The Securities and Exchange Commission’s final rules on disclosing climate-related risks to investors are on hold, but California and EU rules are in effect. Our Securities and Environmental, Social & Governance (ESG) teams discuss how proactive companies can prepare.

• Determine which climate-related risk disclosure rules apply to the company
• Analyze how climate risks impact the company’s business operations, strategy, goals, outlook, and planning
• Develop definitions for and familiarize management with the climate-related regulations’ terms

The Securities and Exchange Commission (SEC) recently adopted new climate-related disclosure rules but due to litigation, stayed the effect of these rules. Because of the stay, many public companies are contemplating how to proceed with these rules. Given the additional regulatory requirements for California, the EU’s Corporate Sustainability Reporting Directive (CSRD), the SEC’s 2010 guidance, and current investor expectations, public companies would be well served to continue to put in place their climate and sustainability-related programs at a measured pace.

SEC Climate Rules

On March 6, 2024, the SEC adopted the climate risk rules it initially proposed in 2022, requiring public companies to provide certain climate-related disclosures. The new SEC climate rules require disclosure on direct and indirect greenhouse gas emissions; oversight and governance; climate-related risks that have had or are reasonably likely to materially impact the business, strategy, and outlook; and recoveries as a result of severe weather or natural conditions. On April 4, 2024, due to the increasing number of petitions filed challenging the rules, the SEC voluntarily stayed its newly adopted climate rules, pending judicial review. Although the new SEC climate rules are temporarily stayed, companies must still comply with the SEC’s 2010 guidance on disclosure for climate change. During the stay, the SEC will likely continue to issue comment letters based on their 2010 guidance.

California

In California, a trio of climate-related disclosure laws will impose far-reaching reporting requirements on companies that do business in the state.

The first, the Climate Corporate Data Accountability Act (CCDAA, also referred to as SB 253), will require companies that have more than $1 billion in annual revenue to disclose Scopes 1, 2, and 3 emissions. Reporting these emissions will be subject to any regulations published by the California Air Resources Board (CARB).

The second, the Climate-Related Financial Risk Act (CRFRA, also referred to as SB 261), requires companies doing business in California with more than $500 million in annual revenue to report their climate-related financial risks and measures that they are using to mitigate these risks using the Task Force on Climate-Related Financial Disclosures, or equivalent, framework.

Lastly, the Voluntary Carbon Market Disclosures Act (VCMDA, also referred to as AB 1305) requires companies that operate in California and make claims of net zero, carbon neutrality, or significant emissions reductions to substantiate them on their website. Substantiating these claims will require providing some documentation of the accuracy of the claims and means of achieving the claims or progress toward them. Moreover, the VCMDA includes additional reporting requirements for companies that purchase voluntary carbon offsets.

The timing for when each of the laws in the California trio goes into effect is staggered. The CCDAA requires Scope 1 and Scope 2 emission reporting by January 1, 2026 but delays Scope 3 reporting to 2027, within six months of disclosing Scope 1 and Scope 2 emissions. Similarly, the CRFRA requires that companies have relevant claims substantiated on their websites by January 1, 2026. The VCMDA was originally slated to take full effect on January 1, 2024 and is expected to be amended shortly to delay the disclosure deadline to January 1, 2025.

Despite the trio’s goals, we have already seen pushback from businesses. Uncertainty remains around the definition of “doing business” in California under the CCDAA and the CRFRA and how far the ultimate definition will reach. As of now, CARB has not published any notices of rulemaking to promulgate regulations to implement these rules.

EU Corporate Sustainability Reporting Directive

The EU’s CSRD, now in effect, imposes rules requiring certain companies to publish information across a number of sectors, including climate change, environmental impact, and societal impact. The European Union adopted the CSRD with aims of modernizing and strengthening reporting requirements on environmental and social information. The new rules are designed to equip investors with information on the impact companies have on people and the environment (“impact materiality”) and the impact that climate change and other considerations have on companies financially (“financial materiality”)—collectively referred to as “double materiality.”

Companies will need to analyze whether their immediate entity or any other related entities are required to report under the CSRD. Reporting requirements will phase in over time.

