Overview of ESG Standards Affecting US Companies

Why US Companies Should Prepare

In the past few years, companies have increasingly faced pressure to report on their environmental, social, and governance (ESG) performance.¹ However, some companies, particularly in the US where ESG is a contentious issue, may question the benefits of investing time and resources in collecting and disclosing ESG data. They may not see how ESG reporting is necessary or adds value to their business.

However, there are several reasons to give ESG reporting important consideration. Recent laws and regulations, such as California’s SB-253 and 261 and the European Union’s Corporate Sustainability Reporting Directive (CSRD), will affect many large US companies and require certain ESG disclosures and reports. Additionally, the Securities and Exchange Commission (SEC) and Federal Acquisition Regulations (FAR) Council have proposed their own rules that would require certain ESG disclosures. Further, the International Sustainability Standards Board (ISSB) recently released a sustainability standard that, while only voluntary now, may be required by some international jurisdictions in the future.

Importantly, investors appear to have a demand for ESG information. Capital Group, one of the world’s largest investment management organizations, reports that 57% of global respondents said that they believed incorporating ESG analysis in investment strategies could uncover attractive investment opportunities.² This implies that ESG information may be influential in decision-making for an increasing number of investors. Consequently, companies that decide to forgo sharing this information may find a decreased interest in their stock regardless of the ESG status of their business because investors cannot evaluate it for themselves.

ESG Standards

The following is an overview of the standards affecting US companies. Included is a brief description of the differing requirements for each standard, the important dates companies should consider, and what interoperability is currently available between standards.

US Standards

California Senate Bills

On October 7, 2023, the Governor of California signed two bills into law: Senate Bill 253: Climate Corporate Data Accountability Act (SB 253) and Senate Bill 261: Greenhouse Gasses: Climate-related Financial Risk (SB 261). When made effective, these laws will become the first government-mandated ESG reporting requirements in the United States.

SB 253 applies to all companies that do business in California and have annual revenues exceeding $1 billion, regardless of whether revenues are earned in California or not. Starting in 2026, these companies will be required to report their Scope 1 and 2 emissions from the previous year and receive limited assurance on their disclosures. In 2027, the law will also require these companies to report their Scope 3 emissions from the previous year within 180 days of reporting their Scope 1 and 2 emissions. Finally, in 2030, companies will need to receive reasonable assurance on their Scope 1 and 2 emissions and limited assurance on their Scope 3 emissions. Companies that fail to comply with this law may face penalties of up to $500,000 in a single reporting year.

SB261 applies to all companies that do business in California and have annual revenues exceeding $500 million, regardless of whether they are earned in California or not. Starting January 1, 2026, these companies will be required to prepare a climate-related financial risk report every two years, which must disclose their company’s climate-related financial risk and efforts taken to reduce and adapt to climate-related financial risk. The report must also be posted on a publicly available website. Companies that fail to comply with this law may face penalties of up to $50,000 in a single reporting year. To learn more about the California Senate Bills, please refer to our article here.

SEC Proposed Rule: The Enhancement and Standardization of Climate-related Disclosures for Investors

On March 21, 2022, the SEC proposed a new rule that would require all public companies registered with the SEC, including domestic registrants and foreign private issuers, to report on certain climate-related topics. Some of the disclosures will be included in the financial statements and related footnotes. For example, companies must disclose information associated with climate-related events and transition activities in the financial statements. This includes financial impact metrics, expenditure metrics, and a discussion of the impact on financial estimates and assumptions. This information is then subject to the financial statement audit and the audit of internal controls over financial reporting (ICFR).

Beyond the financial statements, companies must also report their Scope 1 and 2 emissions along with their Scope 3 emissions if they are deemed material or included in a GHG emissions target or goal. Additionally, companies must report on climate governance, climate-related risks and opportunities, climate risk management, and climate targets and goals. Companies must also receive at a minimum assurance over their Scope 1 and 2 emissions from an independent provider. Failure to comply with these requirements could result in delisting, loss of access to capital markets for debt and equity issuances, and other consequences from the SEC. To learn more about the SEC proposed rule please refer to our in-depth article here.³

Federal Supplier Climate Risks and Resilience Proposed Rule

The executive branch of the United States government is also introducing ESG reporting regulations. The Federal Acquisition Regulations (FAR) Council creates rules that govern the purchasing of goods and services by the Federal Government. In November 2022, the FAR Council proposed a new rule called the Federal Suppliers Climate Risk and Resilience Proposed Rule. This rule would require that government contractors disclose certain environmental data based on their level of contract award in the previous year.

The proposed rule categorizes all federal contractors into one of three groups: major, significant, and other contractors. Major contractors are those who have been awarded more than $50 million worth of federal contracts in the previous year. Significant contractors are suppliers who have been awarded contracts worth less than $50 million but more than $7.5 million. Other contractors are those who have received contracts worth less than $7.5 million.

