Ideally, corporate reporting on global issues such as climate change should be governed by a globally coordinated disclosure system. In the absence of such a system, standards such as those of the ISSB could serve as a safety net to link different disclosure rules across countries and regions. The legislative proposals aim to clarify which activities are considered sustainable. They propose a taxonomy with standards and labels for sustainable financial products to help investors make informed decisions. They also examine how asset managers and ESG factors should fit into their investment decision-making, how investments can be aligned with ESG objectives, and how this alignment is disclosed to investors. They included proposed rules to create a new category of benchmarks, reflect companies` carbon footprint and provide investors with better information on the carbon footprint of their investment portfolio. The objectives of the European Green Deal require both private and public funding. The Commission is therefore reviewing State aid rules to further support these objectives. The SEC`s proposed rules require large companies to provide independent auditor assurance reports for their scope 1 and scope 2 emissions. There is a grace period of between one and three years to provide «limited» security, followed by stricter «reasonable security», also with a period that varies between large and small businesses. The proposed EU directive also requires companies to obtain «limited» assurance from external auditors within three years of the directive`s entry into force, with a potential and unspecified plan to move to «adequate» assurance at a later stage. The stringency of disclosure requirements is slightly stricter in the EU CSRD than in the SEC`s proposed legislation. While the United States joined the Paris Agreement under President Biden, it lacks a national climate transition strategy from Congress.
The EU, on the other hand, adopted the European climate law and made a legal commitment to achieve the goals of the Paris Agreement. The absence of similar, legally binding national legislation is why the SEC has taken a narrow, investor-centric view of materiality, which has also limited the stringency of the proposed rules. For example, the proposed EU standard will require companies to disclose the compatibility of their activities with the Paris Agreement`s goal of limiting global warming to 1.5 degrees Celsius. In contrast, the SEC`s proposed legislation does not go far enough to require disclosure of enterprise risk strategies in a range of hypothetical future climate scenarios. Interestingly, EU and US regulators have chosen to develop their own disclosure policies and standards, ostensibly to overcome the lack of comparability between the cacophony of third-party standards currently in use. The SEC`s disclosure guidelines rely heavily on the Task Force on Climate-Related Financial Disclosures, which is widely used around the world. This seems to be aimed at facilitating a smooth transition to the new disclosure regime with a sufficiently high level of cross-border comparability of publication. The European Financial Reporting Advisory Group, which has been tasked with developing EU reporting standards, also relies on the Global Reporting Initiative, currently the world`s most widely used standard for third-party reporting.
The dependence of EU and US regulators on existing and recognised standards for the development of binding standards may lead to consistency between the two publication regimes. However, the EU regulatory standard will be much more complex, covering at least five main areas (climate change, water and ecosystems, workers and communities, value chains and corporate governance). It will also include sectoral measures that establish different disclosure rules for as many as 40 industries. These large differences in scope will inevitably lead to significant gaps in the comparability and compatibility of information with the two regimes. As can be expected with the introduction of new regulations, companies face a number of challenges if they want to follow EU ESG rules. This includes finding the significant resources needed to compile and communicate relevant information and metrics to monitor sustainability and control measures at company and product level, as well as the challenges associated with product classification. The SEC`s proposal on climate disclosure rules,30 as discussed in our warning to clients, is long overdue, but faces deep disagreement over the SEC`s role in this area. Thousands of public comments were submitted to the SEC, many of which expressed support for the proposal and cited other legal and political reasons in opposition. Some commentators responded that a final rule would involve the doctrine of key issues, an argument that has gained considerable traction in U.S.
administrative law when it comes to challenging regulatory measures, including the recent U.S. Supreme Court ruling that the Environmental Protection Agency (EPA) does not have the authority to «generate conversion» of coal and natural gas electricity generation from sources. with lower emissions without «clear congressional approval.» 31 The SEC will consider comments before issuing final rules. Implementation of the final rules is likely delayed because the EPA`s power to require full climate disclosures without clear congressional approval is legally challenged. ✔ (Although not specified, the rules would require disclosure of transition plans, targets or targets, as well as Scope 1, Scope 2 and, if significant, Scope 3 GHG emissions.) In contrast, the U.S. Federal Reserve and the Office of the Comptroller of the Currency (OCC), the two main U.S. banking regulators, have yet to offer banks advice or new prudential rules on climate risk. The OCC said it would likely provide a forecast by the end of the year. U.S. President Joe Biden`s nominee for Fed vice chairman for oversight, Michael Barr, said at a recent Senate hearing that the central bank`s climate-related powers are «significant but quite limited» and focus primarily on assessing the risks banks may face as a result of climate change.