Environmental Social Governance Reporting Overview

SEC’s Climate Disclosure

OVERVIEW: On March 6, 2024, the SEC adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The final rules require registrants to include certain climate-related disclosures in their registration statements and periodic reports, such as on Form 10-K, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. The SEC’s final rules differ in many ways from other regulations, such as the European Union’s Corporate Sustainability Reporting Directive and the California climate disclosure laws, which are explained further below.

The rules would require a registrant to disclose information about:

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
• For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Further, the rules would require a registrant to disclose information about its greenhouse gas (GHG) emissions:

The final rules will require a registrant to:

• File the climate-related disclosure in its registration statements and Exchange Act annual reports filed with the Commission;
• Provide the Regulation S-K mandated climate-related disclosures either in a separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis, or, alternatively, by incorporating such disclosure by reference from another Commission filing as long as the disclosure meets the electronic tagging requirements of the final rules; and
• Electronically tag climate-related disclosures in Inline XBRL.

Who is AFFECTED?

Public companies, including foreign private issuers.

What’s NEXT?

The final rules would be phased in with the compliance date dependent on the registrant’s filer status, with disclosure requirements potentially applicable as early as 2025 (filing in 2026) for large accelerated filers. Further, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emission disclosures, with a phase-in over time.

Corporate Sustainability Reporting Directive (CSRD)

OVERVIEW: In December 2022, the European Union published the CSRD, which went into effect in January 2023. The CSRD requires comprehensive and granular disclosures covering the entire spectrum of sustainability topics (e.g., climate change, biodiversity, and ecosystems, working conditions, human rights, business ethics).

Companies within the scope of the CSRD are required to disclose information on sustainability matters and information necessary to understand:

1. The company’s impacts on sustainability matters; and
2.  How sustainability matters affect the company’s development, performance, and position.

CSRD rules are much broader than those in the US and require disclosure from a “double materiality,” meaning that a company must report how sustainability risks and opportunities affect its financial performance, position, and development (financial perspective) as well as how the company’s performance, position, and development affect people and the environment (impact perspective). The CSRD requires that the sustainability reporting, which will be subject to limited assurance, be included in a dedicated section of the management report that is submitted based on the requirements of the relevant regulatory and/or EU Member State.

Who is AFFECTED?

Companies will need to determine their applicability based on the following criteria:

All companies with securities listed on an EU-regulated market (this includes both EU and non-EU entities with listed debt or equity securities).

• “Large” EU companies that are not listed. An EU subsidiary of a US company would be required to report if it qualified as “large.”
• EU companies that are part of a “large group” and not listed. Reporting is required for an EU entity (including an EU subsidiary of a US company) if IT qualifies as a “large group.”

“Large” or “large group” is defined as exceeding at least two of the following three metrics on two consecutive annual balance sheet dates:

• Total assets of €25 million
• Net turnover (revenue) of €50 million
• Average of 250 employees

What’s NEXT?

EU Member States have until early July 2024 to incorporate the CSRD’s provisions into national law. Required reporting for some companies will begin as early as fiscal year 2024..”

US-based companies with significant operations in EU countries should consider the following:

• Have you evaluated how your organization will be affected by the CSRD and supporting European Sustainability Reporting Standards (ESRS) requirements?
• Have you performed an assessment comparing your company’s currently established material sustainability topics with the CSRD’s double-materiality requirements—and how this broader set of materiality considerations relates to the materiality determination process for the SEC’s climate disclosure rule?
• Do you have data processes and controls in place to be able to report the required sustainability information? Keep in mind that while the CSRD implementation date for many U.S.-based companies may be a few years out, the CSRD will:
  1. Require the company to pull into the financial reporting cycle sustainability reporting that is much more comprehensive than that on climate and greenhouse gas emissions under the SEC’s rule on climate-related disclosures.
  2. Subject this more comprehensive sustainability reporting subject matter to limited assurance upon implementation.

California Climate Disclosure Bill

OVERVIEW: On October 7, 2023, California passed two bills, Senate Bill (SB) 253 and SB 261, that require public and private companies operating in the state to disclose their greenhouse gas emissions (GHG) and their climate-related financial risks. On October 1, 2024, SB 219 was signed into law, introducing key amendments to these bills.

Climate Corporate Data Accountability Act (Senate Bill 253) requires private and public companies with revenues over $1 billion that do business in California to disclose their Scope 1, 2 and 3 GHG emissions, with assurance requirements. Companies with revenues over $500 million must report Scope 1 and 2 emissions, without assurance requirements, and disclosure of the measures they are adopting to mitigate climate risks.

Climate-Related Financial Risk (Senate Bill 261) requires companies with revenues over $500 million to create a biannual sustainability report, highlighting climate-related financial risks and actions to mitigate them. This report will follow the Task Force on Climate Related Financial Disclosures (TCFD) framework.

Climate-Related Financial Risk (Senate Bill 219) provides the following key amendments:

1. The California Air Resources Board (CARB) has until July 1, 2025, to finalize regulations explaining how companies should measure, collect, and report GHG emissions. These regulations will provide guidance on methodologies, reporting formats, and data sources for companies to understand their reporting requirements.
2. Scope 3 emissions reporting will still begin in 2027, but the reporting no longer needs to occur within 180 days of Scope 1 and 2 disclosures. Instead, the timeline will be determined by CARB.
3. Parent companies can now consolidate reports for their subsidiaries, and there will no longer be a filing fee required for these reports.

Who is AFFECTED?

An entity is determined to be doing business in California if it:

1. Engages in any transaction for the purpose of financial gain in California,
2. Is organized or commercially domiciled in California, or
3. Has California sales, property, or payroll exceeding certain amounts (for ’22, sales $690,144; property $69,015; payroll $69,015).

What’s NEXT?

1. SB 253: Scope 1 and 2 emissions disclosures will be required starting in 2026 for fiscal year 2025, and Scope 3 emissions will begin in 2027.
2. SB 261: Companies within scope must create a biannual sustainability report in line with the TCFD.
3. SB 219: CARB will finalize the reporting guidelines by July 1, 2025, with a schedule on Scope 3 emissions reporting to be provided.

How Eliassen Group
CAN HELP

• Perform a materiality assessment and identify which ESG topics are material to your organization.
• Determine what you will measure and any gaps in collecting or reporting that data.
• Collect data to track ESG metrics.
• Build internal controls to ensure that your ESG plan is audit ready.