Article | ESG and sustainability regulations checklist
How mandatory regulations are shifting the global ESG and sustainability reporting landscape
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 ESG disclosure requirements. This article discusses the most impactful mandatory ESG and sustainability reporting regulations, which redefines the need for organizations to formalize their ESG capabilities. This includes:
- SEC Proposed Climate-Related Disclosure (SEC)
- Corporate Sustainability Reporting Directive (CSRD)
- Sustainable Finance Disclosure Regulation (SFDR)
- Federal Acquisition Regulation Climate-Related Disclosure Rule (FAR)
While Europe is leading the way in ESG and sustainability regulation (CSRD & SFDR), the U.S. is a close follower with SEC’s proposed climate-related disclosure rule and the proposed changes to the FAR.
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.
1. 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 greenhouse gas (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.
U.S. listed companies
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The timing has yet to be determined, but final ruling possible in Q4 2023, requiring FY24 data to be reported in FY25 filings. There may be changes or revisions to the original proposed rule and timeline.
A qualitative write-up of climate-related risks, governance and risk management, climate goals, and a note to the financial statements will quantify the impact of climate-related events and transition activities, in addition to disclosure of GHG emissions (scope 1, 2 and 3) *Scope 3 is required for the organization if considered material or if it has publicly stated goals that include scope 3 reductions.
2. The Corporate Sustainability Reporting Directive (CSRD)
The CSRD is an EU regulation currently in effect. It requires companies to report on the impact of corporate activities on the environment and society. To ensure accuracy of the data reported, the CSRD requires an audit (ESG data assurance) 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 ESRS are expected to be finalized in August 2023 with sector-specific standards expected in June 2024.
Large EU companies, EU listed companies and non-EU companies generating a net turnover of €150 million in the EU
- Excludes micro undertakings which meet 2/3 criteria: <10 employees, net turnover <€0.7M, and total assets <€0.35M
- Organizations are considered a “large EU company” if they meet 2/3:
- >250 employees
- Balance sheet total >€20M
- Net turnover >€40M - Non-EU companies generating a net turnover of €150 million in the EU must also have either:
- A subsidiary in the EU that follows the criteria applicable to EU companies or
- A branch in the EU generating a Net turnover >€40M
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The CSRD is in effect and disclosures are required starting in 2025 for fiscal year 2024 for large companies who are currently subject to the NFRD. Large EU companies not currently subject to the NFRD will report in 2026 for fiscal year 2025. Non-EU companies that meet criteria will be required to publish a 2028 report in 2029.
Disclosure of five main dimensions from NFRD [1] (precursor) and disclosure of general, environmental, social and governance topics [2]. Additionally, the report must be in a standardized, electronic, and searchable reporting format.
3. The Sustainable Finance Disclosure Regulation (SFDR)
In March 2021, the European Union’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.
FMPs and FAs in the EU and those who market products to EU clients.
- FAs with fewer than three employees are not required to provide information
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The SFDR is currently in effect. Organization-level disclosures are required for fiscal year 2022 in 2023. Fund/product-level disclosures are required for fiscal year 2023 in 2024.
Disclosure of ESG conditions/events and PAI across the entity and individual funds.
4. Federal Acquisition Regulation (FAR) climate-related disclosure rule
In November 2022, the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) proposed an amendment to the FAR to 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.
U.S. government contractors that received $7.5 million or more in federal contracts
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The rule is currently proposed and had a comment period, which concluded in February 2023. The implementation of the final rule is unknown. However, beginning one year after publication of the final rule, contractors must have completed their GHG inventory and disclosed total scope 1 and 2 GHG emissions in the SAM. The remaining requirements, applicable only to major contractors, would need to be satisfied beginning two years after publication of the final rule.
If considered a significant contractor [3], the requirements include GHG emissions (scope 1 and 2) disclosures. If considered a major contractor [4], the requirements include GHG emissions (scope 1, 2, and 3), a report on the entity’s climate risk assessment process and any risks identified, completion of the CDP Climate Change Questionnaire sections that align with TCFD, and development of science-based targets that are validated by the SBTi.
Take action
If you are a public or private company based in the U.S. or EU, you will likely be impacted by the shift from voluntary ESG and sustainability reporting to mandatory disclosure. Get ahead of the changing regulatory landscape by acting today to understand how your organization could be impacted in the future.
ESG reporting is important, and it can feel like navigating uncharted waters. Lean on our specialists to guide the way and act now to protect and enhance your organization’s value.
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.
Proposed FAR amendment would increase GHG emissions reporting requirements for federal contractors
The proposed amendment to the Federal Acquisition Regulation (FAR) will increase the transparency of climate-related information reported by federal contractors. Significant and major contractors will be required to disclose scope 1 and scope 2 GHG emissions with additional requirements for major contractors.
