EU Corporate Sustainability Reporting Directive: Time for Article 40a Businesses to Take Stock

The EU Corporate Sustainability Reporting Directive (CSRD) required EU-listed businesses with more than 500 employees, among other entities, to report on the impact in 2025 of environmental and social factors on their business and of their business impact on people and planet. The detailed regulatory regime sought to capture non-EU incorporated businesses with a substantial EU footprint.

However, a review of European competitiveness resulted in the “Stop the Clock” regulation[1] that paused implementation of the CSRD across EU member states as the EU’s regulatory bodies considered whether the regime was fit for purpose, bearing in mind the objective of ensuring that businesses with a footprint in Europe could compete on a global scale.

This legislation delayed the compliance date for the publication of disclosures by large EU businesses (now those with more than 1,000 employees and more than €450 million of annual revenue — an In-Scope EU Company) to 2028, reporting with respect to ESG data gathered and analysed in 2027. It also delayed the compliance date for the publication of disclosures by those non-EU businesses (i.e., those with more than €450 million of revenue generated in the EU) with a substantial EU footprint (i.e., branches or subsidiaries with more than €200 million revenue) to 2029, reporting with respect to ESG data gathered and analysed in 2028.

This note answers key questions regarding the draft regulatory standards governing those non-EU corporate disclosures (Article 40a ESRS Exposure Draft) that have been published for consultation by the EU technical advisory body, the European Financial Reporting Advisory Group (EFRAG). The consultation closes on 31 October 2026, and EFRAG is expected to publish its technical advice in January 2027, with the implementing legislation due for adoption in mid-2027.

1. Is my non-EU business in scope of the CSRD?

If you (i) generated more than €450 million revenue in the EU during the last two consecutive financial years and (ii) have a subsidiary or branch in the EU that generated more than €200 million revenue in the preceding financial year, then you are in scope of the CSRD (i.e., you are an Article 40a Company). If an Article 40a Company is an ultimate parent undertaking that prepares consolidated financial statements, the sustainability report that is published shall cover the parent and subsidiaries in accordance with the applicable accounting requirements.

2. What if I have a subsidiary that is already captured by the CSRD on a standalone basis?

If you have an In-Scope EU Company in your corporate group, that entity will or should be preparing to gather and analyse data with respect to its risks, impacts and opportunities linked to the environment, climate change, employment and human rights from January 2027, with a view to reporting in its management report that will be published in 2028.

If you are a non-EU Article 40a Company that is required to prepare reports from 2029, reporting with respect to ESG data gathered and analysed in 2028, then whilst your In-Scope EU Company subsidiary will be required to report in its own right in 2028, its reporting would be rolled-up into the parent undertaking’s consolidated financial statements from 2029.

3. Can or should I streamline my ESG reporting with my EU subsidiary?

Under the Article 40a ESRS Exposure Draft, you will have options in how you report with respect to the impacts of your Article 40a Company and your In-Scope EU Company. These are:

1. Global reporting
2. Mixed reporting
3. Full ESRS reporting

4. What is meant by ‘global’ reporting?

The “global” reporting standard means that impacts are reported at the global level for all topics. It covers the same reporting boundary as the group financial statements of the ultimate third-country parent undertaking. This means an Article 40a Company reports on all material impacts on people and planet across worldwide operations and the entire upstream and downstream value chain, exactly as an EU company would under full ESRS except that the reporting objective is limited to impacts only (i.e., it excludes risks and opportunities).

5. What is meant by ‘mixed’ reporting?

The “mixed” reporting standard means that for impacts other than climate change, an Article 40a Company may report solely in relation to (a) impacts that arise from products and/or services that were or can be reasonably assumed to be sold or provided in the EU[2] and (b) impacts of the undertaking’s EU activities (EU Impacts). These are known as “customer” and “location” based impacts. This is only available where EU Impacts can be meaningfully identified. Note that there are multiple points under consultation in the Article 40a ESRS Exposure Draft that mean these approaches may change.

