Pencils down on climate disclosure compliance? Not so fast.

It is uncertain when or if the SEC’s new climate disclosure rules will come into effect. The ultimate fate of the rules is unclear given the litigation over the rules in the Eighth Circuit. In addition, the SEC recently stayed the rules pending resolution of the litigation. However, as we have said before, “it’s not pencils down on climate disclosure more generally.” Public and private companies need to manage to other current and pending climate disclosure requirements (and other ESG disclosures more generally) at the U.S. federal and state levels as well as outside the United States. As discussed in this piece, even though the SEC’s new climate disclosure rules are on hold and may be scaled back or never implemented, there are other climate disclosure requirements to take into account.

SEC Climate Reporting is Down but Not Out

The SEC’s stay of its new climate disclosure rules does not affect other disclosure obligations under the U.S. federal securities laws. The SEC has long been of the view that some of those obligations may require disclosure of climate-related matters.

The SEC issued guidance in 2010, which we discuss here, that highlighted how climate-related matters might need to be discussed under existing principles-based business, risk factors, legal proceedings and MD&A requirements. More recently, in 2021, the SEC published a sample comment letter on climate change-related disclosures. The SEC staff also has issued climate-related comments to many registrants.

As recently as this month, Democratic members of Congress continue to pressure the SEC to “ensure robust enforcement of existing SEC climate disclosure-related guidance” while litigation on the new rules remains pending. If there is a Democratic administration in 2025, the SEC will be focused on climate even in the absence of the new rules.

The EU is Setting the Pace on Climate Disclosure

The EU’s Corporate Sustainability Reporting Directive will result in climate disclosures by thousands of companies, including a large number of U.S.-based multinationals and/or their EU subsidiaries. In addition to companies listed on regulated markets in the EU, the CSRD applies to private entities organized in an EU jurisdiction, including wholly-owned and other subsidiaries of public and private U.S.-based multinationals, that exceed specified balance sheet, income and employee thresholds. Those thresholds are €25 million in assets, annual turnover of €50 million and 250 employees on average. An EU-organized entity that hits any two of the three thresholds will be required to report, even if it is a subsidiary of another company.[1]

EU subsidiaries of U.S. multinationals largely will be in the second wave of CSRD reporting companies – required to make disclosures in 2026 for fiscal years beginning after January 1, 2025. The first wave, which is generally limited to companies listed on EU regulated markets, is required to begin reporting a year earlier. Many U.S.-based multinationals will be subject to enterprise/parent-level reporting in 2029 for fiscal years beginning in 2028. Enterprise-level reporting will apply to non-EU parent companies with a large EU subsidiary (see the thresholds above) and EU turnover of more than €150 million for the two preceding fiscal years.

The CSRD requires disclosure across a broad range of ESG topics, beyond just climate. Thus far, the European Commission has adopted disclosure standards, known as European Sustainability Reporting Standards, for ten sustainability topics, plus two cross-cutting standards that provide the basic framework.

ESRS E1 is devoted to climate. In many respects, ESRS E1 calls for more disclosure than the SEC’s climate rules. For example, ESRS E1 expressly calls for Scope 3 greenhouse gas emissions disclosures. In addition, the CSRD assurance requirement in respect of climate is broader.

CSRD reporting generally is only required if information is material. However, climate is “comply or explain.” If a reporting company concludes that climate change is not material and omits all disclosures specified in ESRS E1, it must provide a detailed explanation of the conclusions of its double materiality assessment (discussed below) with regard to climate change, including a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is material in the future (see our earlier post).

For most companies, preparing for CSRD reporting is a long lead-time exercise. It is prudent for companies that will need to report in 2026 to begin that process now. Many already have done so.

Before beginning to produce disclosures, U.S. multinationals with subsidiaries required to report under the CSRD will need to decide what level to report at. Relevant options may include (1) separate reporting by each in-scope EU subsidiary (which will include the consolidated subsidiaries of the reporting entity), (2) artificial consolidation of all in-scope EU subsidiaries under transitional provisions included in the CSRD or (3) preparing a global, enterprise-wide report. Key considerations that will factor into the approach include differences in what is material for different reporting boundaries, the incremental work and cost required to report at a particular level and whether parent-level reporting ultimately will be required.

The approach to materiality is a key difference between the CSRD and other climate disclosure requirements, including the SEC’s climate rules (and SEC disclosure rules more generally) and the International Sustainability Standards Board standards, which are further discussed below. Each of those regimes focuses only on financial materiality – i.e., the financial effects of climate on the reporting company.

