According to COP27 leaders, the credibility problem surrounding climate pledges and net-zero financing has a clear solution: more implementation, more accountability, and more transparency. European companies have returned to their home countries after COP27 to an avalanche of rapidly developing environmental, social, and governance (“ESG”) reporting regulations aimed at developing that transparency—regulations that will inevitably test companies’ strategic planning abilities. Companies would likely benefit from building their internal and external teams now, in order to meet the deadlines, analyze the requirements, and align their strategies with meaningful climate goals.
Companies may need external help, because the timelines are upon us. Level 2 of the EU Sustainable Finance Disclosure Regulation (“SFDR”) will come into effect on 1 January 2023 with the first report due on 30 June 2023. The EU Council adopted the Corporate Sustainability Reporting Directive (“CSRD”) on 28 November 2022. The CSRD will enter into force 20 days after its publication in the EU Official Journal and EU member states will have 18 months to integrate it into national law. Complying with these and other regulations will require a significant organizational and strategic effort by companies and is complicated by the fact that the requirements of the myriad regulations and frameworks are unstandardized.
The proposed EU Corporate Sustainability Due Diligence Directive (“CSDDD”) includes an obligation to prevent adverse impacts but the CSRD does not. The CSRD does not include requirements related to director duties; the CSDDD, by contrast, only includes them for EU companies but not for non-EU companies. The CSRD does not include civil liability but the CSDDD does. The regulations are even more complex for companies who do business in multiple regions. For example, the U.S. Securities and Exchange Commission’s proposed Climate-related disclosure rule bears comparatively little resemblance to either the CSRD or the CSDDD. And the requirements are further complicated for those covered by reporting or due diligence provisions under certain industry-specific rules such as Article 72 of the proposed EU Battery Regulation Amendment.
In addition to getting a handle on the timelines and requirements, a strategic approach is necessary to align a company’s reporting with climate goals and to stay ahead of regulatory developments and enforcement. Though most of the recent regulations include no enforcement mechanisms of their own, they will be enforced under the member states’ legal regimes. The increased transparency will also expose companies to greater litigation risk. Furthermore, reporting requirements often involve a comparison to previous years’ reports and goals, so it will be crucial for companies to ensure that their interim and long-term sustainability and climate goals are ambitious, comprehensive, and yet, achievable.
Traditionally, this sort of reporting has often been under the purview of a single department within an organization, such as Sustainability. As ESG continues to gain momentum, however, it will be particularly useful for organizations to think beyond a single function when creating teams to develop ESG-related strategies and reports. For example, the SFDR requires companies to report on 14 different sustainability factors, including both climate-related indicators and social matters. Of these 14 factors, only six are concerned with greenhouse gas emissions.
To that end, to most effectively work towards the COP27 goals of better implementation, more accountability, and greater transparency, it is imperative that companies (1) act now, (2) sort out what regulations and frameworks apply to them, and (3) figure out who they need on their teams, both internally and externally.