Classifications of suppliers are important because one year after the proposed rule is finalized, major and significant suppliers will both be required to report their Scope 1 and 2 emissions on the System for Award Management (SAM) website, which the Federal Government uses to track US federal acquisition and contracting activity. Furthermore, two years after the rule is finalized, major contractors will also be required to report relevant scope 3 emissions, create an annual climate report through the CDP questionnaire that corresponds to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and set an emissions reduction target approved by the Science Based Targets Initiative (SBTI).

While there is a possibility this rule will be altered or discarded if the executive branch switches political parties, companies that do work with the government should be prepared regardless because noncompliance could result in a supplier being considered non-responsible by the Federal Government and therefore ineligible for contract award. For more information on the Federal Supplier Climate Risks and Resilience Proposed Rule, please refer to our in-depth article here.

International Standards

EU’s Corporate Sustainability Reporting Directive (CSRD)

In April 2021, the European Commission adopted the Corporate Sustainability Reporting Directive (CSRD), which assigned the European Financial Reporting and Advisory Group (EFRAG) and the European Commission to draft the European Sustainability Reporting Standards (ESRSs). The ESRSs were subsequently drafted and exposed for comment. Currently, EU member states are in the process of transposing the CSRD into their respective national laws, which they are required to finish by July 2024. Upon approval of the CSRD, select companies will be required to report their sustainability performance in accordance with the ESRSs starting in 2025 for their 2024 fiscal year.

The CSRD requires all companies operating within the European Union and their subsidiaries, even if those subsidiaries are located in other parts of the world, to report under the ESRSs if they satisfy the following criteria:

The company qualifies as a large company.
A company is considered large if it meets at least two of the following criteria for the last two years: more than 250 employees, net turnover exceeding €50 million, or total assets exceeding €25 million. (Deloitte stated in a FAQ article that “the CSRD defines net turnover as ‘the amounts derived from the sale of products and the provision of services after deducting sales rebates and value-added tax and other taxes directly linked to turnover.’”⁴)
The company has securities listed in the EU (with an exception for micro-companies).
A company qualifies as micro if it meets at least two of the following criteria for the last two years: 10 employees or fewer, net turnover of €875,000 or less, or total assets of €437,500 or less.

Subsidiaries of non-EU parent companies are also obliged to report if they meet these specified requirements.⁵

At first glance, it may seem that the Corporate Sustainability Reporting Directive (CSRD) will not have a significant impact on companies located in the US. However, the CSRD can also encompass non-EU parent companies within its scope. Non-EU parent companies that meet a different set of scoping requirements will need to report under the ESRSs. A non-EU parent company falls within the scope of the CSRD if it has generated over €150 million in net turnover from the EU over the past two consecutive years and meets either of the following criteria:

One of its subsidiaries fulfills the aforementioned general scope criteria.
The company has at least one branch in the EU that had a net turnover greater than €40 million in the previous year.

If a non-EU parent company meets these criteria, its entire consolidated group will be required to report under the ESRSs. A new exposure draft is anticipated to be released soon outlining reduced disclosures in this scenario. Nonetheless, the company’s subsidiaries meeting the general scope criteria will still be obliged to report under the standard ESRSs. Furthermore, the number of non-EU companies impacted is substantial. According to Refinitiv, a financial data firm, an estimated 10,000 foreign companies (a third of these are expected to be US companies) will need to comply with these new standards.⁶

Companies should pay particular attention to the CSRD because its ESRSs are the broadest and most demanding of the standards mentioned in this article. The ESRSs consist of 12 standards, two of which deal with general requirements, and the other 10 standards are divided into categories dealing with the environment, social issues, and governance-related matters. While most standards are focused primarily on climate, the ESRSs have many requirements dealing with other ESG topics, causing them to pose a unique reporting burden. Currently, there is no penalty associated with non-compliance because individual EU member states will be able to determine what penalty they wish to impose when they transpose the CSRD into law. For more information on the CSRD, please refer to our in-depth article here.

IFRS Sustainability Disclosure Standards

In 2021, the IFRS Foundation created the International Sustainability Standards Board (ISSB) and tasked it with developing the IFRS Sustainability Disclosure Standards. In June 2023, the ISSB published the final version of these standards. There are two standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Both S1 and S2 leverage the TCFD framework in requiring the disclosure of sustainability-related risks and opportunities and S2 has a specific focus on climate-related disclosures. S2 requires that companies disclose their Scope 1, 2, and 3 emissions.

The ISSB created these standards to serve as a global baseline for other countries. The idea is that jurisdictions around the globe will either directly adopt these standards into law or use them as a basis when creating their own reporting requirements. As such, the standards are voluntary unless required by a particular jurisdiction. Currently, according to a Deloitte ESG Reporting Comparison Guide, Australia, Canada, Japan, Hong Kong, Malaysia, New Zealand, Nigeria, Singapore, and the U.K. are all considering using the standards in some way.⁷ Consequently, even though the standards are currently voluntary, it may not be long before these standards are required in many different countries. In that case, many US companies that do business abroad may find themselves compelled to file a report under these standards or a variation of them adopted by a foreign country.

Requirements for assurance and penalties for noncompliance are left up to the countries that adopt the standards. For more information on the IFRS Sustainability Disclosure Standards, please refer to our in-depth article here.

