Do Companies Need Cross-Regulatory Reporting Strategies? A Look at the Key Differences Between the SEC and CSRD Disclosure Requirements

This March the U.S. Securities and Exchange Commission (SEC) adopted climate-related disclosure requirements for companies. Shortly after adopting these rules there were several lawsuits filed requesting review by the courts, which resulted in the SEC deciding to voluntarily stay the implementation of the disclosure requirements. This process is not dissimilar to what happened earlier in the year with companies filing lawsuits challenging California’s disclosure laws, SB-253 and SB-261. While the United States is grappling with what standard of climate-related disclosure will be required for companies, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD) in 2022, which provided expansive mandatory disclosures compared to the prior EU Non-Financial Reporting Directive (NFRD). Additionally, this year the International Sustainability Standards Board (ISSB) issued IFRS SI General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related disclosure. Although the reporting guidelines are not mandatory, they do provide a framework for companies wishing to voluntarily report, and some countries have indicated an interest in adopting the standards set out by the ISSB as their own.

As more regions adopt and propose climate-related disclosure requirements and guidelines, companies are faced with an important question: What reporting requirements should and must my business follow? The SEC recognized that there would be overlap, noting in section IV(A)(4) how approximately 3,700 Commission registrants will be impacted by CSRD reporting eventually, with approximately 70 already subject to the 2024 reporting requirements. As such, whether a U.S. company is choosing to make environmental, social, and governance disclosures voluntarily or is preparing for the potential mandatory reporting standards of various regions, understanding the similarities and differences is crucial in creating a cross-regulatory reporting strategy. There are several key differences between the SEC and the CSRD disclosure requirements: who is required to report, when they are required to report, and what must be reported.

Companies Required to Report

First, there are several factors that determine who is required to report under the SEC and CSRD disclosure requirements. Companies registered for SEC registration statements and Exchange Act annual and quarterly reporting, described as registrants, will be subject to the new climate-related disclosure requirements. The reporting requirements may extend to some consumers and third-party service providers, however, it is primarily targeted toward registrants with few exceptions. The CSRD’s scope of who is required to report is more expansive. It includes all large companies and companies listed on regulated markets doing business within the EU. There are different thresholds for EU-based companies, non-EU companies with a significant presence in the EU, and small and medium enterprises (SMEs) in Europe. This covers approximately 49,000 companies, which is a drastic change from the 11,000 companies included in the NFRD mandate.

The SEC and the CSRD find common ground by requiring reporting from both domestic and foreign companies that meet the requirements. Foreign company registrants must report to the SEC. As for the CSRD, there are factors that result in non-EU companies being required to report. Specifically, companies that generate a net turnover of 150 million euros in the EU and that have at a minimum one subsidiary in the European Union and meet particular standards are required to report to investors and other stakeholders based on CSRD requirements.

When Reporting Is Required

Secondly, the SEC and CSRD have different deadlines for when companies must report. Fortunately, both require reporting based on fiscal years. The CSRD’s first deadline for reporting is in 2025, when companies with existing NFRD requirements must submit reports based on the 2024 fiscal year. The following year large companies must report, and the year after that SMEs must report. For non-EU companies, reporting will not be required until 2029 based on the 2028 fiscal year. The SEC’s first filing deadline was set for a year after the CSRD’s, requiring reports for large-accelerated filers in 2026 based on the 2025 fiscal year. Then followed by accelerated filers reporting in 2027 based on the 2026 fiscal year and non-accelerated filers reporting in 2028 based on the 2027 fiscal year. However, based on the current administrative stay, these dates are projected to be pushed back.

What Must Be Reported

Finally, one of the greatest distinctions between the SEC and CSRD is based on what must be reported. What needs to be reported is broken down into both the scope of greenhouse gas reporting and the definition of materiality. Scope in climate-related reporting is often broken down into Scope 1, direct emissions that a company burns; Scope 2, indirect emissions a company purchases; and Scope 3, indirect emissions associated with a company’s upstream and downstream activities. The SEC only requires reporting on Scope 1 and/or Scope 2 if such emissions are “material.” The final rule published by the SEC defines material as, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” This definition is in alignment with what the U.S. Supreme Court has defined material to mean. Additionally, if something is considered material, companies must explain if the risk is short-term or long-term.

In contrast, the CSRD requires reporting on all three scopes. The CSRD requires companies to disclose emissions in all three scopes that are material or provide a detailed explanation as to why they are not material. As for what is material, the CSRD uses “double materiality.” Double materiality is explained as reporting on both “the impacts of the activities of the undertaking on people and the environment, and on how sustainability matters affect the undertaking.” Thus, reporting must include anything material from either an impact or financial material perspective or both, resulting in the CSRD having a much broader reporting requirement.

Ultimately, the differences between the SEC and CSRD climate-related disclosures require numerous companies to create cross-regulatory reporting strategies. Something that both the SEC and European Union acknowledge will take time and cost money. Considering both standards apply to international companies, there are numerous companies that will be required to report on these topics in the coming years. Approximately over 3,000 U.S. companies would be required to start meeting the Scope 1 and/or 2 material disclosure by 2026 under the current SEC deadlines and then required to report on Scope 1, 2, and 3 double materiality based on the CSRD requirements by 2029. Companies in this position will benefit from investing in a robust cross-regulatory reporting strategy that can satisfy both requirements to limit the amount of work required to make the disclosures. Even for U.S. companies that do not currently fit into either the SEC or the CSRD mandatory reporting, with the ever-changing landscape of climate-disclosure requirements internationally, it is likely that making the investment in collecting the data necessary to meet reporting requirements will benefit them in the future. Finally, for U.S. companies confident that the SEC climate-related disclosures will be defeated in the U.S. courts, there is still a benefit in investing in the necessary data collection to build rapport with consumers and be prepared for the potential international obligations.

The structure of climate related reporting requirements is dependent on varying factors from domestic political support to the urgency of the climate emergency internationally. As the factors morph, so will the requirements from different regulatory bodies. Thus, companies would benefit from also growing with the changes by developing cross-regulatory reporting strategies in anticipation of future requirements.