The SEC has not yet adopted the long-anticipated final version of its proposed climate change disclosure guidelines, although there is some speculation that the final guidelines will be adopted in the Fall. In the meantime, however, sustainability reporting standards are going into effect elsewhere, with important ramifications for all companies.

On July 31, 2023, the European Commission adopted the first set of European Sustainability Reporting Standards (ESRS), which require EU and non-EU companies with specified levels of EU activity to file annual sustainability reports with their financial statements. The standards will soon become law and apply in all 27 EU Member states, with compliance requirements effective as early as 2025 for the 2024 reporting period. The ESRS as adopted on July 31, 2023, by the European Commission can be found here. The European Commission’s adoption of the first set of ESRS and the reporting standard’s requirements are described in detail in an August 11, 2023, memo from the Cooley law firm, here.

The ESRS was approved pursuant to the January 2023 entry into force of the EU’s Corporate Sustainability Reporting Directive. As the Cooley law firm’s memo summarizes, the first set of ESRS, adopted on July 31, set out detailed reporting requirements for EU companies, including general reporting requirements; a list of mandatory disclosure requirements related to the identification and governance of sustainability matters; and ten ESG-related topics on which disclosure is required, subject to a materiality assessment. While this ESRS is the first set of standards, there will be further sets adopted in the future for specific industry sectors, small and medium sized enterprises, and non-EU parent companies.

The standards require companies to perform materiality assessments on each sustainability topic subject to a “double materiality” standard, that is, subject to an assessment as to whether the information is material from either a financial or an impact perspective. Companies are also required to report on material impacts, risks, and opportunities in the company’s own operations, as well as those of its corporate group and its upstream and downstream value chain. Companies must provide metrics and targets for material sustainability topics and connect those to their financial reports. The sustainability disclosures must be audited by an independent third-party auditor.

The topical reporting standards identify the 10 ESG-related topics with respect to which companies must perform a materiality assessment as the starting point for their reporting. The ten topics are divided into three categories: Environmental (climate change; pollution; marine and water resources; biodiversity and ecosystems; and “circular economy” [resource inflows and outflows toward a sustainable “circular economy”]; Social (own workforce; workers in the value chain; affected communities; and consumers and end-users); and Governance (business conduct).

The standards adopted in the first ESRS go considerably further than the disclosure requirements in the SEC’s proposed climate change disclosure guidelines; among other things, the EU standards go further by  mandating the need for the double materiality assessments and the obligation to report on a broader set of sustainability topics, such as biodiversity, water, and pollution.

The impact of these new disclosure requirements will be felt most immediately and most significantly by EU-based companies, but other companies will feel the impact as well. The companies immediately subject to the disclosure requirements will need to include disclosures reflecting the companies’ entire value chain. In order to try to meet this extended value chain reporting requirements, companies will be sending and receiving questionnaires to gather date necessary for their ESG reports; many companies outside the EU will become a part of the reporting and disclosure process.

Of critical importance, for the fiscal year 2028 (that is, to be reported in 2029), non-EU companies that generate a net turnover of more than 150 million euros in the EU in the last two consecutive financial years must comply with the reporting standards. Similarly for the fiscal year 2028, non-EU companies that have at least one subsidiary or branch within the EU that is within the scope of the Corporate Sustainability Reporting Directive must comply with the reporting requirements. For further discussion of the companies to which the sustainability reporting requirements apply and when, refer to this separate detailed memo from the Cooley law firm entitled “EU’s New ESG Reporting Rules Will Apply to Many U.S. Issuers,” here.

The new EU disclosure standards are both broad and incredibly detailed. The ESRS are dense, full of jargon and acronyms, and defiantly unreadable. Compliance with these requirements will be extraordinarily time-consuming, costly, and burdensome. Because of the directive’s sweeping reach, many companies outside the EU, including many U.S-based companies could see an impact on their disclosures and reporting.

These burdensome new disclosure requirements present a very odd contrast to the current state of the ESG culture wars in the U.S., characterized as it is by an active anti-ESG backlash.

Notwithstanding the current anti-ESG push in the U.S., the SEC’s climate change disclosure guidelines seem likely to go into effect in some form sometime later this year. To be sure, the U.S. guidelines undoubtedly will face a legal challenge, as discussed here. Whether or not the guidelines survive a legal challenge and go into effect, many U.S. companies could nevertheless face a different set of climate change reporting requirements, if, as seems increasingly likely, California adopts its own set of climate change reporting rules. The proposed California rules, which, according to Politico (here), go further than the proposed SEC rules, could of course also face legal challenge. For further discussion of the proposed California climate change disclosure legislation, refer to the August 21, 2023, post on the PubCo blog, here.

 In other words, one way or the other, U.S. companies likely will soon find themselves having to deal with climate change disclosure requirements.