To: European Financial Reporting Advisory Group (EFRAG)

We appreciate the opportunity to submit public comments on European Sustainability Reporting Standards for Certain Non-EU Undertakings in Accordance with Article 40a of the Accounting Directive (hereinafter, the "ESRS-40a"). Our comments are as follows:

Content of the Standards and the Standard-Setting Approach

• We support the overall direction of using the revised ESRS as the basis for ESRS-40a. However, it is essential to give due consideration to practical feasibility, ensuring that no excessive administrative burden is imposed, so that third-country undertakings can continue to conduct businesses in Europe with confidence.

• With respect to CSRD disclosures, discussions on regulatory simplification, including the Omnibus I Directive, have resulted in substantial subsequent changes to the stringent disclosure items, scope, and application dates originally established for EU undertakings. In some cases, preparatory work undertaken by companies has therefore been rendered unnecessary. In light of these recent lessons, we consider it a more realistic approach not to impose excessively stringent requirements from the outset, but instead to allow flexible responses in order to identify which practices are effective.

Global Approach and Mixed Approach

• We support the overall direction of the proposal to retain the mixed approach as an option. While the global approach may be suitable for some undertakings due to the nature of their business or technical constraints, others may be able to efficiently distinguish EU-related impacts. Accordingly, undertakings should be allowed to choose flexibly between the mixed approach and the global approach in light of their actual business circumstances.

• Under the current proposal, however, collecting and assessing information on EU-related impacts are complex. Consequently, many undertakings may find the mixed approach difficult to apply and, even when it is applied, may not achieve the expected reduction in burden. We therefore believe that improvements are necessary.

• For example, where business operations are managed as a single unit across Europe, including non-EU countries, or across EMEA, including the Middle East and Africa, or where an EU-based regional headquarters also conducts businesses outside the EU, it may be extremely difficult in practice to isolate and identify information related solely to the EU.

• In view of how such undertakings actually manage their businesses, a simpler reporting model should be introduced for identifying EU-related impacts. Examples include the following:

  • Treat as EU-related impacts, and therefore within the reporting scope, impacts associated with establishments located in the EU and with establishments outside the EU that provide products or services to both EU and non-EU markets. In this case, establishments outside the EU that do not provide products or services to the EU should be excluded from the reporting scope, as should, on materiality grounds, establishments outside the EU whose provision of products or services to the EU represents only a small proportion of their overall activities.

  • Permit each undertaking's management unit, such as Europe as a whole or EMEA, to constitute the reporting scope, provided that the undertaking explains the scope, the criteria applied, and the rationale for its determination.

• We do not believe that human rights impacts arising from business activities outside the EU should be excluded from the mixed approach. This is because human rights impacts arising outside the EU that are unrelated to the provision of products or services in the EU do not necessarily have a clear link to the EU-related impacts covered by ESRS-40a. By contrast, greenhouse gas emissions, regardless of where they occur, may have impacts on the EU through global climate change. Human rights issues therefore differ in nature from climate issues.

• Providing a collection of good practices would also be useful in promoting appropriate and substantive disclosure practices. We look forward to EFRAG's future work in this area.

Incorporation by Reference and Interoperability

• We support the overall direction of the proposal to ensure interoperability with the ISSB Standards and jurisdictional standards based on them (collectively, the "ISSB Standards, etc."). Permitting incorporation by reference from other statutory disclosure documents would avoid the duplicative preparation of disclosure documents and duplicative assurance, thereby reducing practical burdens. It would also ensure consistency of information for users.

• Many jurisdictions, including Japan, are currently developing their requirements based on the ISSB Standards, etc., which serve as the global baseline. EU undertakings, however, report under the ESRS and are not required to report under the ISSB Standards. This may undermine the level playing field among EU undertakings and third-country undertakings that are required to report under both the ISSB Standards, etc. and the ESRS.

• Against this background, and to reduce the practical burden on third-country undertakings operating globally, it should be made clear that disclosures prepared under the ISSB Standards, etc. may be used directly without modification. Undertakings should then be required to report only those matters additionally required under ESRS-40a, and this should be clearly communicated to stakeholders through guidance or similar materials.

• Furthermore, information incorporated by reference should not, solely for the purpose of incorporation into ESRS-40a reporting, be required to be translated into one of the official languages of the European Union or be subject to additional assurance procedures. For third-country undertakings that report and obtain assurance in the language of their home jurisdiction, preparing translated documents and performing additional assurance procedures solely for incorporation into ESRS-40a reporting would create excessive practical burdens and costs and reduce interoperability with the ISSB Standards, etc. In addition, third-country undertakings already fulfil their disclosure responsibilities to stakeholders through disclosure documents prepared in the language of their home jurisdiction. Requiring an additional burden solely because of language differences would therefore undermine the level playing field with undertakings established in the EU.

References to EU Laws and Regulations and Their Feasibility

• We strongly oppose the proposal. For third-country undertakings conducting business under the laws and frameworks of their home jurisdictions, applying terms and concepts based on EU-specific laws and regulations to their global operations would create excessive practical burdens and compliance costs and is therefore not realistic. A regulatory design that does not adequately account for practical implementation would create significant uncertainty for third-country undertakings considering future business expansion in Europe and could impede stable and continuous business operations there.

• In addition, amendments to the referenced EU laws and regulations could affect disclosures under ESRS-40a. Predictability of the standards and operational stability are essential for third-country undertakings to maintain their reporting systems on a continuous and stable basis; references to EU laws and regulations may undermine both.

• Accordingly, reporting by third-country undertakings should adopt flexible methods that give due consideration to feasibility in practice, including allowing the use of the laws of the home jurisdiction and concepts based on those laws, as well as reasonable indicators and estimates.

Other Comments

• In practice, an adequate preparation period is essential for each undertaking to make appropriate disclosures responsibly. However, the period under the proposal between finalisation of the standard and its application is far too short. The schedule should be reconsidered so that not only undertakings but all relevant stakeholders have sufficient time to prepare, for example, by postponing the application date by one year.