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Introduction

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ESG has become a global topic and there are many similarities but also differences between local laws. In a globalized world, it is important to keep track. This overview will shed light on some of the most relevant pieces of legislation from the UK, USA, and Australia.

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SEC Climate-Related Disclosure

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The Securities and Exchange Commission (SEC) Climate-Related Disclosures are the American counterpart to the European Corporate Sustainability Reporting Directive (CSRD). Its disclosure will apply to both domestic and foreign SEC registrants, which would be around 12,000 companies in total. Similar to CSRD, there have been delays. It was adopted on March 6th 2024 after having originally been expected for 2022 (1).

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The SEC’s rules (2, 3) contain requirements relating to the disclosure of climate-related risks and risk management, financial impacts as well as greenhouse gas emissions. The requirements relating to risk are based on the Task Force on Climate-Related Financial Disclosure (TCFD) framework due to its wide acceptance by issuers, investors, and others. Registrants will need to report actual and likely material impacts that climate-related risks have on their business as well as their processes for identifying, assessing and managing them. Furthermore, expenditures and losses as well as expenditures and charges resulting from severe weather events must be disclosed in a note to the financial statements in case they exceed predefined thresholds.

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The requirements for GHG emissions disclosure are based on the GHG Protocol. Again, the idea is that leveraging established frameworks will lower the burden. So-called Accelerated Filers (AF) and Large Accelerated Filers (LAF), companies with a public float of above $75 million and $700 million respectively, unless otherwise exempted, must disclose material scope 1 and/or 2 GHG emissions. There are no quantitative criteria that determine whether emissions are material. The idea is that if information on emissions or its omission could influence investment decisions, it is considered material. The SEC expects that most, if not all affected companies will need to assess emissions for the materiality assessment. So-called Non-Accelerated Filers (NAF), Smaller Reporting Companies (SRC), and Emerging Growth Companies (EGC) are excluded from having to report emissions.

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Overall, the requirements have been watered down considerably compared to the 2022 proposal: disclosure of emissions is required only for LAF and AF, the criteria of materiality was added to scope 1 and 2 emissions disclosures and companies will no longer be required to report scope 3 emissions, even though they often constitute the largest share of a company’s total emissions.

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The rules will be rolled out from FYB (fiscal year beginning) 2025 to 2029 according to the following table:

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Overall, the scope of the SEC proposal is more narrow than the CSRD both in terms of companies affected as well as disclosure requirements. Notably, social and governance disclosures, which CSRD addresses, are not covered.

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TCFD & ISSB

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The Task Force on Climate-related Financial Disclosures (TCFD) (4) is an initiative established by the Financial Stability Board (FSB) in 2015 to develop a set of recommendations for more effective climate-related disclosures. They were released in June 2017 and are designed to be applicable to organizations across different sectors and jurisdictions. They focus on four key areas:

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1) Governance involves disclosing the organization's governance around climate-related risks and opportunities, detailing how the board and management oversee these issues.

2) Strategy requires companies to explain the actual and potential impacts of climate-related risks and opportunities on their businesses, strategies, and financial planning over the short, medium, and long term.

3) Risk Management involves describing how the organization identifies, assesses, and manages climate-related risks.

4) Metrics and Targets require the disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This includes Scope 1 and Scope 2 GHG emissions independent of a materiality assessment¹, and, if appropriate, Scope 3 GHG emissions and the related risks.

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The TCFD itself is not a regulation. However, the UK was the first country to enshrine its recommendations into law (5). Since April 2022, over 1,300 of the largest UK-registered companies and financial institutions have to disclose climate-related financial information on a mandatory basis. The government also plans to implement the recommendations for central government departments according to its 2023 Green Finance Strategy (6).

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What complicates matters is that the TCFD recommendations will be merged into and subsequently be superseded by the IFRS Sustainability Disclosure Standards (7). They are also known as ISSB Standards after the International Sustainability Standards Board which develops them will also take over the TCFD monitoring responsibilities in 2024 (8). The first two standards were only published in June 2023 so governments will need more time to respond to them.

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The UK already communicated its intentions to endorse the ISSB Standards. They will be adopted via the so-called UK Sustainability Disclosure Standards (UK SDS) which are supposed to only divert from the ISSB Standards only if absolutely necessary for UK specific matters (9).

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Overall, the ISSB Standards are broadly consistent with the TCFD recommendations but go further. IFRS S2 includes sustainability-related topics beyond climate. Related to GHG emissions, IFRS S2 introduces additional disclosure requirements including (10):

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1) a separate disclosure of Scope 1 and Scope 2 GHG emissions for (1) the consolidated accounting group, and (2) associates, joint ventures, unconsolidated subsidiaries or affiliates not included in the consolidated accounting group;

2) Scope 2 GHG emissions using a location-based approach and information about any contractual instruments that is necessary to inform users’ understanding;

3) Scope 3 GHG emissions disclosures, including additional information about the company’s financed emissions if the company has activities in asset management, commercial banking or insurance; and

4) information about measurement approach, inputs and assumptions used in measuring Scope 3 GHG emissions.

In addition, IFRS S2 sets out a Scope 3 measurement framework to provide guidance for preparing Scope 3 GHG emissions disclosures.

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The Scope 3 framework addresses topics such as prioritization of measurement approaches. Broadly, primary data is preferred over secondary data. Within the category of secondary data, preference should be given to activity data and emission factors which are timely, more representative of the given activity or region, and verified. These considerations must be made transparent.

