With Transatlantic Sustainability Disclosure Regulations on the Horizon, Companies Will Need a Unified Global Strategy Across Policy, Legal, Brand and Reputation
Setting climate targets without a consistent way to keep companies accountable will not work. This has been the main conclusion that both the EU and U.S. have drawn in recent years, leading to a slew of changes in corporate reporting. In the EU, policymakers have drawn up a new sustainability reporting framework called the Corporate Sustainability Reporting Directive (CSRD) with corresponding sustainability reporting requirements. In the U.S., the Securities and Exchange Commission (SEC) is expected to imminently strengthen its climate disclosure rule, while the California Assembly has recently passed legislation requiring all large companies to disclose scope 1, 2 and 3 greenhouse gas emissions.
This push for increased sustainability disclosures is putting ESG even higher on the priority list for executives. While in the EU, corporates have engaged with the specific requirements that will apply to their sector, several U.S. companies plan to outright sue the SEC for any changes made. More generally, many EU and U.S. companies have made low or zero-carbon pledges, but many don’t yet necessarily have a fully developed plan for how they will get there, making reporting much more complex. A situation that is exacerbated by the nascent state of ESG data collection.
Regardless of the political reception, companies must be aware of the specific changes underway and how the increased disclosures will open a much larger window into their sustainability communication, risk management, marketing and business strategy.
How companies meet this moment matters. Some may enter only into compliance mode and miss the opportunity to communicate effectively. Others may continue boldly without the right substance and step into a different kind of peril. But these do not harness the long-term value of ESG. What companies need now more than ever is the right ESG strategy, which includes a deliberate and unified trajectory for where the company wants to be and how it will get there. The fragmented and parochial approach at the country, function and even agency level has to evolve to a cohesive and connected outlook.
What does the Corporate Sustainability Reporting Directive mean for businesses?
The new CSRD will require all large and EU-listed companies to disclose detailed sustainability-related information. Corporates will have to report against comprehensive and sector-specific ESG impacts, risks and opportunities. This can include revenue linked to certain sectors (e.g., fossil fuels and chemical production) and remuneration policies linked to sustainability matters for board members.
Companies that have their headquarters outside of the EU, but with operations above a certain size in the EU (see thresholds below), will also be required to disclose against the EU’s standards. This could significantly alter the reporting practices of many U.S. companies, given the expected differences in level of detail required between the EU’s standards and the anticipated SEC rule.
The proposed SEC rule will require additional reporting on the governance and oversight processes of climate-related risks by the company board. It is also expected to require companies to disclose whether they have a climate transition plan, and if so, how they intend to reach the specific goals and targets.
How do the Corporate Sustainability Reporting Directive and U.S. climate disclosure frameworks compare?
While both disclosure frameworks will lead to an increased reporting burden for companies operating across the Atlantic, in comparing, it becomes evident that the global impact of the EU framework is much larger.
Even though the U.S. climate disclosure risk framework does apply to foreign registrants, the number of foreign companies that are registered with the SEC is rather small. In contrast, the new CSRD will apply to all third-country undertakings with a net turnover of €150 million in the EU, and either a “large” subsidiary or a branch that generates €40 million net turnover. This means that parent companies with a sufficiently large branch in the EU will be due to report under the CSRD in 2029, a significant extraterritorial reach of EU legislation.
Additionally, while the EU is actively coordinating with the International Sustainability Standards Board (ISSB) to ensure alignment between the EU’s extensive reporting framework and the International Financial Reporting Standards (IFRS) that are used in many other parts of the world, this seems to be less of a concern for the United States.
How can companies navigate the new sustainability and climate disclosures?
There is no doubt that the new reporting rules, especially those entering into force in the EU, will require many global corporates to significantly increase their data collection and disclose more details on their sustainability journey than ever before. This will open up corporates to significantly more scrutiny and judgment than before.
Yet this is only the beginning. The step change in disclosure requirements is opening a window onto what corporates can expect in the coming years on ESG.
FleishmanHillard’s global ESG advisory approach helps corporates to anticipate the shifting ESG sands in a coherent and connected way across policy, legal, brand, communications and reputation:
- Preparation: helping organizations understand what is coming up and how to position themselves
- Global horizon scanner: identifying relevant sustainability policy trends and their legal implications.
- Green authenticity gap: analyzing the alignment between corporate positioning and stakeholder expectations.
- Corporate narrative development: advising on globally resonant and locally relevant messages for corporates in any sector to help manage their reputation and positioning.
- Execution: helping clients walk the walk
- Bringing ESG reports to life: assisting with the production of sustainability reports from concept to conclusion, underpinned by expert knowledge of different global rules and regulations.
- Strategic partnership building: advising on external profiles (civil society, ESG board representatives) to help boost corporate presence and positioning.
- International event participation: identifying impactful speaking opportunities and advising on a corporate narrative that resonates with the latest ESG developments.
- Strategic advisory: ongoing advice and support
- Across PA, PR, reputation management and crisis communications based on in-depth expertise of global sustainability trends.
Ensuring a 360-degree approach to sustainability across all corporate functions is essential to a successful business strategy. The sustainability window is being cast wide open, and we can help provide organizations with the clearest perspective.
Read our report, “EU and U.S. Sustainability Disclosure Requirements — a FleishmanHillard Perspective” for more.