Regulatory Landscape and Compliance
The Regulatory Shift
ESG disclosure has transformed from voluntary best practice to regulatory requirement across major jurisdictions. Understanding this evolving landscape is essential for compliance and strategic planning.
Key Regulatory Developments
European Union
Corporate Sustainability Reporting Directive (CSRD)
What it is: EU legislation requiring detailed sustainability reporting
Who it covers:
- Large EU companies (>500 employees initially, expanding to >250)
- EU-listed SMEs
- Non-EU companies with significant EU operations (>€150M EU revenue)
What it requires:
- Double materiality assessment
- Detailed disclosure across environmental, social, and governance topics
- Digital tagging (XBRL)
- Third-party assurance (limited initially, reasonable later)
- Location in management report
Implementation timeline:
- 2024: Large public-interest companies already under NFRD
- 2025: Other large companies
- 2026: Listed SMEs, small and non-complex credit institutions
- 2028: Non-EU companies meeting thresholds
European Sustainability Reporting Standards (ESRS)
What they are: Detailed standards implementing CSRD requirements
Structure:
- Cross-cutting standards (general requirements, general disclosures)
- Topical standards (environment, social, governance)
- Sector standards (under development)
Key features:
- Double materiality approach
- Detailed disclosure requirements
- Interoperability with ISSB standards
- Phased-in requirements for some disclosures
EU Taxonomy
What it is: Classification system for environmentally sustainable activities
Requirements:
- Disclosure of revenue, CapEx, OpEx from taxonomy-aligned activities
- Six environmental objectives
- "Do no significant harm" criteria
- Minimum social safeguards
Sustainable Finance Disclosure Regulation (SFDR)
What it is: Requirements for financial market participants
Relevance for corporates: Investors subject to SFDR will demand data from portfolio companies
United States
SEC Climate Disclosure Rules
What they are: Climate-related disclosure requirements for SEC registrants
Key requirements:
- Scope 1 and 2 emissions (phased in by company size)
- Scope 3 if material or included in targets (for larger companies)
- Climate-related risks
- Governance of climate risks
- Financial statement impacts
- Targets and goals
Status: Final rules issued March 2024, but subject to legal challenges
State-Level Requirements
California Climate Corporate Data Accountability Act (SB 253):
- Scope 1, 2, 3 emissions for companies >$1B revenue doing business in California
California SB 261:
- Climate risk disclosure aligned with TCFD
United Kingdom
Streamlined Energy and Carbon Reporting (SECR): Energy and emissions disclosure for large companies
TCFD-aligned disclosure: Required for large companies, asset managers, insurers
Sustainability Disclosure Requirements (SDR): Framework under development
Asia-Pacific
Singapore: Climate disclosure requirements phasing in (SGX-listed companies)
Japan: TCFD disclosure required for prime market companies
Hong Kong: Climate disclosure requirements (HKEX-listed companies)
Australia: Climate disclosure consultation, legislation expected
International Standards
ISSB Standards
IFRS S1: General requirements for sustainability disclosures
IFRS S2: Climate-related disclosures
Status: Final standards issued June 2023, adoption by jurisdictions ongoing
Significance: Intended as global baseline for sustainability disclosure
Compliance Strategies
Understanding Your Obligations
Step 1: Identify applicable regulations
- Where are you incorporated?
- Where are you listed?
- Where do you operate?
- What is your size?
Step 2: Map requirements
- What disclosures are required?
- What metrics must be reported?
- What is the timeline?
- What assurance is needed?
Step 3: Gap analysis
- What do you currently report?
- What additional data is needed?
- What process changes are required?
Building Compliance Programs
Governance: Clear accountability for compliance
Cross-functional team: Legal, finance, sustainability, operations
Data systems: Capability to collect required information
Controls: Processes ensuring accuracy and completeness
Documentation: Evidence of compliance
Training: Building awareness and capability
Managing Multiple Frameworks
Most companies face multiple requirements:
Mapping exercise: Identify overlaps and differences across frameworks
Single data collection: Collect data once, use for multiple reports
Report mapping: Show where requirements are addressed
Efficiency focus: Avoid duplicating effort
Due Diligence Requirements
EU Corporate Sustainability Due Diligence Directive (CSDDD)
What it requires:
- Human rights and environmental due diligence
- Assessment of actual and potential adverse impacts
- Prevention and mitigation measures
- Grievance mechanisms
- Stakeholder engagement
Who it covers: Large EU companies and non-EU companies with significant EU operations
Supply chain scope: Own operations, subsidiaries, and business relationships
Other Due Diligence Requirements
German Supply Chain Due Diligence Act: Human rights due diligence
French Duty of Vigilance Law: Human rights and environmental due diligence
Industry-specific: Conflict minerals, forced labor, deforestation
Assurance Requirements
Current State
CSRD: Requires limited assurance initially, reasonable assurance later
SEC: Attestation required for emissions (larger companies)
Voluntary: Many companies obtain voluntary assurance
Assurance Standards
ISAE 3000: Assurance on non-financial information
ISAE 3410: Assurance on greenhouse gas statements
AICPA attestation standards: US attestation standards
Preparing for Assurance
Documentation: Clear methodology documentation
Evidence: Supporting documentation for reported data
Controls: Documented internal controls
Consistency: Consistent application of methodologies
Regulatory Risk Management
Monitoring Regulatory Developments
Stay informed: Track regulatory proposals and developments
Industry associations: Leverage collective monitoring and advocacy
External advisors: Legal and consulting guidance
Anticipating Future Requirements
Trend analysis: Where is regulation heading?
Scenario planning: What if regulations tighten?
Early adoption: Getting ahead of requirements
Managing Enforcement Risk
Understand penalties: What are the consequences of non-compliance?
Compliance culture: Build commitment to compliance
Issue resolution: Address identified issues promptly
Legal advice: Engage counsel on complex compliance questions
Reporting Best Practices for Compliance
Completeness
Cover all required topics: Ensure nothing is missed
Follow prescribed structure: Use required formats and frameworks
Include required elements: All mandatory disclosures present
Accuracy
Verify data: Check accuracy of reported information
Consistent methodology: Apply approaches consistently
Reasonable estimates: Where estimation is necessary, use reasonable methods
Clarity
Plain language: Understandable to intended audiences
Organization: Logical structure and navigation
Materiality focus: Emphasis on what matters most
Connectivity
Cross-referencing: Link to related disclosures
Consistency with financials: Align with financial reporting
Digital tagging: Implement required data standards
Key Takeaways
- ESG disclosure is shifting from voluntary to mandatory across jurisdictions
- Key regulatory developments include CSRD (EU), SEC climate rules (US), and ISSB standards (global)
- Companies must identify applicable regulations and map requirements
- Due diligence requirements extend beyond disclosure to actual practices
- Assurance requirements are increasing and require preparation
- Managing multiple frameworks requires efficiency and coordination
- Regulatory monitoring and anticipation reduce compliance risk
- Compliance requires completeness, accuracy, clarity, and connectivity
Next Module
Module 11 covers building your ESG career—the skills, roles, and paths in corporate sustainability.