Businesses need to prepare for SEC climate rules, EU's CSRD
While the SEC's new climate rules and the EU's CSRD are both facing delays, businesses still need to identify methods for collecting and assessing climate data.
New climate reporting rules in both the U.S. and EU are facing implementation delays. But businesses still need to prepare to collect, analyze and report climate data as the stringent reporting requirements slowly come into effect.
The U.S. Securities and Exchange Commission finalized its long-awaited climate risk disclosure rules in March. The rules would require publicly traded businesses to disclose Scope 1 emissions, or direct carbon emissions, and Scope 2 emissions from outside sources like energy facilities.
But earlier this month, the commission opted to stay implementation until several lawsuits against the rules are resolved. The climate rules are also facing a Congressional challenge after Sen. Tim Scott, R-S.C., introduced a resolution to overturn the rules.
After finalizing the rules, the SEC immediately faced legal challenges. Nearly 20 U.S. states in two separate lawsuits sued the SEC over the rules arguing they create unnecessary burdens for businesses. The U.S. Chamber of Commerce also sued the commission.
The EU has also opted to delay parts of its compliance with the Corporate Sustainability Reporting Directive (CSRD) for non-EU companies. Those companies with a presence in the EU will have an additional two years to prepare for the industry-specific European Sustainability Reporting Standards (ESRS), which businesses that fall under CSRD will need to comply with. Instead of June 2024, businesses will have until June 2026 to comply.
Despite delays, businesses are facing a new era of climate risk reporting that's being mandated not just in the U.S. and EU broadly but also by individual countries and U.S. states, including California. That means businesses need to start considering climate reporting as part of their overall business strategy, Gartner analyst Janel Everly said.
"It's looking at making sure that climate-related issues are aligned with financial planning," Everly said. "It's getting non-financial filing to the state of precision of financial data."
Gearing up for climate rules
The SEC's climate rules stem from investors wanting accurate, comparable climate data from businesses. Through enforcement measures such as fines and legal action, the rules will push businesses to accurately report climate risks and carbon emissions in their 10-K financial filings.
Collecting accurate, comparable climate data is a goal shared by the U.S. and EU -- something Forrester Research analyst Alla Valente said she hopes the climate rules will foster.
"We can now put aside this whole 'is climate risk real or not' debate and actually focus on what all organizations can do to better transition to a place where the potential impact of climate risk will be minimized," she said.
Regardless of the SEC ruling and where that lands after the legal proceedings, Everly said there will still be a trickle-down effect from the CSRD climate reporting requirements even for small businesses. While some companies in the U.S. might not meet the size threshold needed to comply with CSRD, they will still need to provide climate data particularly if they contract with multinational companies that must comply with climate rules.
"They have multinationals that are coming to them indicating, 'We need this data; we need your Scope 1 and Scope 2. We expect that you reduce your carbon emissions. We expect to understand what your business model is because it impacts us and what we need to comply with,'" she said.
Jonathan Feniak, general counsel and head of finance at compliance software vendor Company Sage, said data collection and analysis for accurate reporting on climate risk is a likely challenge for businesses.
"Given the novelty of these regulations, establishing a robust and reliable data system can present difficulties," he said. "Further, ensuring that this data is communicated effectively in the disclosures is another layer of complexity."
Feniak pointed to AI-driven technologies and predictive analytics tools as potential aids in gathering and interpreting climate data.
More time for businesses to set CSRD reporting strategy
The EU's two-year delay gives companies time to evaluate their overall climate risks as well as determine their reporting approach, which could alter business models and communication strategies, Everly said.
Given the novelty of these regulations, establishing a robust and reliable data system can present difficulties.
Jonathan FeniakGeneral counsel and head of finance, Company Sage
Many non-EU companies most likely have offices or other business operations in Europe. Regarding reporting, business leaders will need to decide whether they do standalone reporting for those individual business locations or take a consolidated reporting approach instead, Everly said. A consolidated reporting approach is a "roll-up of what they typically report in their financial filings for all the legal entities," she said.
The key strategic decision facing business leaders will be how to report material issues, such as climate risks and carbon emissions, for those business operations, according to Everly. How a business chooses to report will affect IT systems because leaders will have to decide whether to have centralized IT systems with controls in place to manage assurance of climate data or remain decentralized and conduct standalone reporting.
"The challenge with that and implications are thinking through defining material issues and identifying those," Everly said. "One legal entity might be focused on sales and marketing, and another legal entity is focused on the manufacturing of the goods. The material issues of those legal entities are going to look very different."
Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general assignment reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.
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