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EFRAG’s public consultation on the ESRS 40a (reporting standard for non-EU companies) marks a crucial moment for those working on corporate sustainability and accountability to send a clear signal to the EU on what direction to take. What is at stake is nothing less than Europe's international standing and authority, derived in part from its vision of a world where respect for human rights and the planet is a non-negotiable.
In 2022, the EU adopted the EU Corporate Sustainability Reporting Directive (CSRD), requiring large companies to disclose their sustainability risks and impacts using the EU standards (ESRS). The directive also set a requirement for non-EU global companies that do significant business in Europe but are headquartered elsewhere, to disclose their global sustainability impacts, starting with the financial year 2028. The purpose was to ensure a level playing field in the EU market.
Under the CSRD, non-EU companies are only obligated to report on one side of the EU's "double materiality" approach. Non-EU groups must report on their global impacts on people and the environment, but not on their sustainability-related financial risks — that is, how sustainability issues affect their net profit and resilience. The question of whether they should disclose such financial information is one for the non-EU states (in which their parent companies are based and/or their stocks are traded), since this is of primary interest to their investors and lenders. The EU's original interest in non-EU groups was based on the aim of achieving comparable and reliable information on impacts. After all, climate change, deforestation and labour exploitation in supply chains all have an impact on Europe, regardless of exactly in which nation states they occur.
As sustainability impacts and financial risk are deeply interconnected, the EU supported the development of international standards under the IFRS Foundation, which are limited to financial materiality and climate. A balance was carefully negotiated in 2022 to promote complementarity and convergence across the disclosure standards.
By 2026, the EU had negotiated Omnibus I, which both massively reduced the number of EU and non-EU companies covered by the CSRD and simplified the standards. But one thing didn't change: non-EU companies are still covered.
The United States administration has publicly challenged the extra-territorial reach of EU sustainability rules once again, characterising them as regulatory overreach and trade barriers.
This pushback manifests in two ways. First, the U.S. bluntly calls on the EU to exclude it from the extraterritorial requirements of EU sustainability law, thus denying Europe the authority to apply the same sustainability requirements to U.S companies as it applies to its own businesses.
Second, the pushback is focused on more technical, yet equally impactful measures. Specifically, this concerns the loosening of the reporting standards applied to non-EU multinational groups, which limits their reporting to their European footprint. Such a change would create major differences vis-a-vis disclosure standards for EU companies and would spill over to sustainability due diligence rules.
EFRAG (the body that drafts these standards) is now consulting on the specific application of the reporting standards for non-EU companies, known as ESRS 40a, based on the article in the CSRD setting out the requirement. Based on the drafts published this summer, there are three compliance pathways:
The first two options are envisaged by the CSRD. In addition, the voluntary application of the full ESRS carries the additional benefit of qualifying for the exemption for any EU subsidiaries of the group that are themselves in scope of Articles 19a or 29a of the Accounting Directive.
However, the "mixed approach" has no explicit basis in the CSRD, and it would allow non-EU companies to limit their sustainability disclosures to EU-related impacts. This would apply to disclosures across all sustainability topics except for climate change, that is, essential greenhouse gas emissions that would need to be provided on a global level.
While the default "global approach" uses the operations of the non-EU parent company at the global level as the reporting boundary, the mixed approach focuses on impacts derived from operations in the EU (location-based) and products or services provided to the EU market (customer-based). For example, a non-EU company might be involved in deforestation, child or forced labour, but by designating the production from such operations as being destined for non-EU markets, it could declare in its CSRD reporting that it has no such material impacts.
The mixed approach is not EFRAG's preferred standard-setting outcome. It appears in the Exposure Draft solely at the explicit request of the European Commission, to be tested through public consultation. EFRAG's Sustainability Reporting Board approved its inclusion on the condition that its reservations were made publicly visible. The basis for conclusions state clearly that "Without such a request, the EFRAG SRB would not have proposed the mixed approach as its own initiative".
EFRAG added several safeguards against the possible abuse of this mixed approach, but the members both of its Sustainability Board and Technical Expert Group expressed their concerns over whether these safeguards will actually be effective and whether it is possible to provide assurance by auditors. The members called attention to the fact that the mixed approach undermines a level playing field with EU businesses, is arbitrary in terms of reporting results, does not capture environmental degradation, and is discriminatory when it comes to whose human rights are protected.
