EFRAG’s proposal for European Sustainability Reporting Standards for non-EU undertakings: Seven things to know
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Non-EU groups with significant EU activities are facing new sustainability reporting requirements. The European Financial Reporting Advisory Group (“EFRAG”) is consulting on its “Exposure Draft” ESRS 40a until 31 October 2026.
Here are seven things to watch:
1. Why is ESRS-40a being introduced?
ESRS-40a Exposure Draft1 is designed to level the playing field for operators in the EU market, giving visibility into how non-EU undertakings with significant EU activities impact people and the environment (ESRS-40a Exposure Draft (ED) Basis for Conclusions, BC42). Article 40a of the Accounting Directive3 requires the European Commission to adopt a dedicated European sustainability reporting standards (“ESRS”) for non-EU undertakings to achieve that objective.
2. Which non-EU undertakings will be required to report under ESRS-40a?
A non-EU group (and not listed on an EU regulated market) falls within scope if two tests are met: its ultimate parent generated a net turnover in the EU exceeding EUR 450 million at group level (or individual level, if not applicable) for each of the last two consecutive financial years, and it has an EU branch or EU subsidiary whose net turnover exceeded EUR 200 million in the preceding financial year (ESRS-40a 1, para 9(a)-(c)).
The obligation is asymmetric: the EU subsidiary or branch must publish and make accessible the ESRS-40a sustainability report, but the report itself must cover the impacts of the non-EU ultimate parent or its group, not just the EU entity's own impacts (ESRS-40a ED Basis for Conclusions, BC14).
Groups within scope have three options: report globally under ESRS-40a, apply the mixed approach described below, or voluntarily apply the full ESRS (or, once recognized, an equivalent regime). Voluntary application of the full ESRS carries an added benefit: it unlocks the subsidiary exemption for any EU subsidiaries in scope of Articles 19a or 29a of the Accounting Directive, relieving them of their own separate reporting obligation. That exemption option is not available where the non-EU parent reports under ESRS-40a, whether globally or under the mixed approach.
The sustainability report will be required for financial years beginning on or after 1 January 2028.
3. What are the main differences between ESRS-40a and the (simplified) ESRS for EU undertakings?
ESRS-40a is built on the same architecture as the simplified full ESRS adopted on 3 July 2026 by the European Commission for EU undertakings (twelve standards: two cross-cutting and ten topical), but differs in several key respects:
- Impacts-only: ESRS-40a excludes reporting on risks, opportunities, resilience and dependencies (“RORD”), unlike the simplified ESRS. In-scope groups therefore do not need to carry out a double materiality assessment.
- Narrower perimeter option: the simplified ESRS always require global reporting, but ESRS-40a proposes that qualifying groups can apply the mixed approach described below for topics other than climate.
- No EU Taxonomy disclosures: ESRS-40a removes them entirely, since the underlying Taxonomy obligation does not apply to non-EU reporting undertakings.
- Flexibility for incorporation by reference: ESRS-40a allows additional flexibility here, recognizing that a sustainability report the group already prepares under its home jurisdiction’s standards may cover much of the required disclosure.
The overall structure, the inclusion of value chain information, and the transitional provisions and phase-in reliefs are otherwise materially the same as under the simplified ESRS (ESRS-40a ED Basis for Conclusions, Table 1).
ESRS-40a reporting relies on terms and concepts drawn from EU legislation. Some EU-defined terms do not have an obvious one-to-one equivalent outside the EU, so a non-EU group may need to identify the closest local or international concept.
