This article was originally posted by Emma Bichet, Jack Eastwood, and Michael Mencher, Cooley LLP, on Wednesday, November 23, 2022 in the Harvard Law School Forum of Corporate Governance.
Is your company doing business in the European Union? If so, they are requiring more stringent reporting on environmental, social and governance (ESG) reporting the the SEC does. Here’s a great chart that demonstrates the differences:
| EU – CSRD | US – SEC |
| Environment | |
| Climate change: This is a transition plan for climate change mitigation, associated policies, targets and resource allocation. Among other things, the report must detail energy consumption, Scope 1 through 3 greenhouse gas emissions, GHG removal and mitigation initiatives. A reporting entity must disclose its plans, implementing actions, and related financial and investment plans that will ensure its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 degrees Celsius and achieving climate neutrality by 2050. | The proposed climate rule would require Scope 1 and 2 GHG emissions reporting, as well as Scope 3, if material. Issuers also would be required to disclose climate risks, strategy impacts, and climate governance and risk management. Climate reporting would be contained in annual reports filed with the SEC, as well as registration statements. |
| Pollution: The report must set out policies, targets and resource allocation affecting pollution of air, water, soil, living organisms and food resources, among others. The report must detail the pollutants generated or used during the production processes and that leave facilities as emissions, products, or as part of products or services, among others. | No requirement in current or proposed US SEC rules. |
| Water and marine sources: Report on how the company affects water and marine resources, in terms of positive and negative impacts and any actions taken (including policies, targets, action plan and resources). | No requirement in current or proposed US SEC rules. |
| Resource and circular economy: The report must set out policies, targets and resources relating to the depletion of nonrenewable resources and the regeneration of renewable resources, and any actions taken to prevent, mitigate, or remediate impacts arising from resource use and the circular economy. This report must detail resource inflows, outflows, waste and resource optimization. It must detail the entity’s ability to create partnerships to accelerate the transition to a circular economy, among others. | No requirement in current or proposed US SEC rules. |
| Biodiversity and ecosystems: Report on how the company affects biodiversity and ecosystems, in terms of positive and negative actual or potential impact, as well as any actions taken and results of such actions to prevent, mitigate, or remediate adverse impacts and protect/restore biodiversity and ecosystems. | No requirement in current or proposed US SEC rules. |
| Social | |
| Own workforce: The report must enable readers to understand how the undertaking affects the company’s own workforce by covering working conditions, access to equal opportunities and other work-related rights. | SEC rules currently require discussion of companies’ human capital resources and strategies at a very high level of generality in annual reports – and the SEC may propose more substantive quantitative human capital and employee diversity disclosure in the next year. |
| Workers in the value chain: The report must set out how the company affects workers in its value chain through its own operations and its upstream and downstream value chain (including its products and services, its business relationships and its supply chain). This would have to include disclosure on processes for engaging with such workers, channels through which such workers can raise concerns, targets related to managing material impacts on such workers, and remediation of material impacts on such workers, among others. | No requirement in current or proposed US SEC rules. |
| Affected communities: The report must enable readers to understand how the undertaking affects local communities through the company’s own operations and its upstream and downstream value chain (including its products and services, its business relationships and its supply chain), any actions taken, and how the undertaking manages risks and opportunities relating to impacts and dependencies on affected communities. | No requirement in current or proposed US SEC rules. |
| Consumers and end users: The report must set out policies and targets that address the management of the material impacts its products and services have on consumers and end users – including impacts to a consumer’s privacy or health, processes for consumer and end-user engagement concerning actual and potential impacts, mechanisms through which consumers and end users can raise concerns, and approaches to mitigating material risks and remediating actual impacts. | No requirement in current or proposed US SEC rules. |
| Governance | |
| Governance, risk management and internal control: The report must detail the diversity, remuneration and risk management policies, among others. It also must detail management composition, meetings and attendance rate. | In addition to long-standing rules regarding corporate governance (board structure and composition, director and management composition, etc.) required in annual proxy statements and elsewhere, the SEC’s climate change and cybersecurity rules include governance disclosure requirements, such as the organization of board oversight and director expertise related to climate and cyber matters. Potential upcoming rulemakings may include expanded board diversity disclosure requirements. |
| Business conduct: This includes information on the company’s strategy and approach, processes, procedures, and performance in respect of business conduct (including business ethics, corporate culture, anti-corruption, anti-bribery, etc.) | SEC and New York Stock Exchange/Nasdaq exchange rules include requirements regarding the content and disclosure of codes of ethics. |
Key features of the reporting requirements
| EU – CSRD | US – SEC | |
| Materiality (i.e., what matters for reporting) | “Double materiality,” which means:Significant impacts from an investor perspective (i.e., reporting on ESG matters material to the company’s value creation).Significant impacts from a wider stakeholder perspective (i.e., reporting on ESG matters material to the company’s impact on the economy, environment and people).While on paper these materiality concepts appear quite distinct, the practical implications of this divergence remain to be seen. For areas such as climate change, there is increasingly convergence between what’s considered material for investors and what’s considered material to society. | Investor perspective only |
| Reporting boundaries | Upstream and downstream value chain and the material sustainability matters that are connected to the company through its direct or indirect business relationships – regardless of its level of control over these value chain entities. | Scope 1 and 2 GHG emissions reporting requirements only apply to direct company emissions and indirect emissions from purchased electricity or other forms of energy. Scope 3 reporting requirements, when applicable, apply to upstream and downstream activities in value chains. |
| Due diligence requirements | A description of the reporting entity’s due diligence process with regards to sustainability matters by the entity or group must be provided. The EU is currently separately negotiating new corporate sustainability due diligence rules. | No requirement in current or proposed US SEC rules. |
| Forward-looking disclosures | Reporting entities will be required to report on a forward-looking and retrospective basis. | The proposed climate rule would require disclosure of climate-related targets and goals, if any. |
| Attestation | The CSRD proposals would require “limited assurance” across all topics from first reporting with limited assurance standards that will be adopted by the European Commission before October 1, 2026. Assurances will be required to address, among other things, compliance with the applicable ESRS and the processes carried out to identify the reported information. The EU has expressed ambition to move toward “reasonable assurance” at a future date, perhaps as early as 2028, but it would need to be adopted as delegated legislation by the European Commission. EU member states may choose to require assurances over sustainability reporting to be separate from the mandatory audit of the financial statement. | The SEC’s proposed climate rule would require a third-party attestation report covering Scope 1 and 2 GHG emissions, with “limited assurance” due for large accelerated filers for FY 2024 and “reasonable assurance” for FY 2026 (FY 2025 and FY 2027 for accelerated filers). |