EU climate disclosure rules could impact thousands of US firms

July 6, 2023|Written by

The EU is tackling climate change disclosures, with several directives that could reshape reporting requirements for not just companies within the bloc, but non-EU companies as well.

The corporate sustainability due diligence directive (CSDDD) is making its way through the legislative process and would require companies, potentially including financial institutions, to conduct due diligence on scope 1,2, and 3 emissions through the supply chain.

Meanwhile, the corporate sustainability reporting directive (CSRD), will require companies, including banks and insurance firms, to disclose their sustainability efforts in 2025, from greenhouse emissions to water pollution and gender pay gaps. A specific set of ESG standards under the CSRD, known as the European sustainability reporting standards (ESRS) are undergoing a final review and are expected to be issued in the autumn.

US Treasury secretary Janet Yellen has voiced concerns over the “unintended negative consequences for US firms.” Research from financial data firm Refinitiv suggests that over 3,000 US companies would be impacted by the EU’s CSRD regulations, with dozens of companies in the UK and Canada also affected. Non-EU companies that are either listed or have an EU branch with over US$40mn in net revenue would have to provide the same disclosures as EU companies.

Many large, publicly traded US companies have been doing some form of sustainability reporting for the past few years. Many use the Global Reporting Initiative standards which align with the EU’s CSRD rules, said Louis Coppola, co-founder and executive vice president at business consulting firm Governance & Accountability Institute.

While public companies likely already have some of the reporting requirements in place, it could be challenging for smaller, private companies which haven’t had to report at all, he added. Many of Coppola’s clients are confused about what requirements and standards are required, especially with so many different global reporting standards.

“A lot of companies are looking for consistency, they’re looking for alignment of these different standards,” he said.

The US Securities and Exchange Commission is expected to issue rules requiring climate change disclosures for publicly traded companies, but Coppola said it is unlikely the SEC rules will be considered equivalent as the rules are less rigorous than the EU’s disclosures. This is mainly because the CSRD rules cover double materially, requiring information on not just issues that impact business finances, but how companies impact the world as well.

What exactly will be required of US companies operating in the EU “will remain an open question,” said Elizabeth Jacobs, senior specialist at climate think tank E3G.

“Distinctions between the application of materiality thresholds is a big issue, although regulatory relief of some kind could help to bridge the distinctions,” she added.

However, the EU and US “have a track record of providing one another with regulatory accommodations to bring about level playing fields — without sacrificing core investor protections or increasing financial stability risks,” she said.

The problem is that it often takes a lot of time for the two countries to agree on how to be accommodating, she added.

“Science tells us that the world simply does not have the time for years of negotiation over equivalency determinations or use of exemptive relief,” Jacobs said.

This page was last updated July 7, 2023

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