The European Financial Reporting Advisory Group (EFRAG) has introduced working papers for the Non-European Sustainability Reporting Standards (NESRS). These standards are intended to align with the Corporate Sustainability Reporting Directive (CSRD) for non-European Union (EU) parent entities. This paper provides a comprehensive overview of the NESRS framework, emphasizing its distinctions from the European Sustainability Reporting Standards (ESRS), its methodological structure, and its prospective implementation roadmap.

Introduction

The CSRD mandates the adoption of sustainability reporting standards for third-country undertakings, enforceable by 2028. The NESRS, developed by EFRAG, aim to address the unique reporting challenges faced by non-EU parent groups while maintaining coherence with the overarching objectives of the CSRD. This document reviews the proposed NESRS framework, focusing on its development, structure, and implications for global reporting.

Methodology

The EFRAG Secretariat drafted the NESRS in consultation with the Sustainability Reporting Technical Expert Group (SR TEG). The working papers include:

• NESRS 1: General Requirements
• NESRS 2: General Disclosures
• Ten topical standards paralleling the “E”, “S”, and “G” dimensions of the ESRS

The working papers were presented for feedback during the SR TEG meeting on November 7, 2024. Public consultation is planned for January 2025 following the approval of exposure drafts by December 2024.

Results

General Requirements (NESRS 1)

NESRS 1 adheres to the structural design of ESRS 1, with adjustments to accommodate Article 40a of the CSRD. Key differences include the exclusion of financial materiality considerations (e.g., resilience, opportunities, and dependencies) while retaining impact materiality assessments. Reporting boundaries are defined at the group level, aligning with group financial statements.

Optional Exclusion of Non-EU Impacts

NESRS 1 provides non-EU parent entities with the option to exclude impacts related to non-EU sales and services, except for climate change (NESRS E1). For topics other than climate, materiality assessments are confined to impacts within the EU. Conversely, climate assessments must encompass global operations. Upstream and downstream value chains linked to EU activities remain within the reporting boundary irrespective of geographic location.

Alternative Reporting Under ESRS

Entities may elect to follow ESRS standards applicable to EU undertakings. This option exempts non-EU groups from NESRS reporting, provided assurance and accessibility requirements are met. However, in-scope EU subsidiaries of non-EU groups opting for Article 40a-only reporting must produce standalone CSRD-compliant reports.

Taxonomy Reporting

Taxonomy-related disclosures remain exclusive to EU entities under the CSRD. This requirement is unchanged under NESRS.

Transitional Provisions

Transitional provisions outlined in ESRS 1 are omitted in NESRS 1 to avoid creating unequal preparation periods between NESRS and ESRS reporters. This decision underscores the commitment to ensuring a level playing field among reporting entities.

Discussion

The NESRS framework reflects EFRAG’s efforts to balance the CSRD’s stringent sustainability goals with the operational realities of non-EU parent groups. The optional exclusion of non-EU impacts introduces flexibility, yet its effectiveness depends on stakeholder feedback during the consultation process. Additionally, the alternative reporting provisions provide an avenue for non-EU entities to integrate with existing ESRS frameworks, potentially enhancing global reporting coherence.

Conclusion

The draft NESRS represents a significant step toward harmonizing sustainability reporting standards across EU and non-EU jurisdictions. By aligning closely with the ESRS while addressing unique challenges faced by non-EU entities, the NESRS framework ensures consistency, transparency, and accountability in global sustainability practices. Stakeholder engagement during the consultation phase will be critical to refining and finalizing these standards.

References

EFRAG. (2024). Working Papers on Non-European Sustainability Reporting Standards (NESRS). European Commission’s Corporate Sustainability Reporting Directive (CSRD).