With new sustainability disclosure regulations being enacted worldwide, thousands of public and private U.S. companies will face required reporting from multiple jurisdictions for reporting periods as early as 2025. The SEC’s Final Rule The Enhancement and Standardization of Climate-Related Disclosures for Investors is the most recent of many disclosure regulations, including the European Union's (EU) Corporate Sustainability Reporting Directive (CSRD) and the California Climate Accountability Package (CCAP).
The overarching goal of disclosure regulations is to enable consistent, comparable and reliable sustainability and climate disclosures, with European regulations in particular looking for companies to adequately identify and address their sustainability impacts on people and the planet.
It is now imperative for public and private companies to understand both if and when they will need to disclose sustainability matters to maintain compliance in their operational jurisdictions, avoid financial and reputational risk and meet stakeholder needs. While non-financial disclosure may feel unfamiliar to your company, marketplace-accepted approaches to sustainability reporting, often derived from the voluntary frameworks that preceded these regulations, can help companies hone their approach in the years to come and identify both risks and opportunities that can positively affect the company’s future value, improve resilience and maintain stakeholder trust.
This graphic shows the timeline for reporting periods and attestation required in California's Climate Accountability Package and the European Union's Corporate Sustainability Reporting Directive. The regulations require disclosures and assurance along different time frames.
Europe’s broad approach to sustainability disclosures
The CSRD is expected to affect up to 50,000 entities that are not currently required to report on environmental, social and governance (ESG) activities under the EU’s Non-Financial Reporting Directive (NFRD). For certain U.S. parent entities that operate in the EU, the CSRD can create reporting obligations at both a consolidated parent and EU-subsidiary level. The CSRD’s disclosure expectations are detailed in the European Sustainability Reporting Standards (ESRS), which contains two cross-cutting standards and 10 topical standards encompassing ESG. Reporting entities must undergo a double materiality assessment to determine which of those topics are material to their organization, reporting according to the ESRS Disclosure Requirements. For ESRS 1: Climate Change, entities that deem the topic not material will need to explain the conclusions of their materiality assessment that support this conclusion. An overview of CSRD, the organizational thresholds for reporting entities, and the requirements for U.S. entities operating in the EU is available here.
This graphic shows the different reporting areas within the ESRD disclosure requirements, broken down by cross-cutting standards, environmental standards, social standards and governance standards.
Global focus on regulated climate reporting
While the EU’s CSRD takes a more holistic approach to ESG, most other, enacted sustainability regulations are focused on climate reporting. Many of these regulations, including the SEC’s Final Rule, California’s regulations and the CSRD, draw from the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD). As a result, companies can benefit from applying a consistent four-part disclosure framework found across many reporting requirements:
This graphic shows the key components of climate-related disclosures, including qualitative disclosures on governance, strategy and risk management, and quantitative disclosures on metrics and targets.
Additionally, most regulations draw from or reference the GHG Protocol to help identify and calculate scopes 1, 2 and 3 emission metrics.
Regulators are taking action globally but there is a silver lining
As jurisdictions worldwide take action, there is a silver lining. Because many jurisdictions are using TCFD as a foundation for their climate reporting mandates, companies can leverage synergies for consistent climate reporting that satisfies multiple jurisdictional mandates and saves on compliance costs in the long run. Below is a summary of key climate-related mandates affecting the market and their applicability to companies:
This chart shows which disclosure and attestation requirements apply to various entities as mandated in the California Climate Accountability Package and the European Union's Corporate Sustainability Reporting Directive, as well as the requirements proposed in the SEC's proposed climate disclosure rules.
In addition to reviewing applicability of the CSRD, company leaders will also want to monitor developments and determine applicability of enacted climate-focused regulations such as those described below:
- SEC Final Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors
On March 6, 2024, the SEC finalized The Enhancement and Standardization of Climate-Related Disclosures for Investors, requiring all registrants to provide certain climate-related information in their registration statements and annual reports. The rule takes effect for large accelerated filers as early as the fiscal year beginning in 2025. Both large accelerated filers and accelerated filers (excluding small reporting companies and emerging growth companies) have a phased-in timeline to additionally report material scope 1 and 2 greenhouse gas (GHG) emissions, with both filer types needing to pursue limited assurance over these disclosures. Only large accelerated filers are required to pursue reasonable assurance for reported GHG emissions.
- California Senate Bills (SB) 253 and 261
The state of California enacted two bills in October 2023 — SB 253 and SB 261 — that mandate both climate risk and GHG disclosures for certain public and private companies “doing business” in California.
