In brief
- The EU Corporate Sustainability Reporting Directive (CSRD) applies to companies and groups headquartered outside the EU, if they generate more than €450 million in EU turnover and have an EU subsidiary or branch with turnover exceeding €200 million.
- Such businesses will be required to make sustainability disclosures in line with European Sustainability Reporting Standards (ESRS) from 2029, for financial years beginning on or after 1 January 2028.
- They have three options for this: apply a new, dedicated set of standards for non-EU companies (ESRS-40a) on a global basis; apply ESRS-40a using a "mixed approach" that limits the scope of certain disclosures to EU operations; or apply the full ESRS required of large EU businesses.
- Analysis of the ESRS-40a consultation draft, published on 23 July 2026, suggests that proposed simplifications may prove illusory for many in-scope organisations, including UK parent companies of groups already preparing to comply with incoming UK Sustainability Reporting Standards (UK SRS).
- For several reasons, including the potential to relieve EU subsidiaries of their own separate reporting obligations, we believe many such businesses would be better served by adopting the full ESRS framework, rather than the ostensibly simpler ESRS-40a standards.
- Either way, now is the time for such businesses to confirm whether they are in scope of EU reporting obligations, to model and make strategic decisions about their reporting options, and to engage in the consultation process to help refine ESRS-40a standards before they are finalised.
What is ESRS-40a and who is it for?
ESRS-40a is the new name for what has previously been referred to as Non-EU ESRS (N-ESRS) or ESRS for Third Countries (ESRS-TC). This dedicated set of standards defines the sustainability reporting obligations of undertakings in scope of article 40a of the Accounting Directive. Following Omnibus amendments, that means non-EU undertakings that:
- Had EU turnover of more than €450 million (at a group or individual level) in each of the last two consecutive years; and
- Have an EU branch or subsidiary that generated more than €200 million turnover in the previous financial year.
The stated objective of ESRS-40a reporting is to ensure that there is a level playing field for businesses operating in the EU market, as well as to ensure transparency on impacts on people and the environment of non-EU businesses with significant EU activities.
What does ESRS-40a actually do?
ESRS-40a mirrors the 12-standard structure of the recently revised core ESRS (two cross-cutting standards plus 10 topical standards). It also covers substantially similar disclosure requirements across governance and strategy, management of material sustainability matters through policies and actions, and metrics and targets.
However, some fundamental policy choices distinguish it from the reporting regime for EU undertakings, most notably:
1. Materiality approach
As currently proposed, ESRS-40a reporting would be based on an undertaking's impact materiality assessment only. This conceptual shift from double materiality to impact materiality is the most structurally consequential feature of the standard, resulting in the exclusion of disclosure requirements or terminology relating to (financial) risks and opportunities, resilience and dependencies (RORD).
The practical consequence of this approach is most visible in relation to climate change. Disclosures regarding identification of climate-related risks and scenario analysis (E1-2), resilience in relation to climate change (E1-3), and anticipated financial effects from material physical and transition risks (E1-11) are deleted entirely from ESRS-40a.
2. Option to limit reporting to EU-related impacts
While requiring reporting of climate-related impacts at the global level, ESRS-40a proposes to allow non-EU undertakings to limit their disclosure of other impacts to those arising in the EU only, provided that they can be meaningfully identified and faithfully represented.
Added at the request of the European Commission, this so-called "mixed approach" is undoubtedly the most controversial aspect of the proposed standards. Whether such an approach is workable in practice, and results in relevant information, is a key question upon which EFRAG is now seeking feedback and it is uncertain that the proposal will survive the consultation process.
Critics, including among EFRAG's own Technical Expert Group, point out that using different scopes for different topics within the same report is likely to harm comparability and understandability. The proposition that material negative impacts on human rights and the environment can be cleanly attributed to EU-related versus non-EU-related operations — and that only the former need be disclosed — is also contestable, both operationally and conceptually.
How much does ESRS-40a really simplify?
Cutting mandatory data points by more than 60 per cent and total data points by more than 70 per cent, revisions to the full ESRS adopted by the Commission on 3 July 2026 have already done a lot of heavy lifting in terms of simplification. It is questionable what ESRS-40a contributes over and above those revisions. If anything, the proposed mixed approach adds greater complexity, and the removal of RORD disclosure requirements is perhaps not as burden-reducing as it first appears.
For reasons expanded upon below, the benefits of deleting E1-2, E1-3 and E1-11 are likely to prove illusory for non-EU entities already committed to IFRS or equivalent reporting standards. While representing a genuine burden reduction for non-EU entities with no such existing commitments, the large, multinational groups most likely to meet CSRD scope thresholds are precisely those least likely to be in that position.
Just as significantly, the impact materiality work that companies generally find more challenging — the hard work of mapping actual and potential negative impacts across complex, geographically dispersed value chains — remains substantially intact.
Reporting standards focused on impacts are not inherently simpler if a company does not yet have well-developed systems and processes for identifying, assessing and mitigating those impacts.
Is there a compelling case for non-EU undertakings applying full ESRS instead of ESRS-40a?