• 2025 – Relevant EU-incorporated companies already subject to the EU’s Non-Financial Reporting Directive are required to publish reports for fiscal years starting on or after January 1, 2024.
• 2026 – Large companies (including non-EU companies listed on an EU-regulated market) and parents of large EU groups (including those headquartered in the United States) are required to publish reports for fiscal years starting on or after January 1, 2025. A large company or large group is defined as a company or group that meets two out of the three following criteria: (1) net turnover of more than €40 million; (2) balance sheet total assets greater than €20 million; and (3) more than 250 employees.
• 2027 – Other small and medium enterprises (other than micro undertakings) listed on an EU-regulated market are required to publish reports for fiscal years starting on or after January 1, 2026.
• 2029 – Non-EU groups (including those headquartered in the United States) with significant activity in the EU are required to publish reports for fiscal years starting on or after January 1, 2028.

The CSRD requires reporting companies to use the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group. The standards require reporting companies to report on two general “cross-cutting standards” and also to determine which of 10 “topical standards” are material to its business and accordingly report to those specific standards.

The cross-cutting standards set out sector-agnostic requirements that apply to all the topics covered by the CSRD, separated into (1) general requirements and (2) general disclosures.

The topical standards are divided into five environmental standards (ESRS E1 through ESRS E5), four social standards (ESRS S1 through ESRS S4), and one governance standard (ESRS G1). This includes Scopes 1, 2, and 3 emissions. Each standard follows the same premise: disclose any relevant risks, impacts, and opportunities that are material for the company, then disclose the policies, actions, and targets in place to mitigate those risks and impacts.

Alternatively, companies should provide an explanation stating why such standards are not material from either an impact materiality or financial materiality perspective. Groups or companies with fewer than 750 employees will have additional time to comply; for example, they will not need to include data on certain greenhouse gas emissions under ESRS E1 and, for the first two years, may disregard standards on biodiversity under ESRS E4 and all of the social standards other than ESRS S1.

The CSRD requires reporting companies to analyze under a “double materiality” assessment that requires an assessment of both (1) the impact of the undertaking on people and the environment; and (2) a financial assessment of how sustainability matters affect the undertaking, and to report accordingly. Information must be provided on the company’s own operations as well as its value chain, both upstream and downstream. This materiality determination is broader than standards that focus on investor-perspective materiality.

Companies will initially need to seek “limited” assurance on information to be disclosed. When a non-EU company is subject to the CSRD, reporting should also be certified, either by a European or third-country independent auditor. This standard of assurance may be heightened going forward.

Companies should consider whether their company or any EU subsidiary falls within the scope of the CSRD. The CSRD will require disclosure beyond what is required by the SEC and California. Companies expecting to report under the CSRD should be preparing to collect relevant data to be in a position to report when required. In preparation for eventual reporting, companies should note any revisions to the ESRS.

Takeaways

While the new SEC disclosure rules are currently voluntarily stayed, the rules may later be implemented in original or modified form, creating extensive climate-related disclosure requirements for public companies. Additionally, reporting requirements under the CCDAA, CRFRA, VCMDA, and CSRD create additional requirements that go beyond the scope of the SEC rules.

Affected companies, including public companies, companies with a presence in California, companies operating in the EU, and companies with subsidiaries operating in the EU, should be proactive and not wait until the disclosure is required to begin preparations for applicable required disclosures. Affected companies should consider taking the following steps to prepare for and comply with the required disclosures under these rules. Below are some next steps companies can take in light of these disclosure rules.

• Determine which climate-related rules and regulations apply to the company to prepare to comply.
• Develop and enhance the company’s existing climate-related infrastructure, including data collection and accuracy, internal controls, delegation of responsibility, and climate-related decision-making frameworks.
• Analyze climate risks’ impact on the company’s business operations, strategy, goals, outlook, and other planning.
• Develop definitions for and familiarize management with terms used in the various climate-related regulations, including “material,” “severe weather event,” and “natural conditions.”
• Consider subjecting climate-related disclosures to more extensive board and auditor review, similar to financial disclosures.
• Review board committee charters to determine if there is a clear delegation of board oversight of climate-related disclosures and tracking processes. If there is no board committee charter containing climate-related responsibilities, companies should consider formalizing the board oversight processes for climate-related activities.
• Determine the materiality—in accord with the applicable disclosure standards—of Scope 1, Scope 2, and Scope 3 emissions to their business and begin to track and identify emissions sources, gather data, and synthesize information to prepare for required disclosures.
• Find third-party service providers to assist with the tracking and reporting of Scope 1, Scope 2, and Scope 3 emissions (if applicable) and any assurances required.
• Educate members of management and the board about the climate-related regulatory framework, the company’s reporting obligations under the regulatory framework, and the company’s climate-risk management procedures and policies.
• Evaluate the company’s existing and proposed climate-related goals and identify tangible actions taken to achieve the goals.

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