Sustainability reporting in the US and EU

The Securities and Exchange Commission (SEC), a US federal agency that oversees stock market trading, recently adopted rules for mandatory climate-related disclosures that will apply to an estimated 7,000 US-listed companies. The largest companies should be required to report under the US Climate Rules for the first time for fiscal years beginning in 2025, with limited assurance of the reports for fiscal year 2029 and reasonable assurancefrom 2033. With only less than half of US-listed companies currently disclosing their Scope 1 and 2 GHG emissions, the Climate Rules would require asignificant step change in the market.

The EU Corporate Sustainability Reporting Directive (CSRD) requires an estimated 50,000 companies to publish their sustainability reports, with the largest companies required to do so already for 2024. Some 11,700 of Europe's largest companies have been subject to limited non-financial reporting requirements so far, and the European Sustainability Reporting Standards (ESRS) will significantly expand the scope of reporting.

The US Climate Rules have been put on hold pending a federal court review of allegations that on the one hand the rules exceed the SEC's statutory authority, are arbitrary and capricious, and on the other hand are too week and fail to meet the objective of protecting investors and maintaining fair, orderly and efficient markets. Regardless of the outcome of this legal review and related doctrinal changes in the US, let us briefly compare these two recent US and EU reporting efforts.

Objectives

The US Climate Rules were adopted to provide investors with consistent and comparable climate-related information. A widespread market-driven transition to lower-carbon products, practices and services, driven by changes in consumer preferences, the availability of financing, technology and other market forces, is considered to have a material impact on companies' business models or strategies and to have a material effect on a registrant's financial condition or operations. Alongside disclosures about other material risks faced by companies, climate-related disclosures are intended to assist investors in making decisions to buy, hold, sell or vote securities in their portfolios.

The CSRD was adopted as part of the European Green Deal, which aims to transform the EU into a modern, resource efficient and competitive economy with zero net greenhouse gas (GHG) emissions by 2050, to protect the EU's natural capital and the health of EU citizens from environmental risks and impacts, and to decouple economic growth from resource use, while ensuring a fair social distribution of economic change.

Scope

The US Climate Rules only cover climate-related risks and opportunities, their impact on strategy, business model and outlook, related transition planning, possibly including scenario analysis, internal carbon pricing, and related governance and target mechanisms. Only GHG Scope 1 and 2 need to be disclosed if material. Materiality should be assessed in terms of the impact of the identified risks or opportunities on the registrant's own strategy, business model and outlook, without regard to its value chain.

The CSRD addresses all environmental, social and governance issues that are material both to a company's financial performance and prospects and to the environment and people affected by the company's activities, taking into account a company's broadly defined value chain. Despite the current general focus on climate change, with disclosure including GHG Scope 3, it is only one of five topical environmental areas under the CSRD, alongside Pollution, Water and Marine Resources, Biodiversity and Ecosystems, Resource Use and the Circular Economy. The social topics to be assessed for double materiality and consequently reported on are Own Workforce, Workers in the Value Chain, Affected Communities, and Consumers and End-Users.

Standards and overlaps

Both the US and EU rules address the widespread inconsistent, difficult to compare and often boilerplate disclosures available in markets. Both rules build on existing voluntary reporting frameworks such as the GHG Protocol, both will require narrative and quantitative disclosures to be electronically tagged in XBRL, and both will require disclosures to ultimately be subject to reasonable assurance.

Both disclosure rules are part of a wider, growing regulatory framework on climate change or sustainability as a whole, with a notorious practice of reporting duplication and overlap. The rules have been adopted at a time when more than 8,000 US facilities already report their GHG emissions to the US Environmental Protection Agency, covering almost 90% of all US facility GHG emissions, and when all major EU industrial emitters are reporting their GHG emissions and surrendering increasingly expensive allowances. The US Climate RUles are being adopted in addition to a growing number of individual state disclosure requirements, not to mention a recently adopted European sustainability reporting ecosystem, including Sustainable Finance, Sustainable Investment Taxonomy, Deforestation, Carbon Border Adjustment Mechanism or Value Chain Sustainable Due Diligence, to name a few.

Key takeaways

The extent and detail of sustainability reporting in Europe do not appear to be comparable to that in the US. However, both markets are moving towards some form of market-wide climate-related disclosure. Although both the US climate regulations and the CSRD directly oblige only the largest and publicly traded companies, the reporting will undoubtedly affect a large number of the reporting companies' suppliers and change market practices.