6. What is meant by ‘full ESRS’ reporting?

Article 40a Companies can choose to prepare a full ESRS report based on the requirements applicable to In-Scope EU Companies. These companies must report based on the double materiality principle, i.e., the impact of environmental and social factors on their business and their business impact on people and planet. To the extent that an Article 40a Company reports on this basis, EU subsidiaries that are In-Scope EU Companies may benefit from an exemption from their own obligations under the CSRD[3]. At the same time, an Article 40a Company that chooses to do this is voluntarily opting for a more stringent regime in the context of there being real scope for the Article 40a ESRS Exposure Draft to be further simplified.

7. What are the reporting requirements of the CSRD for Article 40a Companies?

Article 40a Companies will need to gather and analyse information during 2027 with respect to their impacts on environmental and social factors, as defined by detailed reporting requirements set out in the Article 40a ESRS Exposure Draft published in July 2026. They will then need to report those impacts in 2028 in a dedicated sustainability report that will capture the same undertaking as the group financial statements of the Article 40a Company. The report must be published and made accessible by the EU subsidiary or branch.

8. What is the subject matter that an Article 40a Company must disclose?

The 40a ESRS Exposure Draft mirrors the European Sustainability Reporting Standards for In-Scope EU Companies in that it retains two cross-cutting disclosure standards and 10 topical standards, the latter of which capture climate change, pollution, water, biodiversity, resource use, own workforce, value chain workers, affected communities, consumers/end users and business conduct.

9. Why is climate change treated differently to other environmental and social topics?

EFRAG retains the global requirement for climate change as this impact is global in nature. In addition, many non-EU jurisdictions have already adopted or are adopting standards based on IFRS S2 (Climate-related disclosures) and so in theory non-EU companies ought to be better prepared to report on climate globally[4].

10. What is material information for the purposes of Article 40a?

An Article 40a Company must report material information, i.e., information that could reasonably be expected to influence decisions made by (a) primary users of general-purpose financial reports and (b) other users of general-purpose sustainability reports regarding corporate impacts. In addition, Article 40a Companies must report information that relates to the business’ material actual or potential and positive or negative impacts on people or planet over the short, medium or long term, including those connected with the business’ own operations and its upstream and downstream value chain, such as through products and services as well as through business relationships (and not just those under contract). There are further definitions governing materiality of impacts varying with regards to potential or actual impacts, positive and negative.

11. Is the Article 40a ESRS Exposure Draft compatible or interoperable with IFRS S1 and S2?

It is important to note that the IFRS S1 and S2 standards have been subject to scrutiny with respect to their definitions of financial materiality. Regardless, they remain important standards with respect to multiple laws and legislative projects globally that require or may seek to require climate-related financial disclosure by companies and asset managers. The 40a ESRS Exposure Draft shares a common architecture with the IFRS S1 and S2 standards in that both require disclosures on governance, strategy, impact management through policies, actions, metrics and targets. The climate-specific disclosures cover transition plans, carbon credits, greenhouse gas emissions and greenhouse gas emission reduction targets.

At the same time, 40a ESRS Exposure Draft requires additional disclosures on energy consumption and mix, locked-in emissions, compatibility with 1.5 degrees Celsius-aligned decarbonisation pathways, biogenic emissions, greenhouse gas removals, disclosure of activity in the fossil fuel sector and internal carbon pricing.

The 40a ESRS Exposure Draft excludes climate risks and scenario analysis, resilience in relation to climate change and anticipated financial effects from material physical and transition risks.

12. I think I am an 40a Company. What should I do next?

You should confirm the scoping analysis with internal and/or external legal counsel, including whether you have an In-Scope EU Company. As part of this process, you should identify which compliance route you consider to be most appropriate for your global corporate group and begin to map out the information that you will need to gather and analyse in order to achieve the relevant compliance reporting deadline(s) for both your Article 40a Company and your In-Scope EU Company. This will consist of a group, product, customer, location and value chain map that can support global, mixed or full ESRS reporting. You should consider assessing these issues ahead of the relevant data window for your company’s reporting (i.e., 2027 or 2028) to ensure early identification and resolution of issues that may otherwise require reporting.