The Bottom Line on Climate Reporting – in Washington DC, Brussels, and Sacramento

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March 12, 2024

After a two-year delay, the U.S. finalized a much-weakened Climate Reporting Rule on March 7. But thousands of American businesses are covered by stronger reporting laws in Europe and California.

Most consequentially, the final U.S. rule omits any duty to track greenhouse gas emissions traceable to a firm’s suppliers or customers. Such “Scope 3” emissions account for virtually all GHG pollution attributable to the finance sector, and around 90% from the agriculture and fossil fuel sectors. Predictably, those three industries had lobbied the Securities and Exchange Commission to emasculate the climate reporting rule.

A series of quieter retreats also thrilled industry lobbyists. The final rule gives firms flexibility in defining Scope 1 and 2 emissions, which it emits directly or through power use.  The SEC will require that such emissions be reported only if they are financially material. It will not require firms to list the climate credentials of their directors, and it will not oblige firms to report climate impacts for each line in their financial statements. It will exempt small or emerging firms from the need for independent assurance of their climate data.

The silver lining for sustainability advocates is that the U.S. is not the only regulator in this field. In fact, the reporting laws in the EU and California are projected to cover more U.S. companies, in part because they include firms not listed on a stock exchange. The SEC estimates that its rule will cover 2,800 issuers based in the U.S.. LSE Refinitiv has calculated that the EU’s law will cover over 3,000 U.S. businesses,  generally including those with 150 million euros in annual EU sales. California’s climate disclosure laws will require over 5,000 firms doing business in California to report Scope 3 GHG emissions, and over 10,000 to report climate-related risks.

The EU’s Corporate Sustainability Reporting Directive (CSRD), effective January 2023, empowers the EU to issue the mandatory European Sustainability Reporting Standards (ESRS) – which go far beyond any American mandatory standards, by covering all ESG concerns, also including labor rights, human rights, corporate governance, and green issues unrelated to climate. Brussels has already finalized the ESRS E1 on climate change, and the ESRS S2 on workers in the value chain, among others. Crucially, the European system embraces “double materiality,” requiring disclosure if an issue is either financially material or has a material impact on people and the planet. The ESRS kick in for EU businesses, as well as non-EU issuers on European exchanges, in 2025.

Brussels is still five years away, though, from becoming the mandatory standard-setter on sustainability reporting for global big business. For most firms outside the EU, the ESRS only bite in 2029. And in a little-noted move, the EU recently struck a deal to delay the standards for non-EU companies until June 2026.

California last fall passed its own set of climate accountability laws. As of 2027, the Climate Corporate Data Accountability Act will mandate the reporting of Scope 3greenhouse gas emissions, and it will do so regardless of financial materiality. As of 2026, the Climate-Related Financial Risk Act will mandate the reporting of climate-related risks in line with the recommendations of the Task Force on Climate-related Financial Disclosure or the International Sustainability Standards Board (which would otherwise be voluntary).

Of course, any U.S. progress on climate reporting will depend on the courts getting out of the way.

The U.S. Chamber of Commerce and the American Farm Bureau Federation, along with several California trade groups, sued on January 30 in federal court in California, to enjoin the California Air Resources Board from enforcing the new laws and to have them declared unconstitutional. The trade groups argue that climate reporting is compelled speech in violation of the First Amendment, that the California laws are preempted by the federal Clean Air Act, and that the dormant Commerce Clause of the Constitution gives the federal government exclusive power in this realm.

Ultimately, Brussels may be the best hope for corporate sustainability reporting. Although Europe is also the site of bitter lobbying battles over corporate sustainability, the range of what is politically feasible in Europe is much wider, and the legal obstacles are narrower.


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