The European Union’s New Climate Regulation Puts Pressure on American Companies
Overview
A lack of US climate reporting regulation may pose negative side effects to US companies in the long run as they will have to adhere to stronger EU compliances. The SEC reports on this ongoing issue as it prepares to release its climate regulation in the coming years.
Summary
SEC Chair Gary Gensler highlighted the pivotal role of U.S. climate reporting rules in influencing global compliance standards. Gensler warned that the absence of such regulations might force American companies into adhering to foreign mandates, specifically citing the European Union’s Corporate Sustainable Reporting Directive (CSRD). The CSRD is a new EU standard that companies will adhere to starting in 2024. Within the new regulation, large companies (more than 500 employees) will have to publish information related to the risks and opportunities, and the impact of their actions on people and the environment by these categories; environmental matters, social and treatment of employees, anticorruption matters, and diversity on company boards. These rules also apply to US companies that generate over $150 million in the EU. Gensler emphasized the SEC's inability to negotiate "substituted compliance" with the EU, wherein companies could meet one jurisdiction's requirements by complying with equivalent rules elsewhere.
The SEC introduced proposed climate disclosure rules in March 2022, mandating U.S. companies to disclose climate risks, mitigation plans, and operational climate footprints. Despite the proposal's completion of the comment period last year, the final rule is pending issuance, leaving U.S. firms under the SEC's jurisdiction subject to evolving global sustainability reporting regimes.
The EU's CSRD, appears more comprehensive than the SEC’s proposal, particularly in demanding comprehensive reporting on Scope 3 supply chain emissions. However, in some US states, climate disclosure is becoming more important as recently California signed legislation that will require comprehensive emissions disclosures from large U.S. companies operating within the state. This bill will require companies in California that generate revenues of more than $1 billion to annually report their emissions from all scopes. It will fully go into law in 2027 but shows a precedent for how climate regulation is advancing in the coming years.
As for the US as a whole, there has yet to be a nationwide climate disclosure rule in place. Gensler stressed that SEC’s focus on materiality and investor usability in crafting climate reporting rules has led to delayed decisions. He highlighted the potential for U.S.-EU discussions on substituted compliance if the SEC finalizes a distinct rule. While a firm release date remains undisclosed, the current regulatory agenda suggests a potential final action on the climate rule by April 2024.
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