EU’s Sustainability Reporting Rule: Affecting Everyone, Everywhere, All At Once

New research from Refinitiv this week revealed that more than 10,000 non-EU companies will be affected by the EU’s new sustainability reporting rule, the Corporate Sustainability Reporting Directive (CSRD) - about 30% of them American companies and 10% Canadian.?

Most US-based public companies have been following the new climate disclosure rule from the Securities and Exchange Commission (SEC), expected to be finalized this month. While there is no way to predict the content of the SEC’s final rule, it is certain to be tied up in court for some time.?

By the time the courts sort out the SEC rule, thousands of US companies will have to report even more ESG information in Europe. The reason? Like many EU policies, the CSRD applies to non-EU companies if they do business in Europe over certain thresholds (e.g., EU revenue of more than €150 million/year).?

Even more interesting, the rule requires companies to report on a new set of standards that cover far more than the climate impacts in the SEC proposal. The EU standards delve into areas such as biodiversity, social issues, and supply chain management - requiring disclosure of more than 100 key performance indicators.

The EU adopted “double materiality” as the basis for their standards - which encompasses both ESG impact on financial performance as well as the impact of the company's operations on the environment and society.?

The new rules are coming quickly. After being approved in January, the first wave of companies will need to collect information next year for their 2025 reports. And all of these new disclosures must be integrated into the company’s assured financial statements.??

ISSB Slows

Sticking with the disclosure theme, most ESG reporting requirements outside of Europe refer to the new standards from the International Sustainability Standards Board (ISSB). This week the ISSB decided that their disclosure standards would focus on climate for the next year before expanding to other sustainability issues - such as biodiversity.??

Two ISSB disclosure standards, a general sustainability standard, and a climate-related standard, are set to be released at the end of Q2. The decision to lead with climate disclosures was taken to reduce the demand on companies as they transition to the new disclosure approaches. ISSB Vice Chair Sue Lloyd said, “One of the reasons we are proposing this is because we know there is quite a bit of work to do .”

The decision means companies are expected to start reporting climate metrics in 2025 and other sustainability metrics in 2026. ISSB board member and former World Bank Vice President Jingdong Hua said the one-year delay “may accelerate the speed of adoption .”

Bringing Integrity to the Carbon Markets

The voluntary carbon offset market is central to many companies' emissions reduction schemes. However, it has been plagued by claims of impropriety. The newly published Core Carbon Principles from The Integrity Council for the Voluntary Carbon Market (ICVCM), a group headed by former SEC Commissioner Annette Nazareth, hopes to add more validity and value to the market.

The Core Carbon Principles provide a framework and benchmark that every carbon credit should meet before becoming an offset. The ICVCM acts like a regulator for the market; ICVCM Chair Annette Nazareth said, “Building a widely shared understanding of what high integrity means for carbon crediting... is a pre-condition for the development and growth of a viable and vibrant VCM .”

The new principles were praised by Julia (Osterman) Strong, from NCX, a developer of forestry offset projects - "There’s a lot of hope riding on it .” Credit buyers and sellers wait with bated breath to see if the new principles can accelerate the market.?

Funding Drying Up for Oil and Gas

This week, investors in the $11 trillion Net Zero Asset Owners Alliance (NZAOA) - a subgroup of the Glasgow Financial Alliance for Net Zero (GFANZ) - released their position on the oil and gas sector . In summary, their position is that no new upstream oil and gas fields “should be financed, built, developed, or planned” and that only limited investments should be made in current fields and infrastructure development.?

NZAOA Chair and Allianz SE Board Member Günther Thallinger said, “How energy is provided and consumed must, therefore, dramatically change. This includes the need to phase out non-renewable sources like oil and gas in many, if not most, of its current uses.”

Insurance Defections?

While one GFANZ group made progress, another suffered some public defections. The Net Zero Insurers Alliance lost two of its founding members in as many weeks . Zurich Insurance Group was the latest defection joining Munich Re in exiting the alliance. Munich Re claimed antitrust concerns led to its decision. Zurich did not comment on antitrust issues - which are at the center of the ESG backlash in the US - instead saying, “Withdrawing from the NZIA will not change the Group’s commitment to sustainability."

