Frustrations Mount Over Differing Climate Disclosure Rules

The long slog to implementing sustainability-related disclosure rules for companies in the United States reached something of a conclusion last month. While issuers are coming to terms with what the Securities and Exchange Commission now requires of them in terms of reporting for environmental, social and governance factors, the divide between disclosure rules in the U.S. and European Union is growing. The same could be said for companies’ frustrations over complying with differing standards of ESG disclosure.

You could certainly make the case that big business scored some key lobbying wins during the arduous process of writing the new rules for climate-related financial reporting. The final product proved significantly weaker than what was originally proposed by the Biden administration. Most notably, policymakers nixed a plan to require issuers to disclose so-called Scope 3 carbon emissions, which come from supply chains and consumers’ use of companies’ products.

Does any of that really matter, though, if companies still must comply with more rigorous compliance regimes elsewhere? Note, for instance, that the state of California passed its own set of ESG disclosure rules known as the Climate Accountability Package in October. The EU has also adopted environmental reporting rules in the form of the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS).

“In fact, many of the disclosure requirements that have been eliminated or reduced by the SEC in the Final Rules are required under other climate-related disclosure regimes,” wrote the attorneys at the law firm Freshfields in an analysis  of the commission’s announcement last month. “Companies that are subject to multiple climate-related disclosure regimes will find that compliance with the various requirements across the globe will require a significant amount of time and resources.”

If the U.S. Chamber of Commerce et.al. balked at the SEC’s ESG disclosure proposal, imagine their consternation over regulators in Europe moving ahead with even more ambitious rules. Moreover, companies operating in the EU are subject to the Corporate Sustainability Due Diligence Directive, which aims to “ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.”

Business interests abroad have offered similar complaints to their U.S. counterparts about the EU regulations. The European Banking Federation, for example, has warned that European financial institutions won’t remain competitive versus foreign competitors in the lending markets. But authorities in the EU have held their ground so far on sustainability disclosures, likely owing to far stronger levels of public support for environmentally friendly policies to combat climate change.

The expansive reach of the EU regulations may bring the conflict over climate-related disclosure to a head. Lawmakers in the U.S. have already reached out to the White House to decry “the extraterritorial application of EU requirements on American businesses as a violation of international norms and an infringement on U.S. sovereignty.” EU policymakers will undoubtedly find such objections rich, given how many U.S. laws have extraterritorial effects.

With little reason to expect the EU to back down, companies operating there should probably accept the reality that they will need to go above and beyond U.S. law for climate-related disclosures.

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