WHY DO THESE REGULATED SUSTAINABILITY DISCLOSURES EXIST?
For private companies, climate disclosures are currently done on a voluntary basis, often driven by stakeholder pressure. Though there are standard frameworks available through organizations such as CDP, GRI, and B Corp, a significant number of global companies still do not disclose or do so inconsistently.
Both the European Union’s recently finalized Corporate Sustainability Reporting Directive (CSRD) and the upcoming Securities and Exchange Commission (SEC) climate disclosure rule in the United States will require mandatory carbon footprint disclosures. These regulations aim to provide investors with consistent, comparable, and reliable information. Carbon footprint data will be required to be disclosed with the same level of rigor as their accompanying financial statements.
WHO IS AFFECTED BY THESE REGULATIONS?
The SEC's climate disclosure will cover both domestic and foreign SEC registrants, encompassing around 12,000 companies, including approximately 1,150 non-US companies.
The EU CSRD has a broader scope than SEC, including large public interest entities, listed companies, banks, insurance companies, EU-listed companies (including SMEs), and third-country corporations with significant EU subsidiaries or branches. In total, around 50,000 organizations will be required to report, covering about 75% of the EU's total company turnover.
WHEN DO THESE REGULATIONS APPLY?
The EU CSRD came into force on January 5, 2023. The European Commission is currently reviewing the Delegated Act covering the adoption of the first set (sector agnostic) of European Sustainability Reporting Standards (ESRS). The EU is expected to adopt the final standards in August 2023, followed by a period of scrutiny by the European Parliament and Council. It is then expected to come into effect in stages from 2024 for EU member states through to 2028 for third-country companies.
The SEC's climate disclosure has faced delays. Proposed in March 2022, the final rule was initially expected to be published in December 2022, then April 2023. Delays continue due to the volume of comments received and some political opposition. A former SEC commissioner suggested a final publication date of Q3 2023. The effective date is unknown but may align with CSRD, with the first reports due in 2025 for the 2024 Financial Year.
WHAT INFORMATION WILL ORGANIZATIONS NEED TO PROVIDE?
Under the CSRD, organizations will be required to disclose using a common framework to report on strategies, business models, governance, sustainability impacts, opportunities, resilience to risks, as well as policies, targets, action plans, and performance. Regarding climate, CSRD should include details on energy consumption, energy mix, scopes 1, 2, and 3 (with scope 3 expected to be optional for the first three years), total GHG emissions, GHG removal plans, use of carbon credits, and internal carbon pricing.
The SEC's proposed disclosure focuses solely on climate-related risks, including governance, material impacts on business, strategy, and outlook, climate-related targets and goals, transition plans, and Scope 1 and 2 emissions. The inclusion of Scope 3 emissions remains a contentious topic.
NEXT STEPS
Following both directives’ anticipated publications, most of the data reported to EU CSRD and US SEC climate disclosure should be publicly available and easily searchable through XBLR tagging. Voluntary reporting organizations, such as CDP, are aligning their standards with these new disclosure requirements, easing the burden of reporting to multiple entities. The development of mandatory disclosure and the standardization of reporting should increase the quality and quantity of climate disclosure reporting.
Inspired by the action taken in the US and the EU, other jurisdictions such as the United Kingdom, Canada, Australia, India and China are considering implementing climate disclosure rules.
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