CSRD, in contrast, requires disclosure if an item is either financially material or impact material. Impact materiality looks to impacts the reporting company has on the wider world, rather than effects on the reporting company. As described in ESRS 1, impact materiality looks to “actual or potential, positive or negative impacts on people or the environment over the short-, medium- or long-term. Impacts include those connected with the undertaking’s own operations and upstream and downstream value chain, including through its products and services, as well as through its business relationships.”  Impact and financial materiality are further discussed in this Ropes & Gray post.

To identify the topics that need to be reported on, companies must conduct a double materiality assessment. This includes identifying the sustainability-related “impacts, risks and opportunities” (IROs) specific to the company and then assessing each for financial and impact materiality. EFRAG recently finalized guidance on the materiality assessment, which we summarize here (EFRAG, the European Financial Reporting Advisory Group, is the technical advisor to the European Commission on the CSRD). The materiality assessment process is discussed in this Ropes & Gray post.

California Has Adopted Landmark Climate Disclosure Legislation, and Bills Have Been Introduced in Other Blue States

Closer to home, California last October adopted legislation that will require U.S. companies (including private companies) that do business in California and exceed certain revenue thresholds to make climate disclosures.

California’s Climate Related Financial Risk Act requires U.S.-organized entities (other than insurance companies) that have more than $500 million in revenues and are doing business in California to publish a “climate-related financial risk report” beginning in 2026, and biannually thereafter. That report will need to be prepared in accordance with Task Force on Climate-related Financial Disclosures framework or a similar standard (including the ISSB standards).

California’s Climate Corporate Data Accountability Act requires U.S.-organized entities  that have more than $1 billion in revenues and are doing business in California to publish their greenhouse gas emissions annually. Scope 1 and Scope 2 disclosure would be required beginning in 2026. Unlike the SEC’s climate disclosure rules, Scope 3 disclosure would also be required, beginning in 2027.

When Governor Newsom signed the bills, he expressed reservations on their implementation timetable, believing it needs to be longer (see this Ropes & Gray post). The Governor’s initial budget proposal did not include funding for the work to be done by the California Air Resources Board in connection with the implementation of these Acts. However, funding was included in a recent budget revision proposed by the Governor.

Uncertainty regarding California climate disclosures is not limited to funding and timing. Like the SEC rules, both laws have been challenged in court and the litigation is ongoing (see this Ropes & Gray post).

Summaries of both laws, and a third California law that requires disclosure regarding voluntary carbon offsets and net zero and similar claims, is available here.

There are initiatives in other Blue States to require climate disclosures. Bills have been introduced in New York and Illinois (discussed in this Ropes and Gray post) that generally are aligned with the California climate disclosure requirements. The New York and Illinois bills were not adopted during the 2024 legislative sessions. However, we will be closely watching further developments in these and other states. As some readers will recall, the California bills did not pass the first time around.

Other Countries Continue to Move Forward with Climate Disclosure Requirements that Will Impact U.S.-based Multinationals

Other jurisdictions have adopted or are considering adopting rules requiring climate and other ESG disclosures.

In the U.K., public and private companies (including large subsidiaries of U.S.-based multinationals) already are required to make greenhouse gas emission and climate-related risk disclosures. For many U.K. subsidiaries of U.S. multinationals, the first climate-related risk disclosures are required by the end of June 2024.

The ISSB standards also continue to gain traction. The ISSB standards include both a general sustainability disclosure standard (IFRS S1) and a standard specific to climate (IFRS S2). The ISSB has stated that more than 20 jurisdictions have adopted or are considering using its standards. Like the CSRD and California climate disclosure requirements, the ISSB climate standard is in some respects more extensive than the SEC’s rules, calling for Scope 3 disclosure. The U.K. is considering implementing the ISSB standards.

Voluntary Climate Disclosures are Still Alive and Well

The focus of this piece is on required climate disclosures. However, even with more robust climate disclosure requirements, many companies will continue to publish additional voluntary climate-related disclosures. Stakeholder expectations concerning climate disclosures will continue to grow. It is likely that these demands will be only partially addressed by regulation. In addition, companies will conclude that at least some climate disclosures (i.e., those that are not material) more appropriately sit outside regulatory filings.

Endnote

1As a Directive, the CSRD is required to be transposed into national law by each EU member state. It is those national laws, rather than the CSRD itself, that create obligations for companies. As a result, there may be some differences in member state requirements. The status of transposition and “gold-plating” by member states is discussed in our