With all the attention to the simplification of the CSRD and the revision of the standard ESRS, adopted by the Commission on 3 July 2026, subject to publication in the EU Official Journal), a parallel and equally significant development has quietly moved forward. On 23 July 2026, the European Financial Reporting Advisory Group (EFRAG) published its 40a-ESRS Exposure Draft for non-EU companies (draft ESRS-40a) – formerly referred to as the N-ESRS or ESRS-TC), opening public consultation until 31 October 2026. EFRAG has also published its Background for Conclusions Document, which clarifies the underlying assumptions behind the preparation of the 40a-ESRS Exposure Draft.
Non-EU headquartered groups are not only invited to submit their views but would do well to monitor these developments closely. In this blog, we share our key takeaways from the draft ESRS-40a for these so-called third country companies (which we will refer to as “Non-EU groups”).
This consultation is an interim step in the process of adopting the ESRS-40a via a Delegated Regulation, which is scheduled to be decided mid-2027. Reporting in accordance with ESRS-40a will be mandatory for financial years starting on or after 1 January 2028.
Background
EU-based subsidiaries of non-EU groups (meeting the revised CSRD thresholds) are required to prepare a (consolidated) sustainability statement, either for the entity under Article 19a or for a subgroup under 29a CSRD. Non-EU groups, however, generating a groupwide net turnover of more than EUR 450 million in the EU and having one or more EU-based entity or branch realizing more than EUR 200 million turnover, on consolidated basis in each of the last two consecutive financial years, must publish a group-level sustainability report pursuant to the revised Article 40a CSRD (i.e. the 40a-sustainablity report). This may be an additional obligation that does not absolve EU-based subsidiaries that fall within the scope of Articles 19a or 29a CSRD from publishing required sustainability statements. Crucially, as EFRAG’s Basis for Conclusions Document clarifies that as the reporting boundary extends to the entire group of the ultimate third-country parent, compliance with ESRS-40a will in practice require a coordinated, group-wide effort, even if the formal obligation rests with a single EU entity.
Article 40a CSRD introduces an alternative (lighter) reporting mechanism for non-EU groups pursuant to the draft ESRS-TC. This more limited regime sets the floor for what non-EU groups must disclose. The purpose of the 40a-report is to provide a fair and useful picture of the company’s most significant sustainability impacts, risks and opportunities, and how these are managed on a group-wide scale. It is intended to inform investors, lenders, business partners, employees, civil society and other stakeholders. Importantly, the draft ESRS-TC only set out what companies must report. It does not impose new sustainability obligations or replace existing environmental or human rights due diligence requirements.
Also, for 40a-reports, it is an EU entity that bears the reporting obligation on behalf of the wider group. Generally, this will be the group’s largest EU-based entity (i.e. the entity with the largest turnover in the EU), though meeting the reporting requirements will, obviously, require a group-wide effort.
ESRS-40a – General Observations
In contrast to the standard ESRS, EFRAG’s current proposal for the draft ESRS‑40a makes clear that it requires reporting on the basis of a single materiality assessment (impact materiality) only. Companies that choose to identify financial material impacts are, of course, not prevented from reporting these, but this is not required for a 40a-report.
In linewith the objectives of the Omnibus-I Directive, EFRAG has deliberately reduced the reporting burden, especially for early years. EFRAG’s Basis for Conclusions confirms that non-EU groups benefit from the same phased-in transitional provisions as EU companies reporting under the standard ESRS for the first time.
As a result, companies may conduct a high-level, top-down single materiality assessment and only dig deeper where needed. Value chain data gaps are excused for the first three years, provided that companies explain what they tried to do and how they plan to close those gaps (i.e. the ‘apply or explain principle’). Notably, four topics, i.e. biodiversity, workers in the value chain, affected communities, and consumers, may be omitted entirely in the first two years.
The topics that matter most
Based on experience with clients navigating the EU ESG regulatory landscape, five topics stand out as particularly relevant. Not surprisingly, these topics all relate to compliance with parallel regulatory obligations under EU ESG legislation:
- Climate transition plans: If climate change is assessed as material, companies must either disclose their transition plan in full or explicitly state that no plan exists (even though the obligation to prepare and implement a climate transition plan has been removed from the revised CSDDD). The Basis for Conclusions Document clarifies that climate change always requires global reporting, not because of any policy preference, but because many non-EU jurisdictions have already adopted or are adopting IFRS S2-(i.e. the international ISSB standard) aligned climate standards. According to the Background for Conclusions Document, non-EU groups are generally better placed to report on climate change globally – particularly, considering that greenhouse gas emissions are inherently global in nature.