SB 253, “Climate Corporate Data Accountability Act”
Under SB 253, the Climate Corporate Data Accountability Act, reporting entities with over $1 billion (USD) in total annual revenue that “do business” in California must disclose and subsequently gain assurance over their Scope 1, 2 and 3 GHG emissions annually, noting preference for the GHG Protocol as a disclosure framework. Compliance with SB 253 is required for reporting entities starting in 2026. Phased-in assurance requirements will also begin in 2026. Failure to comply with or violations of SB 253 could result in administrative penalties of up to $500,000 in a reporting year.
SB 261, “Greenhouse gases: Climate-related financial risk”
Meanwhile, covered entities with over $500 million (USD) in total annual revenue that “do business” in California must digitally publish a TCFD-aligned climate risk report biannually to comply with SB 261, Greenhouse gases: Climate-related financial risk. Compliance with SB 261 is required for covered entities on or before Jan. 1, 2026. Failure to comply with or violations of SB 261 could result in administrative penalties of up to $50,000 in a reporting year.
- Proposed and enacted climate-related disclosures for U.S. federal acquisition
For companies that provide contracted support to the United States federal government, there are increasing signals that climate-related and emissions reporting may become criteria for evaluation and award. This includes the proposed Alliant 3 draft for Governmentwide Acquisition Contracts (GWACs), the Federal Supplier Climate Risks and Resilience Proposed Rule and Sec. 318 of the FY2024 National Defense Authorization Act, which gives the secretary the ability to waive, on a contract-by-contract basis, the prohibition of GHG emission disclosures to Department of Defense contractors. Read more about these three proposed and enacted updates and how preparing for future climate-related disclosures helps federal contractors gain a competitive advantage.
- Additional climate-related regulatory disclosures
In addition to the disclosures listed above that directly affect the United States and the EU, other jurisdictions are also working on climate-related disclosure requirements. The United Kingdom announced its intent to adopt the standards of the International Sustainability Standards Board (ISSB), which has established a “global baseline” for ESG reporting and uses TCFD as the touchstone for its International Financial Reporting Standards (IFRS) Standard 2 (S2) — Climate-related Disclosures. Other jurisdictions, such as Canada, Australia and South Korea, are establishing national sustainability standards boards to cooperate with the ISSB as a global foundation and have drafted their own standards, making robust climate reporting a requirement for companies worldwide.
What can companies do to prepare
While regulations continue to evolve, the marketplace standards of sustainability reporting are established. To prepare for compliance with these evolving regulations, companies can take five steps, depending on the maturity of their sustainability reporting efforts:
- Regularly scan current and pending sustainability regulations, reviewing mandatory disclosure thresholds against your company’s organizational footprint, revenue and other determining factors. Coordinate this scan with your company’s legal and/or compliance team(s) to understand and confirm which regulations apply to your company and when you are expected to begin disclosing best practices.
- Conduct a reporting gap assessment to understand what required information your company has readily available to disclose and where information gathering is needed. The gap assessment, when conducted with multiple reporting regulations in mind, can highlight data collection and process efficiencies to help your company meet its disclosure obligations across multiple jurisdictions while also surfacing internal control needs to prepare for consistent and accurate regulated disclosure.
This graphic shows elements of the sustainability compliance lifecycle, which involves continuous improvement around steps including a regulatory scan, disclosure gap assessment, reporting roadmap, assurance readiness and assurance.
- Develop a reporting roadmap outlining the activities needed for compliance. This could include:
- Going through a double materiality assessment to narrow the scope of a company’s sustainability focus areas to what is most important to the company and its reporting requirements.
- Creating a GHG emissions inventory management plan to enhance governance over its emissions data, understand emissions sources, and prepare complete and accurate reporting of scope 1, 2 and 3 emissions, and/or
- Undergoing a climate risk assessment to understand your organization’s climate-related risks and opportunities and how they can inform and impact your company’s near- and long-term strategies. These exercises are required by many enacted regulations and should be approached with both reporting requirements and future assurance needs in mind.
- Carry out disclosure assurance readiness to increase the quality of your company’s sustainability disclosure-related processes, controls and data, enhance confidence in your company’s sustainability reporting, and prevent surprises during future assurance. Identifying the company’s disclosure gaps before the required assurance takes effect will alleviate questions and concerns prior to reporting.
- Obtain third-party assurance over the company’s sustainability-related disclosures to increase market confidence and meet compliance requirements. Obtaining limited or reasonable assurance, depending on the regulatory requirements and where your company sits in the disclosure timeline for specific regulations, will support your company’s adherence to third-party assurance requirements across sustainability disclosure regulations.
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This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
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