The SEC recently delayed the release of its final rules on climate disclosure until later this year, meaning companies will have to wait a little longer to see what climate-risk information they will need to share with investors.
In the meantime, US companies should pay close attention to what’s happening in the European Union (EU), where regulations on sustainability, corporate responsibility and transparency are being implemented. They will apply to many non-EU companies that operate within its borders.
As these regulations come into force, it will be crucial for US companies to understand their scope and develop a comprehensive plan for preparing appropriate communications and compliance materials.
Here is a brief overview of some key EU regulations and their implications for businesses.
- Corporate Sustainability Due Diligence Directive (CSDDD)
The CSDDD focuses on establishing a responsible and sustainable approach to global value chains. It requires companies to take responsibility for their own environmental and social impacts and those of their suppliers. EU companies with more than 250 employees and 40 million euros in revenue, or non-EU companies with significant EU revenue, must conduct due diligence of their operations and supply chains. Non-EU companies are required to comply if they have generated 40 million euros in revenue within the EU or if their parent companies have at least 150 million euros in global revenue and 40 million euros generated in the EU.
- Corporate Sustainability Reporting Directive (CSRD)
The CSRD mandates European companies meeting certain conditions to disclose sustainability issues from a “double materiality” perspective. This means companies must provide third-party audited reports describing how sustainability issues affect their business and how their business affects people and the environment.This rule also applies to US companies that have generated net revenue of 150 million euros in the EU for each of the last two consecutive years and that have a listed EU subsidiary that generated a net turnover greater than 40 million euros in the preceding year. Such companies may be required to furnish sustainability information covering EU as well as all non-EU operations. Moreover, US companies would need to support their sustainability claims with verifiable data. This goes beyond what many US companies now provide in their sustainability reports, as well as the scope of the SEC’s proposed climate disclosure regulation. Reporting for EU subsidiaries of US companies is set to begin next year, with enterprise-level reporting expected by 2028.
- European Sustainability Reporting Standards (ESRS)
The ESRS aims to ensure compatibility with various reporting standards to avoid duplicative efforts. It establishes guidelines for sustainability reporting, covering topics such as climate change, resource management, biodiversity, human rights, labor practices, diversity, and anti-corruption measures. EU companies meeting specific criteria must comply with the ESRS, which expands reporting boundaries and significantly affects the information to be disclosed. Non-EU parent companies whose securities are listed on EU-regulated markets and have EU revenue of more than 150 million euros are also obligated to comply. These standards are on track to become effective in January 2024.
- Green Claims Directive
In a recent study of 150 companies, the EU Commission found that over half provide vague and misleading information about their ESG accomplishments. Aiming to combat such greenwashing, the Green Claims Directive sets detailed rules for companies marketing their environmental impacts and performance. The directive will apply to EU companies and non-EU companies targeting EU consumers. It is likely to apply beginning in 2026.
Navigating the EU’s regulatory landscape poses challenges for companies operating in the European market. US companies should pay close attention to regulatory compliance criteria, stay informed about updates, seek expert counsel, and plan the preparation of compliance and communications materials well in advance of deadlines.
Complying with these new EU regulations is not only a legal requirement but also an opportunity for US companies to demonstrate their commitment to responsible business practices and transparent communication with stakeholders. By doing so, they can build trust and establish themselves as leaders in the EU market and beyond.
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