Sustainability Reporting: A wave of new regulations across the globe

This week, during the Impact Workshop that we gave to the start-ups enrolled in the Stanford LEAD Incubator and Startup Accelerator 10-week program (LISA), I emphasized how mandatory sustainability reporting was being pushed around the world.

Why is it relevant?

Sustainability reporting is a not just a gimmick. It is a transformative endeavor which requires a company to create the foundation of a sustainability strategy. One needs to conduct an assessment of its sustainability practice, engage with stakeholders on that topic, develop a data collection strategy, mitigate risks, commit to actions and monitor outcomes over time. It is a first step to making sustainability an integral part of corporate strategy.

The regulations that we are seeing often affect listed companies and big companies with revenues exceeding $1bn. However, one must consider the ripple effects of such regulations to the chain of partners and suppliers of these companies. In other words, a start-up or a small business who wants to do business with a bigger company will need to be ready to provide the necessary input to them for their sustainability reporting. In the same vain, a regulation that is enacted in Europe, may still make waves to other parts of the world through this ripple effect chain too.

Additionally, there is a silver-lining for companies who adopt early the practice of sustainability reporting: uncovering insights and opportunities for innovation that can benefit their business models through cost-cutting, new revenues streams or efficient changes in their production processes.

In the end, the push for clearer reporting is aimed at satisfying investors demands. Those investors who will channel investments for carbon neutrality and the Sustainable Development Goals (SDG) want greater clarity on the risks and opportunities tied with their potential investments.

A Global Puzzle

Let’s have a look at the situation in different regions of the world.

Europe: Leading the way with CSRD

Effective since January 2024, the Corporate Sustainability Reporting Directive (CSRD) amends the existing 2018 Non-Financial Reporting Directive (NFRD) which only affected listed companies, banks and insurance companies (less than 12,000 companies).

According to KPMG, the CRSD expands its outreach to almost 50,000 companies, covering over 75% of the total of EU companies’turnover. For instance, companies of 250 employees with turnover exceeding EUR 40 million are now part of the bucket of entities who will include sustainability disclosures in their annual report. They must set discuss their business models, strategy, policies for sustainability governance. They must set KPIs, targets, and discuss their management of sustainability risk. Last but not least, CRSD includes a mandatory audit requirement (“third-party assurance).

United States: Still timid at the federal level

In the US, there is no federal regulationn imposing mandatory reporting although the Securities and Exchange Commission (S.E.C.) has encouraged companies to include sustainability information in their reports. In 2022, the SEC proposed a rule to enhance and standardize climate-related disclosures for investors, but this rule has not been adopted yet as of January 2024.

California: the Trailblazer in the US

In October 2023, California adopted the SB 253 - Greenhouse Gas Emission Reporting (CCDAA) and the SB 261- Climate-Related Financial Risk Reporting (CRFRA). The first disclosures will be applicable as of 2026.

Under CCDAA, California will require large companies to disclose their scope 1,2, and 3 emissions, and  share these disclosures on a publicly available digital registry. Mandatory audit is required. Maximum fines can reach half a million dollar. This rule affects companies in excess of $1bn revenues.

Under CRFRA, California requires companies to submitt Climate-Related financial risk reports. This rule affects companies of more $500M. Source: Watershed article.

Japan

The Financial Services Agency (FSA) published in March 2023 new rules for mandatory sustainability disclosures in Japan that will affect all listed companies in Japan (about 4,000 companies). For more information, see the EY article.

South Korea

Although a regulation exists for mandatory sustainability disclosure, it is not effective yet. So far, the disclosure requirement has been postponed to 2026 in a wait-and-see move to supposedly give space for the development of more widely approved standards. See Responsible Investor article.

Latin America

The landscape in Latin America is heavily influenced by extraterritorial regulations adopted in the EU. See Thomson Reuters article.

Chile requires listed issuers to disclose their sustainability and corporate governance performance under the General Rule No. 461 dated November 2021.

Colombia has launched in 2020 a Guide for the preparation of ESG reports to encourage sustainability disclosures aligned with international standards.

Recently, Brazil committed to adopt the ISSB Global guidelines in a move to impose mandatory disclosures on January 1, 2026.

One More Thing: Developing Sustainability Reporting Standards

Mandating sustainability reporting only works with a set of standards widely accepted and understood by industry players. GRI, SASB and ISSB are leading the effort to create such standards. Although they have different approaches, they are working towards alignment. This is a discussion for another day.