A climate change transition plan must cover reduction targets, decarbonisation levers, investment needs, board approval, and Paris alignment. Importantly, preparing a climate change transition plan is a disclosure obligation, not a behavioural one: the CSRD does not itself legally compel Paris alignment. That said, publicly disclosing the absence of a credible plan carries real reputational and stakeholder risk, and may expose sustainability claims to anti-greenwashing scrutiny. Notably, even though the obligation to prepare and implement a climate transition plan has been removed from the revised CSDDD, non-EU companies may still be required under Article 40a CSRD.
- Due diligence obligations: The draft ESRS-40a imposes no conduct obligation, but the outcomes of supply chain due diligence directly inform the materiality assessment – making it practically indispensable. This mirrors the logic of the Forced Labour Regulation 2024/3015 (FLR); while the FLR does not formally impose a standalone due diligence requirement, demonstrating compliance, in practice, effectively requires one, as reflected in the Commission’s FLR Guidelines published on 26 June 2026. When it comes to the topic of forced labour, however, the draft ESRS-40a imposes a specific reporting requirement that could be used to support an FLR due diligence exercise. In short, companies must disclose their exposure to forced labour, child labour, and trafficking risks by type of operation or geography, and confirm whether supplier codes of conduct are in place for their supply chain. The Basis for Conclusions Document makes clear that forced labour and child labour exposure disclosures were deliberately retained in ESRS-40a because they directly serve the information needs of financial market participants under the SFDR’s principal adverse impact framework.
- Deforestation: Not a standalone topic but embedded within the biodiversity and ecosystems framework (E4). Helpfully, the Commission’s EUDR FAQ Document (4 May 2026) confirms that companies which have already disclosed the relevant information under the CSRD or CSDDD need not repeat it under the EUDR – meaning EUDR due diligence will in most cases feed directly into the biodiversity disclosures required under the draft ESRS-40a. Also, the most recent EUDR Guidance document of 13 July 2026 will guide compliance with both the materiality assessment and the reporting requirements relating to deforestation risks in the supply chain.
- Gender pay gap: The gender pay gap (expressed as a percentage of male average pay) and the ratio of the highest-paid individual’s remuneration to the median must both be disclosed. Interestingly, The Basis for Conclusions Document reveals that EFRAG has not yet decided whether the gender pay gap and remuneration metrics must be disaggregated between EU and non-EU workforce under the mixed approach. EFRAG has therefore included this as an explicit question in the public consultation – making it worth engaging with the consultation process on this point.
- Packaging & Packaging Waste: while the draft ESRS-40a does not contain a standalone packaging (waste) reporting requirement, recyclability rates and waste data are required under the circular economy topic. E5-5(c) refers to, amongst other things, the “designed recyclability rate of its key products and their packaging”. Under the Packaging & Packaging Waste Regulation 2025/40 (PPWR), various economic actors (regardless of whether they fall under the CSRD) are subject to various disclosure requirements relating to, i.a., the quantities of weight placed on the market (particularly, relevant for ‘producers’), re-uses targets, amount of recycled content and the material composition, and specific data from waste management operators. In that regard, PPWR compliance data may serve as the primary source of input (though certain gaps with the reporting requirement under the draft ESRS-40a remain and must be further supplemented).
Lastly, we note that there are no sector-specific standards, but entity-specific disclosures will be required where standard topics do not adequately capture a material impact.
Determine your reporting strategy
Non-EU groups may of course choose to cast their reporting net wider in order to meet their own sustainability goals:
- Global reporting (default): assess and disclose material impacts across the entire consolidated group.
- EU-focused approach (optional): for topics other than climate change, limit reporting to impacts arising from EU activities and EU-facing products and services.
- Full ESRS (voluntary exemption): EU subsidiaries are released from ESRS-40a obligations entirely if the non-EU parent already reports under the standard full ESRS framework.
Where do things stand and what to do now?
The road to the final ESRS-TC has been a long one. The Commission originally had until 30 June 2024 to adopt the standards, a deadline extended to 30 June 2026 by the Stop-the-Clock Directive before being deprioritised altogether in the Commission’s letter of 9 October 2025, pushing adoption back to 1 October 2027 at the earliest.
The current EFRAG consultation runs until 31 October 2026, after which EFRAG will finalise its Technical Advice (expected early 2027). The Commission will then publish its own consultation before adopting the standards as a Delegated Act.
With 2028 on the horizon, now is the time to act.
For further information, please contact:
Pauline Kuipers, Partner, Bird & Bird
pauline.kuipers@twobirds.com
