It feels like we can’t go more than a few days without hearing a fierce defense or criticism of environmental, social, and governance (ESG) practices and reporting. Companies can feel whiplash in how ESG is perceived – certain states are implementing bans while some are considering making reporting mandatory. It’s a confusing time and with companies looking further than the DC election cycle, it’s important to decide today how much emphasis to put on this work over the next decade.
We often hear that the decision on how much to invest internally is based on reading the tea leaves around what the final SEC Climate Disclosure rule will look like. As a reminder, this proposed rule, released in March 2021, aims to require public companies to disclose more detailed information about their climate-related risks and opportunities. However, the longer this proposed rule remains in limbo, the more activist states and other countries are filling the vacuum and defining what companies should and shouldn’t disclose.
At Brumidi Group, we’re closely monitoring the following issue areas to help companies determine how three different ESG policies should play into long-term planning:
1. European Union's Corporate Sustainability Reporting Directive
The EU has been at the forefront of climate action, advocating for comprehensive sustainability reporting that goes beyond financial performance. The Corporate Sustainability Reporting Directive (CSRD), which was agreed to in 2022 and will take effect in 2024, expands the scope of reporting to include a wide range of ESG indicators. One of the core components of CSRD is the requirement for companies to disclose granular climate-related information as well as social components including human rights, diversity, and employee health with the goal that investors and stakeholders will have a holistic understanding of the company’s impact.
The CSRD's reach extends beyond the EU's borders, as it covers companies operating within the EU and those that raise capital in its markets. This extraterritorial impact means that global companies operating in the EU will need to comply with the CSRD requirements. As a result, US-based companies with business within the EU borders are proactively disclosing climate emissions to meet CSRD guidelines.
2. California's Climate Reporting Bills
In the final months of the California state legislature, the state is poised to pass the most comprehensive ESG reporting requirements in the country. The two bills under consideration are the Climate Corporate Data Accountability Act (SB 253), which would require both public and private companies with over $1 billion in annual revenue to report GHG emissions for Scope 1, 2, and 3 emissions, and the Climate-Related Financial Risk Act (SB 261), which would require companies with over $500 million in annual revenue to report climate-related financial risks.
Similar to the EU’s CSRD, companies that operate in California and meet the predetermined threshold would have to comply. Bill champions believe SB 253 would apply to over 5,300 companies and SB 261 would apply to over 10,000 companies.
3. Investor Demands
An increasing number of investors now see climate action through a financial risk lens. With an increased understanding of the risks posed by climate change to corporate performance and longevity, investors are demanding transparency from companies. Meanwhile, activist shareholders are increasingly using their influence to urge companies to disclose their climate emissions, align with international climate targets, and implement strategies to mitigate risks.
This investor pressure is not confined to a specific sector or region. Major institutional investors, such as pension funds, sovereign wealth funds, and asset management firms, are spearheading the call for enhanced climate disclosure. As a result, companies are moving forward with reporting with or without the SEC Climate Disclosure Rule and instead as a strategic imperative to attract investment, maintain a positive reputation, and secure their long-term viability.
While the SEC's Climate Disclosure Proposed Rule is a landmark development in corporate transparency, it is far from the only driving force behind companies' growing commitment to climate emissions disclosure. The convergence of the European Union's CSRD, California's climate reporting bills, and the mounting demands of investors collectively form a powerful catalyst for change.