Global regulations are reshaping corporate sustainability. Are U.S. companies prepared for mandatory reporting? (2024)

The global ESG and sustainability reporting focus is shifting from being largely voluntary to a mandatory disclosure landscape. Underpinning this shift is a patchwork of global regulations with various environmental, social and governance (ESG) disclosure requirements. The jurisdiction, scope, and timeline for these regulations are incredibly dynamic, challenging sustainability teams at U.S. companies to determine the applicability and requirements for their organizations.

This article discusses the most impactful mandatory ESG and sustainability reporting regulations, which redefines the need for organizations to formalize their ESG reporting capabilities. This includes:

1. California Climate Accountability Package:SB 253 California Climate Corporate Data Accountability Act
2. California Climate Accountability Package:SB 261 Greenhouse Gasses: Climate-Related Risk
3. New York Proposed Climate Corporate Accountability Act
4. SEC Proposed Climate-Related Disclosure (SEC)
5. Corporate Sustainability Reporting Directive (CSRD)
6. Sustainable Finance Disclosure Regulation (SFDR)
7. UK Financial Conduct Authority Climate-related Disclosure Requirements
8. Federal Supplier Climate Risks and Resilience Proposed Rule

While Europe is leading the way in ESG and sustainability regulation with its comprehensive sustainability regulations, the U.S. is a close follower with the recent introduction of the California Climate Accountability Package, along with New York and the SEC’s proposed climate-related disclosure rules, in addition to theFederal Supplier Climate Risks and Resilience Proposed Rule.

Organizations should determine which ESG and sustainability regulations apply to them and prepare now to protect against risks associated with inaction. Download the easy-to-follow checklist of regulatory applicability to understand if your organization is impacted.

Take action

With the web of regulations regarding sustainability reporting that are either proposed or final, almost all U.S.-based companies will be impacted in one regard or another. At a minimum level, you may be required to provide climate data to larger suppliers and, for certain companies, you may need to align reporting across several regulatory jurisdictions. By taking action now and understanding the full breadth of impacts, companies can develop appropriate systems and controls that are feasible to implement, cost effective to deploy, and yield dividends for competitive advantage ahead of regulations.

Get ahead of the changing regulatory landscape by acting today to understand how your organization could be impacted in the future.Lean on our specialists to guide the way and act now to protect and enhance your organization’s value.

1. The California Climate Accountability Package – California Climate Corporate Data Accountability Act

The California Climate Accountability Package was released in October 2023, including two pieces of regulations (SB 253 and SB 261) impacting both public and private organizations that do business in California. The Act requires companies to publicly report on their full greenhouse gas (GHG) inventories, which include scope 1, 2 and 3. Limited assurance requirements (ESG data audit) for the GHG data reported will begin in 2026 and will increase to reasonable assurance requirements beginning in 2030.

2. The California Climate Accountability Package – Greenhouse Gasses: Climate-Related Risk

The California Climate Accountability Package was released in October 2023, including two pieces of regulations (SB 253 and SB 261) impacting both public and private organizations that do business in California. The Act requires companies to prepare a climate-related financial risk report, in line with the TCFD framework, publicly disclosing climate-related financial risk and measures adopted to reduce and adapt to those risks on a biannual basis.

3. New York Proposed Climate Corporate Accountability Act

The Climate Corporate Accountability Act, introduced in February 2023, is a proposed amendment to the environmental conservation law which would require New York companies to report on and obtain assurance (ESG data audit) over their full GHG inventories, which include scope 1, 2 and 3. The act would require annual GHG emissions reporting to the state’s GHG emissions registry. GHG inventory reports would be due to the registry no later than July 31 for the previous calendar year’s scope 1 and 2 data, while scope 3 data would be due no later than Dec. 31.

4. The SEC’s proposed climate-related disclosure rule

In March 2022, the SEC proposed a landmark rule that would require publicly traded companies to disclose GHG emissions, climate-related risks, impacts and risk management process within registration statements and annually (10-K). The proposal is modeled by the recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD) with a goal to provide consistent, comparable and reliable disclosure of climate-related risks.

