Alice Roberts, Laura Bowler
May 29, 2024
Making sense of recent climate legislation: The SEC climate rule, CA climate disclosure bills and CSRD
Climate-related legislation is emerging rapidly, making it challenging for US companies to keep up, particularly for those subject to multiple regulations. In this article, our experts break down three major pieces of recent legislation and provide guidance on how companies can get started with compliance.
In the past year, US companies have faced a surge in sustainability regulations. Both Europe and the US have been active in passing climate-related legislation that can impact US businesses, including:
- The Corporate Sustainability Reporting Directive (CSRD)
- SB-253 and SB-261, two California climate-related disclosure bills
- The SEC climate disclosure rule
For US companies not closely following climate legislation, these rules may seem to have appeared suddenly. In reality, these laws represent the latest in a growing trend of sustainability regulations. Globally, countries like Singapore, the UK, India, and New Zealand have required climate-related disclosures for years.
Most US companies have not been affected by these rules until now. Therefore, it is essential to compare these regulations and understand how companies can prepare if they are impacted by one or more of these rules.
These regulations are similar in many aspects. All of them:
- Require companies to disclose on GHG emissions and climate-related risk
- Mandate third-party assurance of GHG emissions
- Build on the existing Taskforce on Climate-Related Financial Disclosure (TCFD) framework, which focuses on governance, strategy, management, and metrics and targets
- Consider the concept of materiality (i. e. requiring companies to focus on areas where they have the most significant impact or are impacted the most)
For companies subject to multiple laws, starting with GHG emissions calculations and climate-risk assessments will be most impactful in terms of compliance.
Unfortunately, despite these similarities, the rules differ in several ways. For example:
- The CSRD and the CA rules require companies to calculate scope 1, 2, and 3 emissions, but the SEC climate disclosure rule only requires scope 1 and 2.
- The CA rules and the SEC climate disclosure rule focus on financial materiality (i.e., factors impacting a company’s cash flow and revenue), while the CSRD utilizes the concept of double materiality (financial materiality as well as the company's impact on people and the environment).
- While the CA rules and the SEC climate disclosure rule primarily cover GHG emissions, climate risk, and governance topics, the CSRD also covers a wide range of other sustainability topics, such as pollution, circularity, biodiversity, water, and human rights.
In addition, reporting thresholds, timelines, mechanisms, etc. differ across these rules. The table below summarizes the key aspects of each rule:
So, what does this all mean for businesses? Beyond spending some time reading through several hundred pages of regulations, companies should identify the people, processes, and technology they need to prepare for these requirements.
People – who is responsible for all this?
Two key areas of the business will need to take on responsibilities related to these new rules: the sustainability department (if one exists) and the financial reporting team, including the chief financial officer (CFO).
For the financial team in particular, this could be a significant shift from business as usual. This team and the CFO have traditionally focused on financial reporting and fiscal strategy. Now, they must play a pivotal role in integrating sustainability metrics and practices into the company's overall financial strategy and updating publicly disclosed statements to include additional sustainability information. This team must leverage the expertise of the sustainability team to gather the right data and address the needs of investors, regulators, and other stakeholders.
If companies lack a dedicated sustainability team to support these rules, this is a good time to consider hiring. The rules require regular disclosures, and having knowledgeable staff can significantly reduce the burden and increase the accuracy of reporting. In the short term, companies may need to bring in external help to prepare initial reports (until they can build their team properly).
Processes and technology – how do companies gather the information they need?
Beyond having the right people in place, companies may need to adjust their processes to streamline reporting. All of these regulations, particularly the CSRD, require extensive input data gathered across the business to comply. Examples of data required include:
1) Energy usage across all global facilities (supports GHG emission calculations)
- Responsible: Operations teams
2) Details on physical climate risks, such as floods, storms, water shortages, etc., and their financial impact (supports climate-related risk assessments and disclosures for all three rules)
- Responsible: Risk and finance teams
3) Policies and processes to inform management of climate-related impacts and risks and integrate mitigation actions into the company strategy (to support governance requirements from all three regulations)
- Responsible: Risk team
4) Descriptions of engagement mechanisms for a company’s workforce, value chain, affected communities, and customers (supports social disclosures required by the CSRD)
- Responsible: Human resources
In many cases, this information may not be easily accessible or may not exist at all. Companies will need to develop new processes to collect data in a standardized and centralized format. In addition, companies may choose to integrate new technology solutions to automate data collection and calculations to reduce the workload associated with reporting.
Developing new processes and adopting new technology solutions can take time - and starting early can help companies ensure they have worked out all the issues before reporting becomes mandatory.
As outlined, US companies are beginning to be impacted by changes to sustainability regulations. The first step for them is to determine which regulations they are subject to before evaluating their current reporting capabilities. In many cases, companies may find they need new people, processes, and technology to comply with all the data required for disclosure.
If this feels overwhelming or your company needs help getting started with initial disclosures, Ramboll can help assess your current reporting capabilities and guide you to meet the various regulatory demands by the set deadlines. Reach out to our experts below for help today!
Want to know more?
Alice Roberts
Managing Consultant
Laura Bowler
Manager
+1 734-890-6226