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Freshfields Sustainability

| 5 minute read

Five considerations when managing global climate reporting frameworks

As mandatory climate reporting progresses rapidly across multiple jurisdictions, businesses have expressed frustration on how to cut through the often competing requirements – each potentially costing significant sums to assure adequate compliance.

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD), which contains mandatory transition planning obligations, came into force in summer 2024, and its cousin, the Corporate Sustainability Reporting Directive (CSRD), will require sweeping sustainability disclosures, including on climate change, from the beginning of 2025. California’s climate disclosure package was signed into law in September 2024 and will require reporting from 2026. The US Securities and Exchange Commission (SEC) passed its own climate disclosure rules in March 2024, although these are currently stayed while they are challenged in court. More than 20 further jurisdictions have adopted or are taking steps to introduce the International Sustainability Standards Board’s (ISSB) Sustainability-Related Standards in their legal or regulatory frameworks.

On the plus side, this trend provides increased transparency of performance for investors, consumers and the public generally. The downside, however, is that the emergence of multiple (in some cases competing) disclosure frameworks exposes companies to legal fragmentation and overlapping requirements. If there is an art form in handling these competing demands, it is to remain strategic when building reporting systems, and to leverage collected data for business aims. 

This blog looks at the competing regimes and offers five takeaways on best practices for managing these hardening standards. 

1. Disclosure requirements for climate are here—start strategising now. 

Proactive compliance with regulation not only ensures alignment with legal requirements but also enables companies to get onto the front foot rather than being buffeted by ever-changing regulatory demands.  While sustainability disclosure frameworks take different positions on scope of topics and assessing materiality, there are key areas of overlap for climate risks and opportunities.  The CSRD and the TCFD-founded approach, which forms the basis for ISSB and US climate reporting-based frameworks) both include requirements to disclose the financial risks and opportunities posed to a company from climate change, and are therefore largely aligned on financial materiality. However, the CSRD does assesses a further dimension of materiality – the impact of the company and its value chain on climate change – producing a so-called “double materiality” framework.  While this additional layer is not likely to be applied in other jurisdictions in the near term, a multi-national business should study carefully how it gathers the additional data to meet those requirements and whether it should be done on just for the European subsidiary affected, or whether enterprise data should be collected and reported from the outset.  

Accordingly, taking a step back to meet disclosure obligations, companies should reflect on the information needs of their business and whether there may be overlaps on data already gathered for their annual financial reporting obligations with the new sustainability disclosure obligations.  While there may be domestic nuances in adoption of sustainability disclosure frameworks, there’s likely to be an overlap in process and outcomes for climate in particular. Understanding and building from the overlap will help companies streamline costs and be better prepared for future regulatory changes. 

2. Don’t overlook the US; California’s requirements could significantly impact businesses

Many companies are focusing on CSRD’s upcoming disclosure obligations. But reporting obligations are also coming down the line in the US. The SEC’s climate disclosure rules may be on hold currently while subject to litigation. However, some individual states are moving ahead with their own requirements. Most advanced is California’s regime, which Governor Gavin Newsom put on track for implementation on September 27, 2024 by signing Senate Bill 219 into law. 

The bill sets two acts on track for implementation: the Climate Corporate Data Accountability Act (SB 253), which would require companies to disclose their GHG emissions, and the Climate-Related Financial Risk Act (SB 261), which would require companies to prepare reports on climate-related financial risks posed by their operations. Companies’ first reports are due in 2026, at dates to be determined by the California Air Resources Board (CARB). (See our prior update for more detail about California’s Climate Accountability Package).

This regime applies to both private and public companies that do business in California. Many scoping details remain to be worked out by CARB in its implementing regulations, but companies that do business in the state and anticipate more than $1bn or $500m (for SB 253 and SB 261 respectively) in revenue in the next fiscal year may be in scope and should consider planning for compliance. This is expected to implicate thousands of companies, both based in the US and elsewhere.

3. Ensure net-zero statements are backed by solid plans to avoid greenwashing

Regulatory scrutiny and the possibility of legal action on ‘greenwashing’ is increasing, notably in California and in Europe (Australia’s courts have also ruled against firms in landmark greenwashing cases this year, as our prior update explains). A greenwashing claim arises out of misrepresentation of an element of reporting, which could include claims about being ‘net zero’ or ‘carbon neutral’, as well as statements about a company or product’s broader environmental performance (eg recyclability). Companies can face liability not just for demonstrably false claims, but also for not having adequate plans or appropriate resources dedicated to reach the targets underpinning their claims. California’s latest anti-greenwashing law, the Voluntary Carbon Market Disclosures Act (VCMDA), requires companies to disclose methodologies used with respect to carbon claims. The EU’s Unfair Commercial Practices Directive, which imposes rules to curtail misleading environmental advertising, will likely enter into force in 2026.

Accordingly, companies should ensure they are careful and consistent in their statements surrounding emissions reduction and sustainability. They should also have realistic plans of engagement with suppliers and other stakeholders to assure that they all reach their net-zero ambitions. This can include contractual requirements with suppliers or, in some cases, business decisions such as replacing suppliers that do not improve performance.

4. Leverage sustainability reporting as a tool for long-term business advantage

The last decade has witnessed a major push to integrate sustainability disclosures in mainstream business reporting to provide greater visibility of material risks and opportunities to investors and other stakeholders. In tandem, sustainability itself has become a competitive issue among companies, not least as a driver of product innovation, supply chain resilience and talent attraction and retention. Companies that do not track their sustainability performance could trail behind their competitors in all of these areas.

Disclosure regimes encourage companies to publish their approach to sustainability, their performance, risks and opportunities and, in some cases, their plans for transitioning into lower carbon, more sustainable versions of themselves in future. The associated transparency can build trust with stakeholders, including investors, customers and employees, enhancing a company’s reputation and strengthening the integrity of its decision making. A good example is scenario-based climate risk and opportunity assessment, which may prompt a company to anticipate changes to its markets, business models and attractiveness to talent – as well as its physical resilience – over far longer timeframes than is ordinary in business analysis, producing more informed strategies for the future.  This optimism must be tempered by the necessary costs of obtaining the most relevant data to the company.   Although businesses may desire to phase these costs in over time, many of the mandatory reporting obligations have a short time fuse and will require preparation begin in the short term. 

5. Gather data to inform effective transition strategies

Transition plans are a critical aspect of a business’s strategy used to explain to stakeholders, including investors and value chain business partners, how a company plans to adapt and grow as the economy decarbonizes. These plans can also demonstrate how companies can thrive as states push towards net zero. For these reasons, transition planning is a growing component of sustainability disclosures with, for example, the Transition Plan Taskforce’s work being adopted by the ISSB (see here and here for earlier blogs about the TPT). Transition plans are also a fundamental obligation of the CSDDD, requiring companies to adopt a plan that “aims to ensure, through best efforts” that the business model and strategy is compatible with the limiting of global warming to 1.5°C in line with the Paris Agreement. Reporting the underlying risks, opportunities and metrics related to the challenges of delivering net zero helps companies to pinpoint where change is needed and where investment should be channelled. Where it is not yet a regulatory requirement, transition plans can be developed voluntarily alongside existing disclosure processes to achieve greater responsiveness to future regulatory and stakeholder pressure.

 

Tags

climate change, global, regulatory