EU, Calif. climate risk rules prompt companies to prepare

Global climate risk reporting requirements are pushing companies to make compliance plans despite legal challenges to similar rules proposed in the U.S.

The EU, the U.K., and even U.S. states such as California have adopted rules requiring companies to report climate-related risks like flooding, drought and fire within their financial filings. Meanwhile, the U.S. Securities and Exchange Commission's climate risk disclosure rule remains mired in legal challenges, which caused the SEC to stay its implementation earlier this year.

Heather Palmer, environmental and energy partner at global law firm Sidley Austin LLP, said that even without the SEC's climate risk disclosure rule, U.S. companies with a global presence, particularly in the EU, are assessing the nuances of compliance with such reporting requirements as deadlines loom.

In this Q&A, Palmer touches on how companies are preparing for climate risk reporting, what challenges business leaders are running into and whether the outcome of the U.S. presidential election will impact U.S. climate risk reporting.

Editor's note: Responses have been edited for brevity and clarity.

Are companies preparing for the SEC's delayed climate risk disclosure rule?

Heather Palmer

Heather Palmer: There's a mix. Some companies are in a wait-and-see mode to see what will happen to the litigation in the Eighth Circuit. The SEC voluntarily stayed the rule in April. The SEC made clear when it issued its voluntary stay that all the deadlines are stayed and will be reevaluated once the litigation has been resolved. The expectation is that, depending on when the Eighth Circuit litigation is resolved and whether there is an appeal to the Supreme Court, the SEC will extend the original deadlines for compliance. Companies would have additional time depending on what happens, even if the rule survives the challenge.

That said, companies are moving forward with systems and processes to comply with the SEC rules because there is a lot of work that needs to be done. In addition, the SEC rules don't exist within a vacuum. You also have new disclosure requirements in the EU, under the Corporate Sustainability Reporting Directive [CSRD]. We have a lot of U.S.-based companies that have subsidiaries or operations in Europe that are focused on compliance with the CSRD. In addition, you have what's happening in California with the climate laws passed last fall. Companies should focus on compliance or assess what is needed to achieve it.

How should companies prepare for compliance with climate risk rules?

Palmer: Our recommendation to our clients has been to focus on a gap assessment to determine where they currently are with respect to their disclosures and compare that with the disclosure requirements under the SEC rules, the California rules and, under CSRD. They should also identify where they may need to enhance data collection, processes and controls around that data and, in general, prepare for third-party assurance.

What are some of the biggest questions and concerns companies are voicing?

We have a lot of U.S.-based companies that have subsidiaries or operations in Europe that are focused on compliance with the CSRD.

Palmer: There are a couple of different questions we're getting. For U.S. companies that have operations in the EU, the most common question concerns threshold: Will they report at the enterprise level under CSRD given that disclosure for a non-EU based parent doesn't begin until 2029? If you have an EU subsidiary, they could be required to report as early as 2025. One question is whether companies should report under CSRD at the enterprise level now or only as required for their EU-based subsidiaries. They're getting different advice. The answer to that question is not necessarily easy and is usually company specific.

The second concern that companies are starting to have relates to reporting requirements under the different regimes and how to ensure that there's consistency across company disclosures. Sometimes the requirements do not necessarily align. Many questions are coming up around materiality and the difference between the materiality qualifiers [under different rules].

In the U.S., will the presidential election impact company's efforts on climate risk disclosure?

Palmer: For a lot of companies, they're not necessarily waiting and focusing on what's going to happen with the election, particularly around climate-related disclosures, because there are going to be those requirements. We don't anticipate that [the election] will change, in general, how companies are going to approach these issues because there does seem to be this trend toward greater disclosure. For companies who are not solely U.S.-based, there are still going to be other jurisdictions requiring these types of disclosures.

Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.