Ready or Not, ESG Regulations Are Knocking on the Door

Ready or Not, ESG Regulations Are Knocking on the Door

ESG has established itself as a mainstream, common sense investment strategy in the U.S. With increasing investor interest and consumer demand, the introduction of new ESG regulations was inevitable. Are you ready to meet these new requirements?

Well, hold on tight because we're about to explore regulatory trends in the EU and how those regulations have a knack for crossing the pond and being embraced in the US, affecting you and your business.

The term Environmental, Social, and Governance (ESG) has a rich and storied history, originating in 2004 with the United Nations Global Compact. While ESG gained widespread attention in the U.S. in 2018, it has been in existence for quite some time and has been extensively implemented and regulated by the EU.

Image by redgreystock on Freepik

Image by redgreystock on Freepik

The Non-Financial Reporting Directive (NFRD) of 2014 stood as the very first piece of ESG legislation. It mandated that all publicly listed companies in the EU with more than 500 employees publish an annual sustainability report. Although a step in the right direction, investors and regulators quickly discovered that the sustainability data provided by companies was inconsistent and often inaccurate. 

In 2023, the NFRD was superseded by the Corporate Sustainability Reporting Directive (CSRD). The CSRD aims to bolster and streamline sustainability reporting requirements, ensuring that investors and consumers have access to dependable and accurate sustainability data related to the environment and society.

The very first CSRD-compliant reports, covering the fiscal year 2024, will be hitting the shelves for public and investor perusal in 2025.

Under the CSRD, companies are mandated to align their sustainability disclosures with the European Sustainability Reporting Standards (ESRS), with the added condition that all disclosures must undergo third-party certification.

Updating sustainability reporting requirements with the implementation of the CSRD serves as a pivotal element of the EU's broader European Green Deal (EGD). The EGD has ambitious plans to slash net greenhouse gas emissions by 55% from 1990 levels by 2030.

What impact do these EU regulations have on the U.S.? Let’s take a closer look.

Impact of EU Regulations on US ESG Reporting

The U.S. has relied on voluntary international ESG frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), among others to guide the creation of ESG reports.

In the absence of official ESG legislation, U.S. companies have the option to forgo ESG reporting altogether or selectively disclose certain information to the public. Leaving investors and consumers to sift through inconsistent and incomparable ESG reports.

Responding to increasing investor and consumer demands for standardized ESG reporting, the U.S. followed the EU's lead with the CSRD, introducing climate-related disclosure rules through the U.S. Securities and Exchange Commission (SEC).

The final SEC climate-related disclosure rules will require companies to:

  • Disclose material climate-related risks faced by the company along with strategies to mitigate those risks.
  • Provide disclosure on the role of the board of directors and their oversight of climate-related risks for the company.
  • Disclose environmental targets and goals that could affect the financial or operational condition of the company.
  • Certain SEC registrants will be required to disclose and attest to their Scope 1 and 2 emissions if deemed material to the company.
  • Provide disclosure on how extreme weather events or other natural occurrences can impact the financials of the company.

Like any new legislation, it's not without its quirks. One notable issue with the finalized rules is that they don't require Scope 3 emissions reporting for any filers. This represents a significant divergence from the EU's CSRD regulations.

The EU imposes significantly stricter greenhouse gas (GHG) emissions reporting requirements compared to the SEC.

California has also entered into the fray of ESG regulations. California Governor Gavin Newsom passed the following climate-related disclosure rules:

  • The Climate Corporate Data Accountability Act (SB 253)–This landmark climate rule mandates that large companies report climate emissions.
  •  SB 261–This rule requires the disclosure of climate-related financial risks in accordance with recommendations from the Financial Stability Board (FSB).
  • AB 1305–In this rule, companies are mandated to disclose specific details regarding the acquisition, sale, or promotion of voluntary carbon offsets (VCO). In addition, irrespective of VCO usage, companies must disclose environmental marketing claims such as net-zero or carbon neutrality.

California's climate-related disclosure rules align more closely with the EU's CSRD requirements. A win for sustainability advocates!

With all these ESG frameworks and regulations, you might be wondering, 'How does this affect my business? What do I need to do to stay compliant?' Look no further than the ESG for Building Defining Principles–an ESG roadmap tailored specifically for companies in the North American residential new construction sector.

The ESG for Building Defining Principles leads readers through essential considerations that building professionals should address in their ESG journey. It encompasses baseline reporting metrics in the “E,” S,” and “G” categories, accompanied by recommended tools and calculators for seamless progress monitoring. 

The document also explores the business advantages of ESG adoption, offering insights into investor expectations for ESG reports and providing guidance on meeting basic compliance requirements.

Feeling overwhelmed by all things ESG? Green Builder Media is here to lend a hand! Our ESG consulting services are designed to help your business not only meet but exceed regulatory requirements. Whether you're new to the game or a seasoned pro, we'll work with you to enhance your ESG strategy and make a real impact.

Take our ESG readiness survey today to find out where your company stands with ESG! It's a quick and easy way to gauge your knowledge of ESG and discover actionable improvements for your company's ESG strategy.