Climate campaigner Peter Bosshard said: "With Munich Re and now Zurich leaving the alliance, insurers have an even bigger direct responsibility to align their businesses with a credible 1.5C pathway."

From Droughts to Floods

With summer quickly approaching in the North, the threat of climate change-related droughts and flooding looms large. Catalonia in Spain is already suffering from record-breaking droughts, and Tunisia is resorting to water rationing to combat its fourth consecutive dry year.?

Conversely, recent rains in California have soaked the long-parched state and replenished reservoirs to almost 100% . But the rains brought other problems: when the record snowpacks inevitably melt; there will be a much higher risk of spring flooding .

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Other Notable News:

• New data from the US shows greenhouse gas (GHG) emissions rose sharply last year . According to the National Oceanic and Atmospheric Association, the three primary GHG emissions caused by human activity (methane, carbon dioxide, and nitrous oxide) continued to rise rapidly in 2022.
• UAE plans oil and gas expansion, making it the third biggest country for oil and gas expansion behind Qatar and Saudi Arabia . But, as host of the upcoming COP28, the plans put the country at odds with the net zero ambitions of the UN climate summits.
• A new geological study of the Norwegian seabed holds a clue to how the Antarctic might melt . It revealed that melting could happen much faster than previously anticipated.
• The effects of climate change on most weather patterns are clear, but the picture is more complicated with tornadoes . With the mounting death toll from a spate of Spring tornadoes in the US, a recent study indicated that the amount of “super cells” - intense, long-lasting storms that produce more severe twisters - would become more common and occur further East with global warming. Still, there is no indication the number of days per year with tornadoes will increase.?
• This interview with Martin Richards, global head of sustainable finance at HSBC Global Commercial Banking and president of HSBC Ventures, explains why climate tech investment is down this year compared to last and the future of climate innovation and the energy transition.
• Crisis on Pause, Europe Still Needs a Green Industry Transformation . The challenges to Europe’s energy system are structural, and the shift in gas supply from historically cheap Russian pipeline supplies to more costly liquid natural gas (LNG) imports highlights a major weakness.?
• CEOs are still bullish on decarbonization in the wake of the Inflation Reduction Act . Climate-driven decisions include long-term investments in sustainable infrastructure, and the Inflation Reduction Act is supporting a bullish mentality toward decarbonization among many CEOs.
• JPMorgan Chase CEO Jamie Dimon published his annual shareholder?letter ?Tuesday calling on America’s CEOs to embrace a form of capitalism that drives equitable growth and suggested two strategies: workforce development and increasing wages for low-wage workers. Echoing Henry Ford over a century ago, Dimon wrote: “Shareholder value can be built only if you maintain a healthy and vibrant company, which means doing a good job of taking care of your customers, employees and communities.”
• Steering Consumers to Greener Travel and Tourism Choices . Travel and tourism—which is responsible for some 10% of global emissions - will grow by 5% annually, to 8.4 gigatons of CO2 emissions in 2030.
• Why Business Leaders Must Resist the Anti-ESG Movement . For many companies, it may seem smart to stay out of anyone’s crosshairs - but there’s no avoiding taking positions on the big issues of the day — major stakeholders, particularly young customers and employees, expect it.

Notable Podcasts

• This week’s Climate Rising podcast from Harvard Business Review features Apoorv Bhargava, CEO and Co-founder of WeaveGrid - a company that uses artificial intelligence and machine learning to help electric utilities optimize the integration of electric vehicles into a clean energy grid. They discuss how his company approaches transport and energy issues, as well as climate careers and business.
• The most recent episode of Drilled - a climate podcast with a true crime twist - is the fourth installment in a series on corruption and coercion in oil and gas operations in Guyana. This episode features a climate activist bringing cases to a Guyanan court to block oil and gas exploration and the Guyanan government countering with the ironic claim that they need oil revenue to adapt to climate change.