5. The Corporate Sustainability Reporting Directive (CSRD)

The CSRD went into effect in the European Union (EU) in January 2023 requiring companies to report on the impact of corporate activities on the environment and society, while requiring disclosures on various governance topics. To ensure accuracy of the data reported, the CSRD requires assurance (ESG data audit) of reported information. The CSRD amends and builds on the Non-Financial Reporting Directive (NFRD) which required disclosure regarding ESG topics. The enhanced regulation will require disclosures according to the European Sustainability Reporting Standards (ESRS). The first set of ESRS were finalized in July 2023 with sector-specific standards expected in June 2024. The disclosure requirements of the CSRD are comprehensive and may differ depending on applicability. Contact an expert to ensure your compliance.

6. The Sustainable Finance Disclosure Regulation (SFDR)

In March 2021, the EU’s SFDR became a mandatory disclosure obligation for EU-based financial market participants (FMPs) and financial advisors (FAs). The European Commission introduced the SFDR in tandem with the EU Taxonomy Regulation, a green classification system.Disclosures are specific to sustainability risks that refer to environmental, social or governance events or conditions that could cause a material negative impact on the value of an investment. In addition, the regulation requires the disclosure of Principal Adverse Impacts (PAI) which are any negative effects that investment decisions or advice could have on sustainability factors. Disclosure is required at the organization level and fund/product level. Disclosures at the organization level are required to be posted on the website of the organization to promote transparency.

7. UK Financial Conduct Authority Climate-related Disclosure Requirements

In December 2020, the United Kingdom’s Financial Conduct Authority, a regulatory body that regulates financial services firms and financial markets in the U.K., introduced their climate-related disclosure requirements for premium listed issuers. In 2021, the regulation was extended to include a broader group of stakeholders that would be impacted. For those U.K.-organizations that fall out of the FCA climate-related regulation’s scope, specific disclosures regarding the plans to incorporate TCFD reporting are required. This regulation supports the U.K.’s goal of mandatory climate-related disclosures across the U.K. economy and is expected to be expanded to incorporate the IFRS’ International Sustainability Standards Board (ISSB) standards in due course as regulators and standard setters across jurisdictions continue to welcome the adoption of the ISSB standards.

8. Federal Supplier Climate Risks and Resilience Proposed Rule

In November 2022, the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) announced the Federal Supplier Climate Risks and Resilience Proposed Rule which would increase the transparency of climate-related information related to government contracting. This proposed rule directly engages the federal contractor supply base, specifically impacting two categories of contractors, significant contractors and major contractors, registered in the System for Award Management (SAM). Significant contractors are those that received between $7.5 million and $50 million in federal contract obligations in the prior federal fiscal year. Major contractors received more than $50 million in federal contract obligations in the prior federal fiscal year.

Footnotes

[1] The five main dimensions from the NFRD, a precursor to the CSRD include disclosures regarding environmental protection, social responsibility and workforce treatment, respect for human rights, anti-corruption and bribery, and diversity of boards. The CSRD goes further than the NFRD and expands on the sustainability reporting standards of the NFRD.

[2] General disclosures include double materiality, business model and strategy, climate transition plans, time-bounded targets, sustainability due diligence, information on own operations, value chain, business relationships and supply chain. Specific to the supply chain, documentation of adverse impacts and actions to prevent/mitigate risk is required. Environmental disclosures include disclosures covering each of the EU Taxonomy environmental objectives which are climate change mitigation (incudes scope 1, 2 and 3 GHG emissions), climate change adaptation, water and marine resources, biodiversity, and eco system, resource use and circular economy. Social disclosures include disclosures regarding diversity and inclusion, human rights, working conditions, health and safety, employee relations, pay gaps, related rights, workers in the value chain, affected communities, consumers and end-users. Governance disclosures include disclosures regarding policies, risk management and internal controls, ownership and structural transparency, independence and oversight, responsible business practices, ethics, anti-corruption and executive pay fairness.

[3] Significant contractors are those that received between $7.5 million and $50 million in federal contract obligations in the prior federal fiscal year.

[4] Major contractors are those contractors that received more than $50 million in federal contract obligations in the prior federal fiscal year.