(This blog post was originally published on April 6, 2023 and has been updated.)
Based in the United States and think European Union Sustainability and ESG regulations do not apply? Think again. Whether by incentive, obligation, or an influence like the ‘Brussels Effect’, the adoption of EU regulations including CSRD by US and non-EU companies is happening. Companies headquartered outside of the EU need to understand and prepare for new European sustainability and disclosure reporting legislation to stay compliant—and competitive.
The Brussels Effect - Effective Indeed
In 2012, a professor at Columbia Law School coined the term ‘The Brussels Effect’, where laws made in the European Union become de facto global standards driven by market forces. This has affected legislation across multiple areas including antitrust, chemicals, aircraft emissions, data privacy, and consumer goods (think REACH, GDPR, Conflict Minerals, and iPhone chargers).Â
Companies headquartered outside of the European Union, (including in the United States) that think European legislation like CSRD does not apply to them need to think again.Â
We are now seeing the Brussels Effect emerge in sustainability and ESG reporting. Companies are opting to uniformly meet the highest regulatory obligation to which they are subject—in the case of ESG reporting, EU regulations—rather than operate a patchwork of international standards.
Legal Considerations for US Companies
When it comes to CSRD adoption by US companies, the Brussels Effect in its broadest sense is not the only thing at play. Many mid-to-enterprise sized companies headquartered in the US will in fact be legally obligated to follow European sustainability and ESG regulations, some of the most rigorous in the world.
CSRD will legally require certain non-EU headquartered companies to prepare extensive reporting using the ESRS framework if they meet the following criteria: Â
- Companies with listed securities such as stocks or bonds on a regulated market in the EUÂ
- Companies with an annual EU revenue of more than €150 million and an EU branch with net revenue of more than €40 million
- Companies with an EU subsidiary that meets at least two of these three criteria:Â
- More than 250 EU-based employees
- A balance sheet above €20 million
- Local revenue of more than €40 millionÂ
Citing analysis from financial data firm Refinitiv, The Wall Street Journal reports that around 10,000 non-EU companies, of which 30% are American, 13% Canadian, and 10% British, will be affected.Â
The Penalties for Noncompliance with CSRD
There are penalties for failing to comply. Under CSRD, member states have the power to apply fines and compliance orders to companies—including non-EU companies—that fail to meet sustainability risk management and disclosure standards. Victim compensation claims are also enabled.
The Incentives of Interoperability: From Brussels to Washington to Beijing
Over time a convergence of non-financial reporting disclosure standards is in everyone’s best interest and is likely to mean that rules made in Brussels will have an influence on lawmakers in Washington and Beijing.
Efforts to align reporting and disclosure frameworks as much as possible to minimize the burden on corporations are what multiple standard setters call ‘interoperability’. An example would be the US SEC paying close attention to what IFRS and European regulatory bodies require and following this model where possible.
Will ESG Pushback Derail Progress?
Despite the positive intention of ESG to provide a valuable lens through which businesses can identify and manage risk, some pushback against it has emerged particularly in more free market sectors of the US economy.
However, reporting in USA Today suggests that the anti-ESG movement does not have widespread public support. 63% of voters surveyed by Penn State Smeal Center for the Business of Sustainability and communications firm ROKK Solutions said governments should not limit ESG investments, with both Democrats and Republicans providing different reasons as to why.
Despite newspaper headlines, the anti-ESG movement will likely find itself on the wrong side of history—and not in the good graces of consumers demanding increased corporate citizenship.
An Opportunity to Create Business Value
As a solutions provider, Benchmark Gensuite has seen extensive evidence from customers that systematic EHS, Sustainability, and ESG disclosure practices generate business value. Far from being a constraint or burden, embracing ESG regulations can help companies reduce costs, create value, and prepare for future challenges.
What’s more, embracing the extensive CSRD regulations coming out of the EU will provide a competitive advantage in a rapidly changing business environment where radical transparency is the new norm (the Climate TRACE project which uses satellites to make detailed emissions data freely available is just one example).
Embrace Brussels (or offer a cautious handshake) either way choosing a CSRD solution will create business value.
As the climate crisis intensifies, the demands on businesses by consumers, investors, the media, NGOs, and other stakeholders are growing. But solutions to address these mounting expectations are keeping pace. The powerful sustainability tools developed at Benchmark Gensuite provide companies with better ways to collect data, report on ESG performance, and help drive operational excellence.
Corporate Citizenship, Powered by Benchmark Gensuite
Companies that recognize their responsibility as corporate citizens to mitigate climate change, support biodiversity, and do better business have a solutions partner that shares these values in Benchmark Gensuite. From helping you navigate the latest legislation out of Brussels to our roots in EHS, Benchmark Gensuite empowers a holistic and integrated management approach fit for a sustainable future.
Request a demo to see how Benchmark Gensuite can help your company with CSRD and other European Union ESG regulations.