The mixed approach raises questions that go to the heart of what the ESRS framework is meant to achieve.
Undermined Level Playing Field and Fair Competition
The “mixed approach” creates a discrepancy between EU companies, which must report on their global consolidation scope, and third-country peers, who may report only a part of their operations.
One argument is that non-EU multinationals already subject to IFRS S1/S2-based jurisdictional standards in their home countries would already disclose similar information under those standards. However, the mixed approach assumes that non-EU countries already require companies to report on sustainability risks and opportunities. Many major countries (including the US) have no such requirement. Those jurisdictions that have implemented the IFRS provide specific topical standards only for climate.
Additionally, the CSRD does not indicate that the global scope of reporting by non-EU groups should be limited. The CSDDD, which relies on the CSRD for disclosures, does not specify any limitations to the global scope of sustainability due diligence duty.
Reduced Understandability and Comparability
Using different reporting boundaries for different topics within the same report (e.g. global for climate but EU-only for pollution) would impair the overall understandability for users, and effectively prevent comparability of corporate accounting of impacts and management.
Even if the transparency objective of Article 40a is understood in a limited way to cover only matters that affect the EU market, for many impacts it is not possible to draw a clear boundary.
Some impacts have inherently global consequences, including deforestation and systemic biodiversity impacts, microplastics pollution of the ocean, and human rights.
Furthermore, a company that profits from weaker environmental and social standards has an unfair advantage, even if the worst impacts don’t occur in connection to products destined for the EU.
Greenwashing risks and reporting burdens
Allowing the limitation of disclosures on severe global human rights or systemic environmental issues raises questions regarding the relevance of such disclosures, as well as the potential risk of greenwashing. As outlined above, a report applying different scopes for different topics and disclosures is fundamentally incapable of providing a fair presentation of a company’s impacts.
The mixed approach does not provide any clear rules on how to draw boundaries, for example by requiring clear geographical separation. It also raises substantial doubts over reliability: isolating, attributing and assuring EU-specific data on topics such as pollution or workplace incidents may not be operationally feasible in a manner that meets assurance standards.
In order to be able to meaningfully identify EU-related impacts, the company would need to have separate business segments dedicated to serving the EU market only or establish separate sustainability management for products and services and their value chains that can be reasonably assumed to be sold or provided in the EU market. Setting aside the question of technical feasibility and assurance, implementing such arrangements would result in higher costs and additional burden.
Rather than allowing the United States to intimidate and bully the EU and accepting the lowest common denominator, some leading European businesses such as IKEA's Ingka Group are calling on the EU Commission to be much more active globally and encourage non-EU jurisdictions to accept CSRD-compliant reporting as equivalent to their local requirements.
The EU should be proactive and promote its sustainability standards globally. It should not back down from the principle that if foreign companies want to benefit from the EU market, they need to respect the same rules and expectations that we have for our businesses.
The mixed approach goes in the opposite direction. It concedes ground to external pressure at the expense of EU companies. When it comes to global standardisation, allowing non-EU multinationals to report only on EU-related impacts further fragments the global reporting landscape and undermines the quality of reporting and corporate transparency for everyone, including investors outside of Europe.
EFRAG’s public consultation (closing date: 31st of October 2026) on the ESRS 40a is an opportunity for all those concerned to send a clear signal to the EU on what direction to take.
What is at stake is nothing less than Europe's international standing and authority, derived in part from its vision of a world where respect for human rights and the planet is a non-negotiable.
The European Commission has published its draft Delegated Regulation revising the European Sustainability Reporting Standards (ESRS). The revision follows the Omnibus I Simplification Package and is presented as a burden-reduction measure. Some of it is - but a closer reading reveals a set of changes that go well beyond simplification, departing from EFRAG's technical advice and disregarding formal recommendations from the European Supervisory Authorities. Many of these changes have significant implications for the quality and comparability of sustainability data available to the market and public.
By approaching sustainability strategically, companies can turn corporate reporting into a powerful tool to identify their exposure to climate and social risks in their value chains, future-proof the resilience of their business model and build trust with investors, customers and partners alike.
The EU Sustainable Finance Disclosure Regulation (SFDR) is a cornerstone of the EU’s sustainable finance framework, but the Commission’s proposed amendments risk weakening comparability, ambition and product differentiation if key loopholes remain unaddressed.