In-scope non-EU undertakings are offered three alternative approaches for meeting their reporting obligations. They can:
- Report in line with ESRS-40a on a global basis, applying the standards' disclosure requirements to their operations worldwide;
- Report in line with ESRS-40a using the mixed approach (as described above), limiting disclosure of non-climate impacts to those arising in the EU; or
- Report in line with the full ESRS, as required of large EU undertakings.
For reasons we explore below, for many non-EU groups, the third option may prove more advantageous than it initially appears:
1. Double materiality is not just about reporting
There is good reason to apply the full ESRS and the double materiality approach it requires, rather than the impact-only approach proposed by ESRS-40a.
As we have long argued, double materiality assessment is not just about reporting. It is an essential strategic process and tool of good governance, helping to develop a more timely and complete picture of where a business is exposed to risk, lacks resilience and needs to transform.
Adopting a single materiality lens — whether focusing on financial materiality or impact materiality only — is of limited value by comparison.
Without the impact lens, a business is not anticipating how its impacts and dependencies on people and planet may circle back as financially significant risks in the future. If an issue only gets recognised once it shows up in the numbers, by that time it may already be too late or far more costly to address.
Equally, without the financial lens, there is also no principled basis for prioritisation. Understanding which impacts are most likely to circle back as financial or strategic risks and opportunities is what allows a business to direct its resources where they matter most.
2. Disclosure requirements dropped by ESRS-40a still apply elsewhere
Another argument in favour of applying the full ESRS is that the disclosure requirements that ESRS-40a proposes to drop do not simply disappear.
Directly equivalent disclosures to E1-2, E1-3 and E1-11 are core to IFRS S2, which represents the global baseline for climate-related disclosures and acts as the basis for mandatory reporting requirements being introduced across multiple jurisdictions, including UK SRS.
Regardless of its EU reporting obligations, a non-EU undertaking following IFRS standards on a voluntary basis, or preparing for mandatory reporting against UK SRS, will already need to be conducting scenario analysis, assessing climate resilience, and quantifying anticipated financial impacts of physical and transition risks.
The analytical work is not avoided by choosing ESRS-40a over full ESRS. In that sense, for groups already committed to IFRS S2 or equivalent reporting, the headline simplification of ESRS-40a is largely illusory. The work happens either way. The only question is whether EU reporting reflects it.
3. Adopting revised ESRS provides for subsidiary exemptions
Where a third-country ultimate parent applies full ESRS, a further benefit is that EU subsidiaries that would otherwise face their own reporting obligations under articles 19(a) or 29(a) of the Accounting Directive could benefit from a subsidiary exemption.
Even accounting for the additional demands of double materiality at the parent company level, relieving subsidiaries of their own standalone CSRD reporting obligations may well represent a net reduction in burden across the group as a whole — a strategic choice that is worthwhile modelling carefully.
What should non-EU undertakings be doing now?
1. Assess threshold exposure precisely
The two-limb scope test — EU net turnover exceeding €450 million at group or individual level, and an EU subsidiary or branch with net turnover exceeding €200 million — is likely to be more nuanced in practice than it appears on the page, particularly for groups with complex or evolving European structures.
Groups that have not yet conducted this analysis should treat it as the necessary first step before any other planning is meaningful. It requires specific legal advice and should inform early decisions about group reporting architecture.
2. Decide on reporting architecture and model full ESRS compliance
The choice between ESRS-40a and full ESRS is not simply a question of which standard appears less demanding at first glance. For the reasons set out above, non-EU parent companies of groups already committed to IFRS or equivalent reporting should model the full ESRS option carefully before defaulting to ESRS-40a.
This modelling should account for the analytical work that will be required regardless of the EU reporting route chosen, the potential relief available to EU subsidiaries under the subsidiary exemption, and the practical and reputational risks of adopting ESRS-40a's mixed approach, should it survive the consultation process.
These are strategic decisions with long-term consequences for reporting architecture, governance processes and group-level resource allocation. They should be made with legal and sustainability reporting advice, not deferred until after the standard is finalised.
3. Strengthen due diligence capabilities
Impact materiality assessment is where the gap between current and required practice tends to be widest. Building the systems, processes and organisational capability needed to do this work rigorously takes time; it cannot be shortcut.
Groups should treat investment in due diligence infrastructure and value chain impact mapping as a compliance priority that is independent of — and parallel to — the ongoing standard-setting process, rather than something to begin once the final standard is known.
4. Engage with the consultation
Consultation on the ESRS-40a exposure draft closes on 31 October 2026 and responses received will materially influence the final standard. The questions EFRAG is explicitly testing — including the viability of the mixed approach — are questions to which the experience of large non-EU groups is directly relevant and genuinely useful.
Standards that are finalised without adequate input from the groups they are designed to regulate are rarely better for the omission. Engagement, either directly or through industry bodies, is not merely a procedural opportunity. It is a practical means of shaping a standard that will apply to your organisation.
How can Mishcon Purpose help?
Mishcon Purpose — our interdisciplinary ESG and sustainability practice — advises corporates and private interests on evolving ESG risks and opportunities, and development and implementation of strategy and governance frameworks to address them. By combining expert lawyers and sustainability professionals, our team balances compliance with strategic foresight, not only helping clients to mitigate risk, but also to seize opportunities to lead and benefit from sustainable transition.
To discuss your biggest challenges and ways we can help, get in touch.