A comparison of the different ESG standards affecting US companies is included in the table below. A comparison is made on some of the most prominent ESG reporting requirements.

Varying ESG Standards and Associated Requirements Affecting US Companies
	US Standards			International Standards
	California Senate Bills	SEC Proposed Rules	Federal Supplier Proposed Rule	EU's Corporate Sustainability Directive	IFRS Sustainability Disclosures
GHG Emissions	Requires disclosure of Scope 1,2, and 3 emissions for companies in scope	Requires disclosure of Scope 1 and 2 emissions. Also requires disclosure of Scope 3 emissions if material or included in a reduction goal	Requires disclosure of Scope 1,2, and 3 emissions for major contractors and Scope 1 and 2 for significant contractors	Requires disclosure of Scope 1,2, and 3 emissions for companies in scope	Requires disclosure of Scope 1, 2, and 3 emissions
Climate-Related Risks	Requires the preparation of a climate-related financial risk report biennially	Requires reporting on climate-related risks and opportunities and climate risk management	Requires the preparation of a climate-related financial risk report through the CDP Questionnaire	Largely aligned with the TCFD requirements to report on climate-related risks but also requires reporters to use a double materiality approach	Requires the disclosure of information about both cross-industry and industry-specific climate-related risks and opportunities
Emissions Reduction Targets	Not Applicable	Does not require an emissions reductions target but does require companies to disclose information about any targets they have set	Must set an emissions reduction target approved by SBTi and regularly disclose progress toward the goal	Does not require an emissions reduction target but does require companies to disclose information about any targets they have set	Does not require an emissions reduction target but does require companies to disclose information about any targets they have set or are required to set
Implementation Status	Both SB 253 and 261 have been passed and signed into law.	The comment period has passed and now the SEC will determine if it will issue a final rule	The comment period has passed and now the FAR Council will determine if it will issue a final rule	EU member states are in the process of transposing the CSRD into law which they are required to do by July 2024	A finalized rule has been released and now individual jurisdictions may choose whether to require it
Assurance	Limited assurance over Scope 1 and 2 emissions with the possibility of Scope 3 in the future. Will eventually require reasonable assurance	Must receive assurance for disclosures included in the financial statements. Also required for their Scope 1 and 2 emissions which are reported outside the financial statements	No Assurance Required	Companies are required to receive limited assurance for their whole report and the intention is to require reasonable assurance sometime in the future.	Assurance is not required by the standard since it is voluntary, but it could be required by countries that adopt the standard
Interoperability	Companies may use a report created for any other reporting requirements if it satisfies all requirements under these laws	Interoperability is not explicitly discussed in this rule, but it does resemble the IFRS Sustainability Disclosures S2 since both standards are based on TCFD.	Not applicable since the method of reporting is highly specific	The European Commission can choose to consider other frameworks as equivalent to the ESRSs so companies would only have to create one report. However, no other frameworks have been deemed equivalent yet	The standards are based on the TCFD framework, so they align well with other standards that are similarly based. The ISSB has also worked closely with GRI to reduce the reporting burden for companies
Items of Note	This is the only US standard that has already been approved and made law	Requires certain disclosures in the financial statements along with the annual report which is different than other prominent standards	This standard only applies to federal contractors, but it also may affect smaller businesses more than any other standard since it requires companies with more than only $7.5 million in federal contracts in the previous year to report	Unlike most other standards this standard uses a double-materiality approach	This is the only standard that is technically voluntary to adopt. However, any jurisdiction worldwide could choose to require it

Overall Timeline

Included in the table below is a timeline of significant events related to the implementation of the standards previously mentioned.

Timeline of Known Significant Dates Affecting US Companies
	Fiscal Year 2024	Fiscal Year 2025	Fiscal Year 2026-28	Fiscal Year 2028	Fiscal Year 2029
California Senate Bills		In scope companies must start reporting Scope 1 and 2 emissions with limited assurance and prepare a climate-related financial risk report.	In scope, companies must start reporting Scope 3 emissions. The board must decide if assurance for Scope 3 will be required		Reasonable assurance for Scope 1 and 2 emissions now required
EU's Corporate Sustainability Directive		US EU Subsidiaries that are large public companies, but not public interest entities, that meet general scoping will need to report under ESRSs		Non-EU parent companies covered under the non-EU parent company scoping will need to report under ESRSs.
IFRS Sustainability Disclosures	Effective in 2024, so companies would report for the first time in 2025 on 2024 information

Conclusion

Many companies in the United States will soon find themselves affected by one of these standards. They may be required to report under California’s or Europe’s regulations if they do business in those locations. Further, the final issuance of regulations from the SEC and FAR Council may be on the horizon. If companies do business in any country considering the adoption of the IFRS Sustainability Disclosures, they may also find themselves in a position to provide relevant ESG disclosures. Even if none of these apply, companies may want to voluntarily work on disclosing ESG information to attract investors or to better work with business partners requiring ESG information for compliance needs. For these reasons, companies should proactively prepare to understand the ESG reporting requirements of relevant standards and begin building out the capabilities to compile the needed data to complete required disclosures.