As new regulations mandate companies to report Scope 3 emissions, which include all indirect emissions in a company’s value chain, our 3D Carbon Accounting solution becomes essential. These regulations encompass the SEC's proposed rules, the CSA's comply-or-explain approach, the EU's Corporate Sustainability Reporting Directive (CSRD), and California's upcoming disclosure requirements. Our expertise in calculating these complex emissions, combined with our rigorous and auditable process, helps companies meet these regulatory requirements effectively and accurately.
Overview of new global sustainability regulations
The new requirements are wide-ranging, and deadlines are fast approaching. Much of our clients’ emissions reporting work has focused on voluntary initiatives. However, global regulators have recently stepped in and made it clear that emissions reporting will soon be mandatory.
New regulations require companies to provide detailed disclosures of the material sustainability risks and opportunities they face, their transition plans, and comprehensive statistics on their environmental impact. For the first time, companies are required to report not only the emissions that occur within their operations (Scope 1) and those associated with their electricity and heat supply (Scope 2) but also those related to their upstream supply chain and customers (Scope 3). Additionally, sustainability data will be subject to verification.
Impact of new US climate disclosure regulations
In March 2024, the US Securities and Exchange Commission (SEC) adopted mandatory climate disclosure rules that would apply to all companies listed on US stock exchanges, including non-US-based companies. The rules include quantifying Scope 1 and Scope 2 greenhouse gas (GHG) emissions, if material, and their independent verification. Only large, accelerated filers must disclose emissions. While the disclosure of GHG Scope 3 emissions was removed from the finalized SEC rules, US companies will still be forced to comply with new regulations coming out of California.
The Climate Corporate Data Accountability Act (CCDAA) and Climate-Related Financial Risk (SB-261) were approved by the California governor in October 2023. The California Air Resources Board (CARB) will implement them.
The disclosures will impact US-based listed and unlisted companies with operations in California within the below thresholds:
SB-253 applies to companies with revenues greater than$1 billion:
- Scope 1, 2, and 3 emissions in accordance with the GHG Protocol
- Verification of scope 1, 2, and 3 emissions by third-party auditor
SB-261 applies to companies with revenues greater than $500 million:
- Climate-related risks in accordance with the recommendations of the TCFD
- Measures to mitigate these risks
The CCDAA will require disclosures on companies’ Scope 1, 2, and 3 emissions beginning in 2026. Based on 2026 data, Scope 3 emissions reporting will not be required until 2027.
Navigating Europe's disclosure regulations
The European Parliament formally adopted the Corporate Sustainability Reporting Directive (CSRD) in November 2022. Starting in fiscal year 2024, the CSRD requires listed EU companies with more than 500 employees, banks, and insurance companies to start disclosing detailed environmental, social, and corporate governance (ESG) information in accordance with the European Sustainability Reporting Standards (ESRS).
In fiscal year 2025, this requirement will be extended to large EU-based companies that exceed two of the following three criteria: 250 employees, €40 million net turnover, €20 million balance sheet total. By fiscal year 2026, listed small and medium-sized enterprises (SMEs) will follow, though they will be subject to proportionate, less stringent ESRS disclosure rules and can opt out until fiscal year 2028.
Eventually, the CSRD will also apply to all non-EU companies listed in EU-regulated markets that have a net turnover of €150 million in the EU or at least one EU subsidiary or branch. This provision is expected to begin in the fiscal year 2028. At the outset, the sustainability disclosures mandated by CSRD will be subject to "limited assurance,” but after a few years, that assurance is elevated to a "reasonable assurance." The difference between the two assurance levels is the degree to which auditors scrutinize the numbers. Limited assurance involves less stringent checks with the conclusion.
The European Commission adopted the ESRS (European Sustainability Reporting Standards) in July 2023. They specify the requirements in the Corporate Sustainability Reporting Directive (CSRD). This contains ten topical standards in the areas of environment, social, and governance (ESG), and two additional cross-cutting standards on general reporting principles and disclosure requirements that apply to all topical areas and sectors. Sector-specific rules, as well as "lighter" SME standards, will follow at a later stage.
The concept of “double materiality” sits at the very core of ESRS. All material information regarding the impacts, risks, and opportunities of ESG matters must be disclosed, enabling the understanding of the company’s impact on those ESG matters, as well as how those impact the company’s financial development, performance, and position. Crucially, in doing so, companies need to consider not only their own operations but must also consider the full value chain, from upstream suppliers to downstream product usage, waste, and disposal. In their reporting, companies must comply with clearly defined qualitative characteristics, such as faithful presentation, verifiability, relevance, comparability, and understandability of provided information.