In March 2023, the Wall Street Journal approached us with an intriguing question. Could we analyse our data to uncover how many non-EU companies would be in scope of the new European Union (EU) sustainability reporting rules?
- An analysis by Refinitiv, an LSEG business, provided the evidence for a Wall Street Journal article reporting that the EU Corporate Sustainability Reporting Directive would affect over 10,000 non-EU companies
- Many of these companies may struggle to collect the data required, with the largest number coming from the US
- Refinitiv can help companies of any size or geography to make the necessary disclosures
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We like a challenge, especially when it involves using LSEG’s Refinitiv data to increase transparency. In the instance of the EU’s new Corporate Sustainability Reporting Directive (CSRD), it was not generally known how many companies from outside the bloc would be within scope.
Part of the European green deal, the CSRD answers calls from different stakeholders, including investors, to increase the availability and reliability of sustainability indicators. For instance, a recent FTSE Russell survey of asset owners identified the limited availability of environmental, social and governance (ESG) data as one of the largest barriers to sustainable investing. The CSRD will help to address that issue by requiring in-scope corporates to report environmental and sustainability metrics according to EU standards.
Our analysis showed that at least 10,300 non-EU companies will be subject to the CSRD, as the Journal reported in April. That’s in addition to EU estimates that 50,000 European companies will be in scope.
From a geographical perspective, 31% of the non-EU companies affected are American, followed by 13% Canadian and 11% from the UK. Rather less are from other countries: 8% are Japanese, 6% Australian, 5% from the Cayman Islands, 3% from Bermuda and 2% from Mainland China. In total, companies from more than 60 countries will have to report, including a few from tiny economies like Bahrain and Zimbabwe.
Top 16 affected countries
More than 3,000 US companies fall within CSRD’s scope, including many medium market capitalisation US companies. These might struggle the most to collect and report the data, as some of our previous research has found a significantly lower availability of ESG data disclosures in this group of companies.
Finding out which non-EU companies will be affected by CSRD is a relatively simple task using Refinitiv Workspace. We leveraged Refinitiv’s wealth of granular data, using search inputs relating to the three broad categories of businesses that the Directive covers. These are:
- Companies with securities, such as stocks or bonds, listed on a regulated market in the EU
- Companies with annual EU revenues exceeding €150 million and an EU branch with net revenue of more than €40 million
- Companies with annual EU revenues exceeding €150 million and an EU subsidiary that is a large company, defined as meeting at least two of the following three criteria: more than 250 EU-based employees, a balance sheet above €20 million or local revenue of more than €40 million
More specifically, the inputs included country of incorporation, country of headquarters, revenues, currency exchanges to EUR, location of listings, industry and geographic revenue segments. We also identified non-EU companies with EU revenues exceeding the CSRD threshold of €150 million.
Using these criteria, we identified approximately 10,300 non-EU companies, more than 100 of which have revenues exceeding €150 million. We expect this number to be close to reality given that most companies with EU revenues exceeding €150 million have either a local branch or a subsidiary that matches the CSRD foreign companies criteria.
Meeting the CSRD’s reporting requirements will be resource intensive for many companies, although Refinitiv can help companies of any size or geography on their ESG disclosure journey. Based on a materiality assessment, companies will have to independently report and verify 82 annual sustainability disclosures, covering everything from greenhouse gas emissions to pollution entering waterways and gender pay differences. Industry-specific standards will mean different companies have to report different types of data. The data must also be audited.
The costs are significant. They will range from 0.004% to 0.008% of revenue, according to the European Financial Reporting Advisory Group (EFRAG), which prepared the CSRD draft standards. Additionally, yearly auditing costs for ‘limited assurance’ range from 0.013% to 0.026%, again according to EFRAG.
Listed subsidiaries of non-EU companies will have to start making CSRD disclosures from 2025. Initially, only the largest companies need to report, with the rules progressively applying to other companies over the next few years until 2029.
While the CSRD is the most significant EU sustainability directive to affect non-EU companies, it will not be the last. In April, the European Parliament formally approved the new European Union Deforestation Regulation, which will affect companies either marketing commodities in the EU or exporting from there. This is likely to apply from 2025. The EU is also making progress on the adoption of a Corporate Sustainability Due Diligence Directive, which will introduce provisions on corporate governance and human rights and environmental due diligence along the value chain of corporates doing business in the bloc.
With the EU making companies adapt fast to a sustainable transition, only data can provide a truly transparent picture. What’s more, it provides insights into the related risks – and opportunities – for investors. As questions arise over what’s likely to be an uncomfortable transition for some, data can provide the answers.