4. What are the key aspects of the new “mixed approach” in ESRS-40a?
The mixed approach lets qualifying undertakings limit non-climate sustainability reporting to EU-related impacts, rather than reporting globally on all topics (ESRS-40a 1, paras 27-28). EU-related impacts are impacts from products or services sold or provided in the EU market (customer-based impact) or from activities carried out in the EU (location-based impact) (ESRS-40a 1, para 28(a)-(b)). Climate impacts must always be reported globally (ESRS-40a 1, para 28). For every other topic, a qualifying group may elect the mixed approach on a topic-by-topic basis (ESRS-40a 1, paras 29-30), but only where EU-related impacts can be meaningfully distinguished from impacts arising elsewhere in the group’s business, based on how its operations, products and value chains are structured and operate (ESRS-40a 1, para 29 and AR 6). The approach was added at the Commission’s request; EFRAG’s board approved the draft only with reservations, citing concerns about a level playing field, comparability and the feasibility of assurance (ESRS-40a ED Basis for Conclusions, BC21(b), BC24 and BC30-BC33).
5. Are there particular considerations for financial institutions?
The Exposure Draft does not specifically address financial institutions. EU regulatory frameworks (including CRD VI, Solvency II, the Insurance Distribution Directive (IDD) and the General Data Protection Regulation (GDPR)) already require substantial regulatory separation between EU and non-EU operations.
There is an important distinction between the ESRS-40a test and the perimeter used in regulatory frameworks such as CRD VI and Solvency II. As currently drafted, ESRS-40a 1, para 29 and AR 6 do not use a regulatory or legal-entity perimeter as the test; they ask whether EU-related impacts (defined functionally in ESRS-40a 1, para 28(a)-(b) by location of activity or EU market for products/services) can be meaningfully identified and faithfully represented. CRD VI and Solvency II are prudential regimes – aimed at financial stability and customer/policyholder protection – not impact-based sustainability regimes. EU banks are already required to integrate climate risks directly into their overall risk management, which creates potential overlaps with ESRS-40a reporting.
6. Is the EU reporting perimeter determined by legal entity or by activity?
The EU reporting perimeter under ESRS-40a is functional, not entity-by-entity (ESRS-40a 1, para 28(a)-(b) and para 29). It depends on where the relevant activity is carried out or the market into which a product or service is sold, not on the corporate vehicle used. Regulated companies can draw on their regulatory records for this assessment. Products sold directly to EU customers by non-EU entities fall within the EU-related perimeter regardless of which entity provides them.
7. Are there any works council information obligations?
Yes. ESRS-40a 1, AR 28 cross-refers to whichever information obligation already exists for workers’ representatives under the applicable regulatory framework of the relevant jurisdiction – it does not create a freestanding new legal obligation of its own. For EU subsidiaries in scope of the CSRD, that obligation already comes from Articles 19a(5) and 29a(6) of the Accounting Directive in the respective reporting regimes: the management of the undertaking (or, for consolidated reporting, the parent undertaking) must inform workers’ representatives at the appropriate level, discuss the relevant sustainability information and how it is obtained and verified, and communicate the representatives’ opinion, where applicable, to the relevant administrative, management or supervisory bodies.
Many non-EU undertakings will be doing this for the first time: companies that have not previously reported under the CSRD are unlikely to have established processes for informing workers’ representatives about sustainability data collection, even though the underlying legal obligation is not new. Non-EU companies should identify, in each EU member state where they operate through subsidiaries with established workers’ representative bodies, the applicable representatives, and inform them – before data collection begins – of the ESRS-40a reporting process and the workforce data to be collected (headcount by country, gender diversity, health and safety data, remuneration metrics). As the first reporting period starts on 1 January 2028, companies in scope should plan to engage with relevant workers’ representatives at their EU subsidiaries during 2027, particularly on any new data collection requirements or changes to existing HR data processes.
Next steps
EFRAG expects to hand over its technical advice to the European Commission in January 2027, with the Commission expected to adopt a delegated act in the first half of 2027.
1 ESRS-40a_Exposure_Draft.pdf
2 ESRS-40a_ED_Basis_for_Conclusions.pdf
3 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19), as amended, in particular by the Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464) and by the "Omnibus I" amendments (Directive (EU) 2026/470). References in this alert are to the consolidated version of 18 March 2026 (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02013L0034-20260318).
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