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SDR

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The United Kingdom has also taken significant steps in the realm of sustainable finance with the introduction of the Sustainable Disclosure Regulation (SDR) (11). Similar in purpose to the European Sustainable Finance Disclosure Regulation (SFDR), the SDR aims to enhance transparency and consistency in disclosures related to environmental, social, and governance (ESG) factors. It is set out by the UK’s Financial Conduct Authority mandates (FCA) and includes a number of provisions. In particular, these include anti-greenwashing regulations, naming and marketing rules for investment products incl. standardized product labels, and disclosure requirements.

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The anti-greenwashing rule will apply to all FCA-authorized firms. The remaining provision will apply to FCA-authorized fund managers. Portfolio managers have been removed from the scope but there will be a consultation in 2024 on whether and how to apply the SDRs to them. For financial advisors, the FCA has set up a working group to help them establish how the SDR will affect and support their role. At present, the SDR applies only to UK firms and their UK-domiciled funds.

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Similar to SFDR, there are entity level and product level disclosures. The entity level disclosures require financial institutions to disclose how climate-related risks and opportunities are factored into their operations and strategies. They are originally based on TCFD (Task Force on Climate-related Financial Disclosures) recommendations and will be updated to align with the new ISSB (International Sustainability Standards Board) standards.

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For financial products, four labels have been defined (Sustainability Focus, Sustainability Improvers, Sustainability Impact, Sustainability Mixed Goals). In order to qualify for a label, products must meet general and label-specific criteria and the firms using them will need to meet specific requirements and make associated disclosures. Notable among the general criteria is a 70% threshold of assets invested in accordance with the sustainability objective. Unlike SFDR, there are no mandatory KPIs required by SDR though it can be expected that GHG emissions will be a commonly used metric.

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After a consultation period and delays, the final policy statement was published in November 2023. The regulation will be rolled out starting in May 2024 when its anti-greenwashing rule and guidance comes into force.

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Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act

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California’s Climate Corporate Data Accountability Act (CCDAA) and Climate-Related Financial Risk Act (CRFRA) can be seen in conjunction. Together, they cover the two sides of double materiality and both were signed into law in October 2023.

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The CCDAA, based on Senate Bill 253 (12), requires companies with over $1 billion in annual revenue operating in the state to disclose their GHG emissions. Starting in 2026, scope 1 and 2 emissions have to be disclosed for the prior financial year. Starting in 2027, scope 3 has to be disclosed irrespective of materiality. The reporting would have to be done in alignment with the GHG protocol and be verified by a third party. Based on the current proposals, CCDAA is stricter than the SEC Climate Disclosures in several areas: including private companies, requiring the inclusion of scope 3 emissions regardless of materiality, and stiff penalties.

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The CRFRA, based on Senate Bill 261 (13), requires companies with over $500M in annual revenue to submit climate-related financial risk reports that cover climate-related financial risks consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework. Reporting starts in 2026 and is required every two years.

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ASRS

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The proposed ASRS (Australian Sustainability Reporting Standards) (14) are intended to serve as the framework for mandatory reporting on climate-related disclosures which the Australian government has committed to introduce. They were developed by the AASB (Australian Accounting Standards Board)

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In October 2023, a three-part Exposure Draft named ED SR1 was published. The standards are largely based on the International Financial Reporting Standards Sustainability Disclosure Standards, also known as the ISSB Standards. However, the ASRS are limited to climate-related financial disclosures and contain some modifications to meet the needs of Australian stakeholders.

They can be seen as the Australian counterpart to the EU’s ESRS standards (the framework for CSRD reporting) albeit with a much narrower scope. Unlike in the EU, however, the legislation which is supposed to be supported by the framework has not actually been passed yet.

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The proposed roadmap is based on a consultation of the Australian Government’s Treasury and hence subject to change. The proposed roadmap contains a three-step approach and would cover large reporting companies in Australia. The first group would have to start reporting in July 2024.

The three parts are as follows:

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1) ASRS 1 General Requirements for Disclosure of Climate-related Financial Information, based on IFRS S1‍

2) ASRS 2 Climate-related Financial Disclosures, based on IFRS S2

3) ASRS 101 References in Australian Sustainability Reporting Standards, listing non-legislative documents that are referenced in ASRS Standards e.g., GHG Protocol Standards and IPCC Assessment Reports.

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The AASB is asking for feedback on content as well as on the structure of the exposure draft.

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In terms of content, the draft contains a list of differences between the ISSB Standards and the current draft with a rationale for modification. With regards to GHG emissions, the main requirements such as including scope 1, 2, and 3 emissions as well as location-based approach for scope 2 are kept (see TCFD & ISSB) but there are some adaptations. For example, the 15 scope 3 categories of the GHG Protocol are named as a suggestion for entities to categorize the sources of emissions rather than a requirement. The rationale is that they are not explicitly referenced in the IPCC guidelines or the Paris Agreement.

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In terms of structure, the main question is how to handle duplicates. IFRS S1 covers sustainability-related risks and opportunities and IFRS S2 sets out specific climate-related disclosures. Since ASRS Standards use them as a basis but their scope has been limited to climate-related financial disclosures, the requirements of ASRS 1 and 2 overlap in a lot of ways.

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Stakeholders are invited to provide feedback by March 1st, 2024.

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Closing

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If you have questions or feedback, let us know. If you are looking for a powerful and easy to use solution to help you with your carbon accounting as part of your efforts to meet regulatory requirements, get in touch with us.

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¹ A materiality assessment is a process to identify and prioritize the ESG issues according to their significance for a business and its stakeholders

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