By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Fast-approaching European climate reporting rules have become top of mind not just for directors on the continent but also across the Atlantic.
The European Union's Corporate Sustainability Reporting Directive comes into effect from July 2024, when member countries will have to adopt it into their national laws, impacting not just local companies but also those based in the European Economic Area (Norway, Iceland and Liechtenstein) and international companies with significant operations in the region.
While US boards are eagerly waiting on the Securities and Exchange Commission to adopt its climate disclosure rule, directors overseeing companies with international operations are also looking to the European Union to see how its sustainability reporting directive will impact them.
Both jurisdictions will require companies to report Scope 1 and Scope 2 emissions, which are direct emissions from owned sources and indirect emissions associated with the production of purchased energy, respectively. The proposed SEC rule will require the reporting of Scope 3 emissions, which are emissions from a company’s value chain, if the company deems them material, with some carve-outs. The EU rule will also require Scope 3 reporting.
However, the CSRD, as it's known, has a “significantly broader scope than the SEC rules,” according to Mike Titera, a partner in Gibson, Dunn & Crutcher’s securities regulation and corporate governance practice group.
The directive requires companies to disclose the so-called “double materiality” of their activities, meaning they will have to explain not just their impact on their bottom line, but also their impact on society.
By comparison, the SEC is typically more focused on information that is important to the investor, says Alan McGill, global head of sustainability reporting at PwC.
Non-EU companies with a net turnover within the EU of €150 million for two consecutive financial years must comply. In addition to the net turnover threshold, the non-EU company must have either an EU subsidiary or a branch in the EU generating €40 million net turnover in the preceding financial year.
In addition to complying with any applicable disclosure requirements, US companies need to understand what their European customers and supply chain partners are going to need from them, says Titera.
“From a business perspective, this could be key to remaining competitive in Europe,” he says.
The final rules could potentially vary between countries. Spain and Ireland are looking at introducing some additional reporting requirements, for example, according to McGill.
Bridget Moore, the litigation department co-chair at Baker Botts, said US companies with a presence in the EU should be thinking about collecting their climate information with respect to both the SEC’s pending rule and the CSRD.
“It makes sense to build it at the same time,” she said. “You’re going to have to consider whether your data collection — what you have within your company now — is actually going to cover all the types of requirements that you’re going to have to comply with, both what’s required in the EU and [by] the SEC.”
It may make sense for companies to approach the EU and SEC rules from a strategic rather than pure compliance perspective, by considering which topics are material to the business and the data, technology and governance arrangements that will need to be in place to report on those, says Lisa O'Donnell, PwC lead for CSRD.
That process in itself could get companies 80 per cent of the way there to meeting the requirements for both sets of rules, she says. "Then it's a 20 per cent adjustment to the particular reporting requirements."
European companies will be well placed to meet the SEC rules because the CSRD is broader, she says. However, there is a risk of larger fines in the US, so European companies will want to be comfortable that their control environment matches the requirements of the SEC.
"Many organisations are starting to change from seeing this as a pure compliance piece to value-add strategic piece," says O'Connell. That's partly driven by the regulators but also expectations from shareholders and consumers, she says.
This article is based on a piece written by Nick Muscavage for Agenda.
