How U.S. companies should prepare for European CSRD rules

In our previous blog, we discussed how companies can overcome common barriers to Environmental, Social, and Governance (ESG) data management and reporting to get ready for SEC’s climate disclosure rule. With the constantly expanding landscape of global ESG regulations, it’s important to avoid tunnel vision and future-proof your ESG data. Many climate disclosure regulations will extend to companies based outside of host countries but have significant presence there. This is exactly the case with the Corporate Sustainability Reporting Directive (CSRD) passed by the European Union (EU), where the U.S. was the second-largest exporter of goods in 2023.

As a result, CSRD is estimated to affect some 10,000 non-EU companies — including more than 3,200 based in the United States. Impact to these non-EU companies will be as early as FY2026, extending to others through FY2028. With global market leaders are already conducting CSRD analysis and disclosure, we strongly recommend preparing now to ensure ability to comply and stay ahead of the competition. Companies just starting on CSRD compliance can understand their current state, expected effort and implementation timeline through double materiality and data assessments. At NTT DATA, we have also been shaping our Corporate Sustainability services to help our clients build a strong foundation for multiregional strategy to meet regulatory requirements and achieve superior ESG performance.

Understanding the impact of CSRD on U.S. companies

In January 2023, the EU adopted CSRD. Its ESG reporting requirements are defined in the European Sustainability Reporting Standards (ESRS), which the EU adopted in July 2023. This aims to apply comprehensive environmental and social reporting requirements with 12 ESRS. For non-EU companies, it applies to those with at least €150 million ($161 million) in net revenue in the EU and one or more of the following:

• Companies that have listed securities, such as stocks or bonds, on a regulated market in the EU
• Companies with an EU subsidiary that is a large company, defined as meeting at least two of these three criteria:
  • +250 EU-based employees
  • Assets over €20 million ($21.4 million)
  • Local revenue over €40 million ($42.7 million)

CSRD is uniquely challenging in its wide coverage of reporting requirements, as defined by the 12 ESRS. It requires broader disclosures that apply double materiality. This concept refers to both financial materiality (impacts of climate change on company performance) and impact materiality (impacts of company operations and value chain on people and the environment). Put simply, financial materiality is the “outside-in” effects to profit and impact materiality is the “inside-out” effects to people and planet. If a criterion meets at least one form of materiality, it is considered “material” for disclosure.

Depending on the results of a double materiality assessment, a reporting company could see as many as 85 disclosure requirements encompassing 1,100+ mandatory and material data points. These span across the 12 standards for now, with sector-specific standards and simplified standards for small- and medium-sized enterprises (SMEs) in development. The existing ESRS standards include cross-cutting general disclosures, as well as standards specific to each ESG pillar, such as biodiversity, workers in the value chain and business conduct.

CSRD as an opportunity for future-proofing

Although the CSRD rule puts the EU much ahead of other geographies, other countries are also shaping their regulatory frameworks around ESG reporting and disclosures. On October 7, 2023, the state of California passed both the Climate-Related Financial Risk Act (CRFRA) and Climate Corporate Data Accountability Act (CCDAA), both of which share significant overlap with CSRD. On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) also introduced climate-related disclosure rules, which further align the U.S. with the EU's standards. Those in compliance with the comprehensive scope of CSRD will find it easy to comply with these additional disclosure mandates. Multinational companies looking to future-proof their ESG reporting can use CSRD compliance as an opportunity to not only take these new disclosures confidently in stride but also demonstrate market leadership in environment and social impact through globally recognized standards.

How can U.S. companies prepare for CSRD

Start by assessing whether your company falls under the coverage of CSRD and the timeline for your compliance based on the criteria described earlier in the regulatory overview. If you need to comply, then we recommend the following steps as a high-level starting point for your transformation journey.

1. Strategy and objectives: Start with an analysis of your current state and intended future state, as with any large new project. This will shape your scope, goals, and operational framework defined for people, process, data and tools. We recommend future-proofing your strategy by considering your overall ESG goals, beyond bridging immediate gaps for compliance.
2. Double materiality assessment: Define which ESRS requirements and data points must be reported, you will need to conduct a detailed double materiality assessment. This will be a lighter lift for those who have already completed a more traditional outside-in financial materiality assessment.
3. Gap analysis: Conduct a comprehensive assessment of your existing ESG data and reporting capabilities, including the related technology stack. Is it efficient and sufficient to meet your data collection, processing, storage, analysis, presentation and reporting ambitions? In most cases, there will be substantial gaps in both sustainability data and related technical capabilities. It's important to work with a partner who understands both domains to help you identify the right software and technology that will efficiently integrate with your existing IT estate.
4. Organizational readiness and communications: Ensure successful compliance across CSRD’s wide coverage with a cross-functional team and well-designed governance structures. It’s important to get buy-in across organizational levels, including from the board and C-suite, to ensure there is clear accountability and ownership for the initiative.
5. Implementation scope and plans: Plan on building a single source of truth that not only meets your CSRD data requirements but also takes into consideration its interoperability across other regulations and reporting standards that you might be using for your existing ESG reporting, if any (GRI, TCFD, ISSB, and so on).
6. Implementations: Accelerate your sustainability maturity with the right data, tools, and best practices to transform your sustainability office, organization business processes, change management and sustainable behaviors, ESG reporting and disclosure and more.
7. Reporting, governance and performance monitoring: Establish robust processes and measures in place to evaluate and continuously improve your sustainability strategy and implementation.
8. Go beyond reporting: The final goal should not be limited to compliance with reporting requirements and obligations but should be focused on the pro-active management of ESG targets, allowing for meaningful insights, access to detailed information, and fostering target settings and actions for improvement.

We help organizations across industries with every step of this journey. With reporting and assurance deadlines for CSRD and other disclosure mandates over the next two to four years, it's time to embark. As with any large new undertaking, clients will experience a learning curve as they integrate reporting into business processes. Additionally, those who can pilot and iterate on their CSRD reporting process prior to disclosure deadlines will further mitigate compliance risks and enhance their transformation journey.

Accelerate sustainability and transparency with NTT DATA

NTT DATA is your trusted partner on the sustainability journey, beyond just CSRD compliance. On April 1, 2024, we heralded the start of a new era with the coming together of NTT Ltd. and NTT DATA under the NTT DATA banner as a global business and technology services powerhouse. Our more than 15 years of experience, 1500+ successful sustainability projects, over 400 dedicated sustainability experts, and industry-leading investments in sustainability and R&D provide an unparalleled advantage.

Throughout our experience, we have built a broad and innovative portfolio of capabilities and proprietary assets to accelerate our clients’ sustainability progress. Whether it’s a double materiality assessment and CSRD gap analysis, a future-proof ESG data model to improve sustainability performance (such as Penske Automotive Group’s), a 360-degree ESG maturity assessment, an AI-driven competitor analysis and benchmarking, or a blockchain-enabled traceable value chain – NTT DATA stands ready to support any client at any point on their sustainability journey.

Want to learn more about how we can help you achieve your corporate sustainability goals at speed and scale, schedule a session with our consulting team or visit our Sustainability Services webpage.