage, which may come as good news to some. The structure of ESRS-40a also seems unlikely to change significantly at this point, given that it uses the revised ESRS as a basis. However, the consultation is a good opportunity to raise anticipated pain points, for example in relation to references to EU law, interoperability and the wording of the mixed scope, so that problems can be headed off as early as possible.