Global ESG Regulations: What They Mean for Your Organization
SUSTAINABILITY & ESG / April 2, 2024
By Mary Riddle
The current state of climate and sustainability reporting regulations is evolving rapidly as states, countries, and economic blocks recognize the need for more transparent, consistent, and comprehensive reporting to address climate change and sustainability challenges.
What are some of the significant new ESG regulatory requirements coming into play worldwide?
This article will explore the current state of ESG regulations globally, what they mean for your organization and what companies need to do to comply.
Understanding ESG Regulations
ESG regulations are a set of guidelines and standards that organizations must follow to ensure they are operating in an environmentally and socially responsible manner. These regulations cover a wide range of topics, including climate change, human rights, labor practices, and corporate governance.
ESG regulations aim to encourage organizations to consider their operations’ impact on the environment and society and take steps to mitigate any negative effects. By complying with these regulations, organizations can demonstrate their commitment to sustainability and responsible business practices.
United States ESG Regulation
SEC’s Climate Ruling
In March, the SEC adopted new rules aimed at enhancing and standardizing climate-related disclosures by public companies. While the final rule significantly scaled back certain requirements from the proposal, these rules are a response to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on companies and how these risks are managed.
Companies must disclose climate-related risks that materially impact their business, strategy, results of operations, or financial condition, including both actual and potential impacts. Companies must also report on their expenditures for mitigation or adaptation activities, as well as governance and oversight of their climate strategy.
Large accelerated filers and accelerated filers are required to disclose material Scope 1 and Scope 2 greenhouse gas (GHG) emissions. These companies will also be required to procure assurance reports from third-party accreditors, but this requirement will be phased in over time.
In their financial statements, companies must also include the impacts and potential impacts of severe weather events and natural disasters, and they are required to disclose any expenditures related to carbon credits and renewable energy credits if used to contribute to their climate targets.
Disclosures in financial statements must include the impacts of severe weather events and other natural conditions, costs and expenditures related to carbon offsets, and renewable energy credits if used significantly to achieve climate-related targets.
The new SEC rule is in line with global trends toward more comprehensive, transparent, and comparable climate and ESG-related disclosure requirements.
California ESG Regulation
Even before the SEC issued their final ruling, California enacted two significant pieces of legislation, SB 253 and SB 261, as part of its Climate Accountability Package. These laws require companies that do business in California to disclose their emissions and climate-related financial risks.
SB 253 – Climate Corporate Data Accountability Act (CCDAA)
SB 253 requires large public and private U.S. companies doing business in California, with revenues exceeding $1 billion per year, to disclose their Scope 1, 2, and 3 greenhouse gas emissions. The reporting requirement begins in 2026 for 2025 data and requires all emissions disclosures to be audited and verified by an independent third-party auditor. Additionally, emissions disclosures will be made publicly available through a digital registry.
SB 261 – Climate-Related Financial Risk Act (CRFRA)
SB 261 requires U.S. entities that do business in California and have total annual revenues of at least $500 million prepare and submit reports on climate-related financial risks and mitigation strategies. These reports must be made available on company websites and submitted to the state once every two years, with the first round of reports submitted no later than January 1, 2026. Consistent with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) framework, reports must include information about costs associated with compliance, insurance, and transition risks.
United Kingdom ESG Regulation
The U.K. became a global climate leader in 2008, when it became the first country in the world to set long-term legally binding climate goals with the passing of the Climate Change Act, which set legally binding targets for reducing greenhouse gas emissions and established a framework for developing five-year carbon budgets to pace the reduction efforts. Since then, the UK has also helped lead global efforts to consolidate sustainability disclosures, aiming to enhance transparency, facilitate informed investment decisions, and promote sustainable practices across industries.
Streamlined Energy and Carbon Reporting (SECR)
SECR came into play in the U.K. in 2019 and required close to 12,000 UK companies to annually report energy use, efficiencies, and greenhouse gas emissions. The framework applies to UK-incorporated listed companies, large unlisted companies, and limited liability partnerships.
Sustainability Disclosure Standards (SDS)
While not yet finalized or implemented, in August 2023, the UK government announced its intention to create an official set of corporate disclosures on sustainability-related risks and opportunities. The UK government has said that the Sustainability Disclosure Standards will be published on or before July 2024 and will be based on the IFRS Sustainability Disclosure Standards from the International Sustainability Standards Board (ISSB).