The new requirements are wide-ranging with deadlines fast approaching. Much of our client’s work in emissions reporting to date has focused on voluntary initiatives. For example, our team frequently assist companies in preparing to have their emissions targets approved by organizations that run voluntary programs, such as the Science Based Targets initiative (SBTi). However, global regulators have recently stepped in and made it clear that emissions reporting will soon be mandatory.
Exhibit 1: Finalized CSRD regulatory reporting requirements
Source: Oliver Wyman analysis
New regulations are requiring companies to provide detailed disclosures of the material sustainability risks and opportunities they face, their transition plans, and comprehensive statistics on their environmental impact. For the first time, companies are not only required to report the emissions that occur within their operations (Scope 1) and those that are associated with their electricity and heat supply (Scope 2), but also those related to their upstream supply chain and customers (Scope 3). Additionally, sustainability data will be also subject to verification.
Exhibit 2: EU regulatory timeframe
Source: Oliver Wyman analysis
In November 2022, the Corporate Sustainability Reporting Directive (CSRD) was formally adopted by the European Parliament. Starting in
fiscal year 2024, the CSRD requires listed EU companies with more than 500 employees, banks, and insurance companies to start disclosing detailed
environmental, social, and corporate governance (ESG) information in accordance with the European Sustainability Reporting Standards (ESRS).
In the fiscal year 2025, this requirement will be extended to large EU-based companies that exceed two of the following three criteria: 250 employees, €40 million net turnover, €20 million balance sheet total. By the fiscal year 2026, listed small and medium-sized enterprises (SMEs) will follow though they will be subject to proportionate, less stringent ESRS disclosure rules and can opt-out until fiscal year 2028.
Eventually, the CSRD will also apply to all non-EU companies that are either listed in EU regulated markets, have a net turnover of €150 million in the EU, or at least one EU subsidiary or branch. This provision is expected to begin in the fiscal year 2028. At the outset, the sustainability disclosures mandated by CSRD will be subject to "limited assurance”, but after a few years, that assurance is elevated to a "reasonable assurance". The difference between the two assurance levels is the degree to which auditors scrutinize the numbers. Limited assurance involves less stringent checks with the conclusion.
The ESRS (European Sustainability Reporting Standards) were adopted by the European Commission in July 2023. They specify the requirements laid out in the Corporate Sustainability Reporting Directive (CSRD). This contains 10 topical standards in the areas of environment, social and governance (ESG), and two additional cross-cutting standards on general reporting principles and disclosure requirements that apply to all topical areas and sectors. Sector-specific rules as well as "lighter" SME standards will follow at a later stage.
The concept of “double materiality” sits at the very core of ESRS. All material information regarding impacts, risks, and opportunities of ESG matters must be disclosed, enabling the understanding of the company’s impact on those ESG matters, as well as how those impact the company’s financial development, performance, and position. Crucially, in doing so, companies need to consider not only their own operations but must also consider the full value chain, from upstream suppliers to downstream product usage, waste, and disposal. In their reporting, companies must comply with clearly defined qualitative characteristics, such as faithful presentation, verifiability, relevance, comparability, and understandability of provided information.
The Securities and Exchange Commission (SEC) has proposed mandatory climate disclosure rules that would apply to all companies listed on
US stock exchanges, including non-US based companies. The proposal includes quantifying the impact of climate-related risks on financial
statements and disclosure of Scope 3 emissions, which has generated court challenges and a politicization of the debate. But even if the
SEC backs off for now, US companies will still be forced to comply through new regulations coming out of California.
The Climate Corporate Data Accountability Act (CCDAA) (SB-253), Climate-Related Financial risk (SB-261) was approved by the Californian Governor in October 2023 which will be implemented by the California Air Resources Board (CARB).
The disclosures will impact US-based listed and unlisted companies with operations in California within the below thresholds:
SB-253, applies to companies with revenues >1 BN USD:
SB-261, applies to companies with revenues >0.5 BN USD:
The CCDAA will require disclosures on companies scope 1, 2 and 3 emissions beginning in 2026. Scope 3 emissions reporting will not be required until 2027, based on 2026 data.
The International Sustainability Standards Board (ISSB), launched by the IFRS Foundation during COP26, has published in June 2023 a
first set of sustainability reporting standards that would mandate climate risk scenario analysis and emissions reporting for
Scopes 1, 2 and 3. While the ISSB has no authority to enforce such a rule, it is expected to heavily influence legislation around
the world following the July 2023 endorsement by IOSCO, the International Organization of Securities Commission.
Similarly to the ESRS, the ISSB draft standards are built upon the TCFD framework, structured around the four pillars: governance, strategy, risk management, and metrics and targets. In line with the ESRS, the ISSB also mandates the assessment of physical and transition climate risks on the business model, strategy, profitability, funding, and cost of capital. It also requires disclosure on corporate transition plans and Scope 3 GHG emissions.
The key difference to ESRS, however, is the ISSB's focus on financial materiality only, in line with its primary audience being investors and capital market stakeholders.
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