When it comes to climate regulations, if you’re only watching the SEC you could be caught by surprise.
Because while the SEC recently delayed its final rules on climate disclosure until later this year, the European Union (EU) is moving ahead with new rules on climate, sustainability, corporate responsibility and business transparency. The new rules start as early as next year, and they will affect many US companies.
As these regulations come into force, US companies should take steps now to understand their scope and prepare appropriate communications and compliance materials.
For example, the Corporate Sustainability Reporting Directive (CSRD) mandates European companies meeting certain conditions to disclose sustainability issues from a “double materiality” perspective. This means companies must provide third-party audited reports describing how sustainability issues affect their business and how their business impacts people and the environment.
This rule applies to US companies if they have generate net revenue of 150 million euros in the EU for each of the last two consecutive years and that have a listed EU subsidiary that generated a net turnover greater than 40 million euros in the preceding year.
Moreover, US companies would be required to back up their sustainability claims with verifiable data. This goes beyond what many US companies now provide in their sustainability reports, as well as the scope of the SEC’s proposed climate disclosure regulation. Reporting for EU subsidiaries of US companies is set to begin next year, with enterprise-level reporting expected by 2028.
The European Sustainability Reporting Standards (ESRS) aims to ensure compatibility with various reporting standards to avoid duplication efforts. It establishes guidelines for sustainability reporting, covering topics such as climate change, resource management, biodiversity, human rights, labor practices, diversity, and anti-corruption measures.
EU companies meeting specific criteria are required to comply with the ESRS, which expands reporting boundaries and significantly impacts the information to be disclosed. Non-EU parent companies whose securities are listed on EU-regulated markets and have EU revenue of more than 150 million euros are also obligated to comply. These standards are on track to become effective in January 2024.
The EU has also taken a strong stance against “greenwashing,” adopting the Green Claims Directive, which sets detailed rules for companies marketing their environmental impacts and performance. It aims to eliminate vague or misleading information in environmental claims. The directive will apply to EU companies and non-EU companies targeting EU consumers. It is likely to apply beginning in 2026.
Navigating the EU’s regulatory landscape poses challenges for companies operating in the European market. US companies should pay close attention to regulatory compliance criteria, stay informed about updates, seek expert counsel, and plan the preparation of compliance and communications materials well in advance of deadlines.
A version of this post appears on the website of Gargiulo + Partners.