For EHS professionals who work for companies that operate in Europe, the announcement of a new mandatory climate disclosure rule for US companies may have felt like déjà vu. Less than a year ago, the EU announced its own mandatory sustainability reporting rules, the Corporate Sustainability Reporting Directive or CSRD. The new US Securities and Exchange Commission (SEC) reporting requirements share a lot of similarities with the EU's rules. However, there are also some key differences — which we'll discuss in a minute. But first, let's take a look at what these two rules are.
What is the Corporate Sustainability Reporting Directive (CSRD)?
The Corporate Sustainability Reporting Directive, or CSRD, is a new European Union (EU) law requiring all large companies to publish regular reports on their environmental, social, and governance (ESG) performance. CSRD expands and improves the existing reporting requirements of the EU Non-Financial Reporting Directive (NFRD).
What is the SEC climate disclosure rule?
The proposed SEC climate disclosure rule would be the first mandatory federal reporting requirement of its kind in the US. It would require companies to report on how climate change could impact their financial performance, as well as how their own emissions contribute to global warming.
The difference between CSRD and the SEC climate disclosure rules
The EU’s CSRD and US SEC’s climate rules have several elements in common. Both are aimed at standardizing and improving access to corporate sustainability disclosure information for investors. In doing so, both make climate disclosure mandatory for certain companies. And both will require companies to electronically ‘tag’ the reported information to facilitate the use of the data.
While both the EU’s proposed CSRD rule and the US SEC’S climate disclosure rules share some similarities, there are several key differences to be aware of:
One major difference is the information companies will be expected to disclose. The SEC climate rules will require covered companies to report their Scope 1 and Scope 2 greenhouse gas emissions — in other words, their own greenhouse gas emissions and also emissions from the energy they consume. They will also have to disclose climate-related risks that could potentially affect their financial stability, such as having operations in an area that would be affected by rising sea levels.
By contrast, the CSRD disclosures are broader. Companies will have to report information on their business model and strategy, risks, targets and progress, and due diligence processes with regards to sustainability matters. They will have to include both qualitative and quantitative data about these issues. Crucially, CSRD uses ‘double materiality’, which means companies have to report how sustainability issues affect their business as well as their business’ impact on people and the environment.
There are also some differences in the scope of these two rules. The SEC rules will initially apply to only public companies, including foreign companies that are publicly traded in the US. However, the SEC has previously said that it intends to mandate disclosure for private companies as well.
CSRD covers 49,000 companies including both large listed and non-listed companies, as well as listed small and medium-sized enterprises. This represents a major expansion from the EU Non-financial Reporting Directive (NFRD), which mandated disclosure for around 11,000 large listed companies.
CSRD was adopted by the European Commission (EC) on April 21, 2021, and will be phased in from now until 2023. Listed small and medium-sized enterprises (SMEs) have an additional three years for implementation.
The SEC rules were proposed almost a year later, on March 21, 2022. The SEC rules will be phased in, with the first companies having to report their climate risks starting in 2024. Smaller reporting companies would benefit from two additional years to make the new disclosures. That said, the rule is expected to face significant legal challenges, which could delay its implementation.
The EU’s Corporate Sustainability Reporting Directive (CSRD) and the US SEC’s climate rules represent a major step forward in sustainability disclosure. This also means that both rules will increase the demands on companies for data collection and reporting. Learn more about how Perillon can help you track, manage, and report on your ESG data effectively to meet all relevant disclosure requirements.