The European Union is taking another significant step toward defining how large non-EU companies will report under the Corporate Sustainability Reporting Directive (CSRD).

The European Financial Reporting Advisory Group (EFRAG) has released its proposed ESRS-40a, a dedicated set of European Sustainability Reporting Standards for certain companies headquartered outside the European Union but with substantial business activities in the EU. The proposal is currently open for public consultation through October 31, 2026.

For U.S.-based multinational companies, the new standards introduce an important strategic question: whether to report under the specialized ESRS-40a framework or, in some cases, use the broader full ESRS framework at the global parent level to help address reporting obligations across the organization.

Who Could Be Required to Report Under ESRS-40a?

Following the EU's Omnibus I amendments, Article 40a of the Accounting Directive applies to certain non-EU companies with substantial EU operations.

A non-EU parent may fall within the Article 40a framework where it generates more than €450 million in EU net turnover in each of the previous two consecutive financial years and has either:

• an EU subsidiary with more than €200 million in net turnover in the preceding financial year; or

• where there is no qualifying EU subsidiary, an EU branch generating more than €200 million in net turnover.

Unlike the standard CSRD scope test applicable to many EU companies, there is no employee threshold in the Article 40a test for the non-EU parent.

Technically, the obligation to publish the Article 40a sustainability report falls on the qualifying EU subsidiary or branch. That entity must make available a sustainability report covering the relevant non-EU parent company and, where applicable, its consolidated group.

According to the European Commission estimate cited by Ropes & Gray, as many as 450 U.S.-based multinational companies could ultimately be captured by Article 40a.

ESRS-40a Is Different From Full ESRS Reporting

The proposed ESRS-40a framework is narrower than the full ESRS framework used by EU companies subject to the CSRD.

Most notably, ESRS-40a does not require the same double materiality assessment required under the full ESRS.

Double materiality requires companies to consider both:

1. Impact materiality: how the company affects people and the environment; and

2. Financial materiality: how sustainability issues create financial risks or opportunities for the company.

ESRS-40a instead focuses principally on material impacts. Reporting on financially material sustainability risks and opportunities would generally not be required under the Article 40a framework.

That distinction could significantly reduce the reporting burden for some non-EU companies. ESRS-40a reporting also would not require EU Taxonomy reporting at the non-EU parent level. However, the framework would continue to cover a broad range of environmental, social and governance topics and consider impacts throughout the upstream and downstream value chain.

A Potential EU-Focused Reporting Option

One of the most significant proposals in the current exposure draft is what EFRAG describes as a "mixed approach."

Under this option, companies could potentially limit reporting for many sustainability topics to impacts connected to the European Union rather than reporting on every material impact globally.

EU-related impacts could include impacts arising from:

• operations carried out in the EU; and

• products or services sold, or reasonably expected to be sold, in the EU.

Climate reporting would remain global rather than being limited to EU impacts. While this approach could reduce the reporting burden, applying the distinction may be challenging in practice. Global supply chains, centralized corporate policies and products sold across multiple markets can make it difficult to separate an organization's EU-related impacts from its broader global impacts.

EFRAG has itself raised questions about the feasibility and comparability of this approach, which is one reason the issue is receiving particular attention during the current consultation.

Why Some U.S. Companies May Still Choose Full ESRS Reporting

For large U.S. multinationals, ESRS-40a may not automatically be the simplest reporting strategy. A company can potentially have two different types of CSRD exposure.

Its U.S. parent may meet the Article 40a thresholds, while one or more large EU subsidiaries may independently meet the standard CSRD thresholds.

Following Omnibus I, an EU undertaking generally falls within the revised CSRD scope where it exceeds both €450 million in net turnover and an average of 1,000 employees.

For affected companies that were previously scheduled to begin reporting later, these requirements generally apply beginning with financial years starting on or after January 1, 2027.

That creates a potential reporting choice. A multinational could prepare an ESRS-40a report covering the global parent group while separately preparing full ESRS reports for applicable EU entities. Alternatively, where the relevant exemption requirements are satisfied, a non-EU parent may choose consolidated reporting using the full ESRS, potentially allowing covered EU subsidiaries to rely on the parent's consolidated sustainability reporting rather than preparing separate reports.

For some multinationals, one global full-ESRS reporting process could ultimately be more manageable than maintaining different reporting frameworks across the organization.

Timing Will Be an Important Factor

The two reporting regimes also begin at different times. Affected EU companies subject to the standard CSRD requirements are generally scheduled to begin reporting for financial years starting on or after January 1, 2027.

Article 40a reporting for non-EU companies begins one year later. The first ESRS-40a sustainability reports are expected to cover financial years beginning on or after January 1, 2028, with the first reports expected to be published in 2029.

This creates an unusual sequencing issue for multinational companies. A U.S. parent could have European subsidiaries preparing full ESRS reporting for 2027 before the parent's Article 40a reporting obligation begins.

Companies with both types of exposure therefore may need to decide their reporting architecture well before ESRS-40a itself becomes mandatory.

What Companies Should Be Evaluating Now

For U.S. multinationals with significant European operations, the first step should be determining whether the organization could be captured at both the EU entity level and the global parent level.

Companies should then compare the operational implications of several reporting structures, including separate EU subsidiary reporting, an ESRS-40a report covering the non-EU parent group, and consolidated full-ESRS reporting at the global parent level.

Existing reporting infrastructure will matter. Organizations that have already built global sustainability data collection, materiality, internal controls and assurance processes may find consolidated reporting more practical than creating a distinct EU-focused reporting boundary.

Companies should also continue monitoring the ESRS-40a rulemaking process. EFRAG's consultation closes on October 31, 2026, with EFRAG expected to deliver its final technical advice to the European Commission in January 2027. The European Commission would then adopt the final standards through a delegated act.

The Bigger Picture

Omnibus I significantly reduced the number of companies expected to fall within the CSRD, but it did not eliminate CSRD obligations for large multinational companies headquartered outside Europe.

Instead, ESRS-40a is beginning to clarify what those obligations may look like. For U.S. companies with large European businesses, the question is increasingly not simply whether CSRD applies, but where the organization should report, which version of ESRS it should use, and whether one global reporting process is more efficient than multiple European reporting processes.

Those decisions could shape sustainability reporting systems, governance structures, data collection and assurance programs well before the first Article 40a reports are published in 2029.