Navigating ESG Reporting: An Overview of EU and California Requirements

In an era where sustainability and transparency are paramount, businesses are now facing enhanced reporting requirements that demand detailed disclosures on their environmental and social impacts. The Corporate Sustainability Reporting Directive (CSRD) in the European Union and California’s recent legislative efforts, including the California Climate Corporate Data Accountability Act (CCDAA) and the Climate-Related Financial Risk Act (CRFRA), mark significant strides towards accountability and transparency in corporate sustainability practices. Here’s a brief overview for business leaders to understand these new requirements, key dates, and preparation strategies, along with insights into their broader implications.

The Corporate Sustainability Reporting Directive (CSRD)

Background

The CSRD, introduced by the European Union as part of the European Green Deal, was introduced in January 2023. Its primary objective is to ensure that companies disclose regular, comprehensive reports on their environmental and social impacts alongside their financial statements. This directive aims to increase transparency regarding how companies manage sustainability risks and the impacts of their operations throughout their value chains. By July 2024, EU Member States are required to transpose the CSRD into national law, with the first reports due in 2025 for the financial year 2024.

Reporting Requirements

The CSRD significantly broadens the scope of reported Environmental, Social, and Governance (ESG) information. Companies must submit over 80 disclosures and 1,100 data points, scrutinized by auditors, similar to financial information. Compliance involves adhering to the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). Key standards include ESRS 1 and ESRS 2, which lay out general requirements and disclosures applicable to all entities under the directive.

Key Dates

• January 2023: CSRD took effect

• 2024: First year of data collection

• July 2024: EU Member States must transpose the CSRD into national law

• 2025: First reports due for the financial year 2024

Preparing for CSRD Compliance

Companies, especially non-EU businesses affected by CSRD, should:

• Familiarize with ESRS: Understand the detailed reporting standards and requirements

• Stay Updated: Monitor updates and supplementary guidelines from the European Commission, especially those designed for non-EU companies.

• Data Collection Systems: Implement robust data collection systems to gather the necessary ESG information across all operations and value chains

• Build Flexible Reporting Systems: Ensure your reporting systems can adapt to ongoing changes and support multiple frameworks

• Collaborate with Value Chain Partners: engage with suppliers and partners to collect relevant data, ensuring the entire value chain is considered

Impact Beyond the EU

Even if your company is not based in the EU, CSRD can still impact you. According to Kristen Sullivan, audit and assurance partner at Deloitte, the directive is expected to affect over 50,000 companies globally, including non-EU organizations. Companies that are part of the value chain or receive investment capital from EU-based entities will need to comply with CSRD reporting requirements. This extensive reach means that the directive will likely have a ripple effect across global supply chains, compelling non-EU companies to align with these standards.

California’s Legislative Initiatives: CCDAA and CRFRA

Background

In October 2023, California enacted two significant pieces of legislation: the California Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). These laws are designed to address the transparency gap in corporate data regarding environmental disclosures and climate-related financial risks, making California a leader in state-level climate action.

Understanding the California Climate Corporate Data Accountability Act (SB 253)

Reporting Requirements

SB 253 mandates corporations operating in California with annual revenues over $1 billion to disclose their carbon emissions across three scopes:

• Scope 1: Direct emissions from company operations.

• Scope 2: Indirect emissions from purchased electricity, heat, or steam.

• Scope 3: Other indirect emissions occurring as a result of company activities (e.g., supply chain, product use).

The act also includes provisions for third-party verification to ensure the accuracy and reliability of the reported data.

Key Dates

• 2026: Start of public disclosures for Scope 1 and Scope 2 emissions.

• 2027: Scope 3 emissions reporting begins.

Understanding Climate-Related Financial Risk Act (SB 261)

Reporting Requirements

SB 261 requires companies with gross revenues exceeding $500 million and operating in California to report their climate-related financial risks in alignment with the Task Force on Climate-Related Financial Disclosures (TCFD) framework, starting in January 2026. This includes assessing and disclosing the potential impacts of climate change on their operations, assets, and supply chains.

Key Dates

• January 2026: Climate-related financial risk disclosures begin.

Preparing for Compliance for CCDAA:

• Understand Emissions Reporting: Familiarize with the Greenhouse Gas Protocol standards for accurate reporting of Scope 1, 2, and 3 emissions.

• Third-Party Assurance: Plan for third-party verification processes to ensure compliance and credibility.

For CRFRA:

• Align with TCFD Framework: Ensure that your climate-related financial risk reporting aligns with the TCFD framework.

• Assess Climate Risks: Regularly evaluate potential climate impacts on your business and integrate findings into your risk management strategies.

Impact on Non-California and Non-EU Companies

Even if your company is not based in the EU or California, these reporting requirements could still affect you. Companies engaged in business relationships with entities within these jurisdictions will need to adapt to the new reporting standards. This could involve:

• Data Sharing: Ensuring seamless data collection and sharing with partners subject to these regulations.

• Alignment with Global Standards: Adopting leading sustainability reporting frameworks to align with international best practices.

The Corporate Sustainability Reporting Directive (CSRD) and California’s CCDAA and CRFRA represent significant steps towards greater corporate transparency and accountability in addressing environmental and social impacts. For business executives, understanding these new requirements and preparing adequately is crucial to ensure compliance and leverage these changes as opportunities for sustainable growth. Staying informed and proactive will not only help avoid penalties but also enhance your company’s reputation and resilience in a rapidly evolving regulatory landscape.