While The CSRD primarily aims to enhance transparency and standardize ESG (environmental, social, and governance) reporting within the EU, it also impacts non-EU companies with significant European operations. In this five-point overview, you’ll learn how the directive will impact US-based companies compared to companies based within the EU.
1. Overall Unfamiliarity
EU Companies:
With the adoption of the NFRD in 2014 and the EU Green Deal in 2020, EU companies have had time to adjust to stringent sustainability regulations through the Green Deal and related legislation. The CSRD builds on the concepts and frameworks laid out in the NFRD and Green Deal, making it a more familiar concept for Europeans.
US Companies:
For US companies, the CSRD and the broader EU Green Deal are foreign and complex, and US companies now need to go from 0 to 100 to comply with laws for which they have no conceptual background.
The comprehensive nature of these regulations can be overwhelming, making it challenging for US firms to digest and implement the requirements effectively. Understanding the nuances of EU legislative language and the broader sustainability context requires significant effort and resources.
2. Fear of Litigation
EU Companies:
European companies operate in an environment that is generally less litigious than that of the United States. They are accustomed to higher levels of transparency and to rigorous reporting standards, which have been progressively strengthened over time.
This familiarity with more comprehensive corporate disclosure reduces their apprehension about the legal implications of the CSRD. EU firms are more confident in their ability to comply with the directive without fearing excessive litigation, as they have established processes and systems to meet regulatory requirements.
US Companies:
In contrast, US companies are more accustomed to a highly litigious environment, making them more wary of the stringent transparency and disclosure requirements imposed by the CSRD. Consequently, US firms may be more hesitant to fully embrace the CSRD, fearing that the detailed reporting could expose them to lawsuits. This apprehension can hinder their willingness to proactively engage with and implement the changes necessary for CSRD compliance.
3. Value Chain Depth and Responsibility
EU Companies:
EU companies are more familiar with the concept of value chain responsibility, including not only how they may cause sustainability impacts, but also how they may be linked to impacts which they have minimal ability to influence. Many companies have already started to develop mechanisms to trace and report on their value chain.
US Companies:
The depth of responsibility required by the CSRD, which demands detailed disclosures on how a company impacts and is impacted by its entire value chain, can be intimidating for US firms. US companies that have less experience with value chain responsibility may find it challenging to map out and report these complex sustainability relationships. In addition, the potential legal implications of these disclosures (as previously discussed) amplify the concerns of US firms.
4. Lack of Engagement with the EU Taxonomy
EU Companies:
EU companies have had exposure to the EU Taxonomy, which classifies sustainable economic activities and is a requirement of CSRD compliance. While Taxonomy reporting is still complex, especially with respect to KPI allocation (i.e. CapEx, OpEx, and revenue), EU companies have had time to map out their operations in relation to the Taxonomy, understand the core components of Taxonomy eligibility and alignment, and integrate these classifications into their reporting systems.
US Companies:
For US firms, the EU Taxonomy presents a significant challenge: understanding and applying this classification system to their operations can be daunting, as the way of thinking is foreign to US firms, and the definitional details are extensive.
The reluctance to disclose the specific revenue, CapEx, and OpEx required by the Taxonomy is another hurdle, as it demands a level of transparency and granularity that US companies may not be accustomed to.
5. Leadership Buy-In
EU Companies:
Convincing leadership within EU companies about the importance of the CSRD and its potential benefits is a challenge, but one that is becoming more manageable as sustainability gains prominence in Europe, driven by regulation, resource constraints, and nearby conflicts, like in Ukraine.
US Companies:
For US firms, securing leadership buy-in is more challenging. US business leaders may view the CSRD as an external imposition rather than a strategic opportunity. Demonstrating how the CSRD can transcend compliance and uncover business value through ESG opportunity identification and risk mitigation is crucial.
Fundamentally, the CSRD drives transparency, and the question for US companies is whether and how to take advantage of this. Leadership buy-in is necessary to mobilize resources and take advantage of the insights that the CSRD process can provide, making it more than an expensive compliance exercise.
Conclusion
The CSRD represents a significant shift in sustainability reporting, posing unique challenges for US companies compared to their EU counterparts. From unfamiliarity with EU legislation and fear of litigation to the complexity of the EU Taxonomy and value chain transparency, US firms face a steep learning curve.
However, embracing the potential of the CSRD’s comprehensive approach to ESG can transform this regulation from a compliance burden into a strategic advantage—fostering transparency, stakeholder trust, and long-term business value.
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