In 2024, environmental, social, and governance matters have continued to amass headlines and remain a bipartisan issue at the state level during a pivotal election year. Private market participants and their stakeholders yo-yo-ed between pro- and anti-ESG legislation, but ESG matters continue to dominate with increased regulatory pressure domestically and abroad. It is evident that ESG matters, though they may not be labeled as such, are here to stay.
Here are some important updates in the ESG regulatory landscape as of October 2024:
Changes to California’s Climate Disclosure Laws
The first industry-agnostic climate reporting requirements for US companies will start with companies that do business in California. Since Gov. Gavin Newsom signed the climate disclosure laws SB253 and SB261 into effect, there have been notable changes, most recently as of September 2024, codified under the just-passed SB219.
Proposals to delay compliance deadlines for California’s landmark climate-related disclosure laws did not pass California’s legislature, so the original timelines stand.
- Under SB253, reporting entities (companies with revenues exceeding $1 billion) must disclose Scopes 1-2 greenhouse gas (GHG) emissions starting in 2026 for 2025 data. The California Air Resources Board (CARB) will set a schedule for reporting entities to publicly disclose Scope 3 GHG emissions.
- Under SB261, reporting entities (companies with revenues exceeding $500 million) must publicly provide a climate-related financial risk report by January 2026.
CARB has also been given six additional months (until July 1, 2025) to adopt the implementation guidance. This implementation guidance will be required to answer key questions such as additional clarification on what “doing business” in California means, how to calculate revenue for purposes of meeting the financial thresholds, and the specific timing of the disclosures.
SB219 also clarified that parent companies can consolidate subsidiary reporting for GHG emissions under SB253; in-scope subsidiaries need not submit separate reports.
Still, California’s climate disclosure laws face plenty of opposition, with a pending lawsuit from the US Chamber of Commerce and other industry groups.
California’s Diversity Law CA 54 Reporting Deadline Delayed
In June 2024, California approved amendments to its October 2023 Fair investment Practices by Venture Capital Companies bill, better known as the “California VC Diversity Law.” Amendments included delaying the date when the first reports are due from March 1, 2025, to March 1, 2026. Covered entities include venture capital companies that “primarily engage” in the business of investing in startups, early-stage, and emerging growth companies. Notably, the meaning of “primarily engage,” as well as specific definitions of “startup,” “early stage,” and “emerging growth companies” is not explicitly stated in the law.
CSDDD Is Formally Adopted
After more than two years, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) was formally adopted and published in July 2024. The CSDDD introduces mandatory human rights and environmental due diligence requirements for large EU and non-EU companies that are active in the EU, affecting approximately 7,000 companies. We can expect the specific components to come into operation in phased approaches in the coming years, with the CSDDD applying to the first in-scope companies (defined as €1500 million in turnover with 5,000 employees for EU companies or €1500 million for non-EU companies) in 2027. Read more about the CSDDD here.
ISSB Releases Guide to Voluntary Requirements
In September 2024, IFRS released a voluntary guide for companies to apply the ISSB S1 and S2 standards. In the absence of mandatory regulatory requirements (and while most of the world waits for its regulatory requirements to kick in), companies can now prepare to report voluntarily to S1 and S2.
This guide came directly from investor pressure to ensure companies are better prepared to comply. While the recommendations are technically not new and are laid out in IFRS S1, the guide offers structure and teeth for a ‘readiness’ path to comply with S1 and S2 standards. Some key takeaways include:
- Companies can disclose only their climate-related risks and opportunities in their first year of reporting (i.e., climate-first reporting). Only after the first year are companies required to disclose other (non-climate) sustainability-related risks and opportunities.
- S1 requires that companies report on sustainability-related financial disclosures and financial statements at the same time for the same reporting period. In the first year, companies have a six-month leeway period to report on their sustainability-related financial disclosures after reporting on their financial statements.
- Comparative information, defined as figures or metrics that highlight past performance to facilitate comparability, is not required to be disclosed in the first year companies report on S1 and S2.
- Companies reporting for the first time are not expected to have any historical data.
- Companies do not have to use GHG Protocol for their first year of reporting if they are already using a different measurement method for emissions. In addition, Scope 3 emissions are not required the first year that companies report to IFRS S2.
EFRAG and TISFD Alignment
In September 2024, EFRAG and the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) announced a partnership to align their efforts in developing and advancing social-related financial disclosures. Investors and companies may know EFRAG (European Financial Reporting Advisory Group) as the regulatory standard-setting body for the CSRD that companies are beginning to report data points for starting this year. TISFD, officially launched this month, is a global initiative aimed at helping businesses and investors identify, assess, and report on risks, opportunities, and impacts related to inequality and social issues.
EFRAG and TISFD’s shared expertise and alignment are a relief for those looking for interoperability between reporting frameworks along metrics pertaining to their workforce. The two groups will participate in each other’s working groups to align and enhance guidance on inequality and social-related financial disclosures, ensuring consistency between EFRAG’s EU Sustainability Reporting Standards (ESRS) and TISFD’s global framework. We can expect the release of guidance materials from the joint partnership in the coming months.
EU Deforestation Regulation Delayed
The EU’s “Deforestation Regulation” passed in 2023, requiring companies that trade seven commodities and certain products derived from those commodities to be “deforestation-free” if they are available on the EU market or exported from it. Operators and traders must respect due diligence obligations and ensure that the products are ‘deforestation-free,” meaning that products or value chains do not contribute to forest destruction. Commodities include cattle, cocoa, coffee, palm oil, rubber, soya, and wood.
In October 2024, the EU agreed to extend the implementation of the deforestation rule originally set for December 30, 2024, and postpone the application date by one year. It will now be binding from December 30, 2025, for large operators and traders and June 30, 2026, for micro- and small enterprises.
Staying Updated on ESG Regulations
Beyond these significant updates, various US states, including New York (Senate Bill S897A) and Illinois (HB4268) have introduced new bills aimed at introducing mandatory carbon disclosures for companies in the absence of the SEC’s rules, which are currently in a stay. Jurisdictions in APAC such as Singapore and Australia are also looking at introducing similar rules. As we look toward the end of the year, Novata will continue tracking changes to the regulatory environment and their implications for investors and companies in-scope for reporting. For companies needing assistance with meeting reporting obligations, learn how Novata’s platform and in-house experts can help you prepare to comply.
