In recent years, sustainability has dominated the conversation in the corporate world. Sustainability reporting; environmental, social, and governance reporting; and climate related-risk reporting were poised to be new standards alongside other financial reporting requirements.
However, in 2024, elections around the world shifted political leadership to the right, resulting in a”green backlash.” As a result, the future of sustainability reporting is being reevaluated and debated. With so many moving pieces in jurisdictions around the world, it is difficult to know what to watch. Below are key developments that occurred leading up to May and to watch for in June.
U.S. Securities and Exchange Commission
In March 2024, the U.S. Securities and Exchange Commission adopted the Climate-Related Disclosure Rule to require large publicly traded companies to disclose climate action, greenhouse gas emissions, and the financial impacts of severe weather events. The rule was immediately met with legal challenges and was delayed while the court heard the cases.
The lawsuits came from both sides. Opponents claimed that the SEC overstepped the authority delegated to them by Congress. Given the current opinions of the Supreme Court, this was most likely a winning argument. Supporters of the regulation brought legal action claiming the SEC did not go far enough. Under SEC Chair Gary Gensler, the SEC was vigorously defending their stance. Everything changed after President Trump took office.
In February, acting SEC Chair Mark Uyeda began the process to permanently end the rule. At the time, he asked the court for a delay in the proceedings while the SEC takes action to rollback the Climate-Related Disclosure Rule. In March, the SEC officially voted to end their legal defense of the rule.
The new chair of the SEC, Paul Atkins, shares the same approach as Uyeda. Do not expect a revival of the rule under the current administration. The SEC may chose to let the courts decide if the rule is within the SEC’s authority. They may also choose to reverse the rule through the normal rulemaking process.
For now, the rule is effectively dead. Companies should shift focus to the state level, while keeping an eye on any developments from the SEC. Be wary of advocates pushing for voluntary disclosure under the guise that the SEC rule may be revived. The legal risks of voluntary disclosures is increasing as climate activists bring litigation against businesses for the impacts of climate change.
State Level Sustainability Reporting
With the collapse of sustainability reporting at the national level, focus has shifted to state level requirements. Conservative states, like Florida and Texas, have limited the ability of fund managers and directors to consider sustainability factors in the decision making process. However, those restrictions do not prevent the creation of sustainability reports. Democrat led states are still pushing forward with sustainability reporting requirements that may impact businesses with a presence in those states.
California
In September 2023, California approved the Climate Accountability Package, a pair of bills aimed at creating sustainability reporting requirements. Senate Bill 253 required companies that do business in California and have an excess of $1 billion in revenue, defined as “reporting entities”, to submit an annual report for Scope 1 and Scope 2 starting in 2026, for FY 2025. Scope 3 reporting will begin in 2027, for FY 2026.
Senate Bill 261 required companies that do business in California and have an excess of $500 million in revenue, defined as “covered entities”, to submit a biennial climate-related financial risk report.
The responsibility of drafting specific regulations and implementing the reporting standards was delegated to the California Air Resources Board. CARB was initially given until January 1, 2025 to draft the rules and processes. That was delayed until July 1.
Given the amount of time required for companies to ramp up reporting, and the reality that CARB would not release reporting standards until midway through the reporting year, CARB announced they were using their discretion to not enforce reporting in 2026. Companies are only required to report based on their current practices.
On May 29, CARB held a virtual town hall to discuss their progress. Over 3,000 people from five continents attended the presentation. In the meeting, it became clear that CARB will not meet the July 1 deadline.
CARB is still in the informal pre-rulemaking stage. At this point, CARB is still debating what standards will be used to determine what companies fall under the reporting requirements. They are working the definitions of “doing business in California”, revenue, and corporate relationships between parent and subsidiary companies.
For now, if your company meets the revenue requirements in SB 253 or SB 261 and has over $735,000 in annual sales in California or $73,500 in property in California, keep a close eye on this process. Surprisingly, CARB received only 261 responses to the first round of open comment. However, they have made it clear they will engage with interested stakeholders throughout the informal stage.
CARB wants to release the rule by the end of the year. A fast-track approach still takes about three months, so I expect CARB will shift to the formal stage by September. Now is the time for interested parties to weigh in. Once the formal process begins, the template will be set and changes are hard to argue.
While the bill sponsors are still strong advocates for the 2026 start date, Governor Gavin Newsom has advocated for delaying implementation. Watch how California reacts to the international backlash on green policies. As the European Union looks to rollback their sustainability reporting requirements, California is finding themselves out of alignment with international standards.
New York
New York has been toying with climate risk disclosure requirements for years. A version of the reporting requirement has been revived this year in Senate Bill 3697, sponsored by Senator James Sanders Jr., and Senate Bill 3456 sponsored by Senator Brad Hoylman-Sigal. The proposal mimics the California requirement.
The current language states that businesses with “total annual revenues in excess of five hundred million United States dollars ($500,000,000) and that does business in New York” will be required to file biennial reports starting in 2028. Businesses with revenues over $1 billion will be required to file Scope 1 and Scope 2 GHG emissions starting in 2027, for FY 2026. and Scope 3 starting in 2028, for FY 2027
SB 3456 unanimously passed the Environmental Conservation Committee on April 2 and was sent to the Finance Committee. SB 3697 followed on May 13. The bills will need to be out of Committee, pass a fully vote of the Senate, and receive the approval of the Assembly before the June 12 end of session. With only seven sessions days remaining, passage looks unlikely.
Colorado
At the beginning of the legislative session, it appeared that Colorado may adopt climate reporting requirements in line with California’s. However, that bill died before it left the committee. The speed at which the proposal died indicates a lack of appetite for this sort of requirement, even from a Democrat led state.
EU Corporate Sustainability Reporting
The most vigorous debate on the future of sustainability reporting is unfolding in the European Union. The EU was the world leader in the establishment of sustainability reporting requirements. They are now rolling back those requirements.
As part of the European Green Deal, a trilogy of directives were passed to force businesses to address climate change and report GHG missions. The Taxonomy for Sustainable Activities created a classification system for business and investors to know what activities are considered green or climate friendly. The Corporate Sustainability Reporting Directive created requirements for businesses to report GHG emissions and other ESG actions. The Corporate Sustainability Due Diligence Directive created additional reporting requirements, as well as legal liability, for companies in relation to their supply chain.
However, the cost of these proposals on businesses and the broader impact on the EU economy became a theme during the 2024 elections. The shift to the right in EU politics embolden opponents to the European Green Deal directives. As a result, the Commission proposed a package of new directives to “reduce the burden” on businesses.
The Omnibus Simplification Package was officially adopted by the Commission in February. The proposal is being debated in the Council and the Parliament. In the interim, the EU has delayed reporting requirements by two years to allow the political process to unfold.
Sustainability advocates are fighting to save the directives, but it is a losing battle. Changes are coming to both the CSRD and the CSDDD, the debate is over the scope of those changes. The Commission proposal effectively removes 80% of businesses in the EU from having to report. It also eliminates nearly all non-EU based businesses.
Once the Parliament and Council approve their final proposal, representatives from the three bodies will meet in a “trialogue” to negotiate the final language. The EU is pushing to adopt the reforms by the end of 2025, so the process is moving quick.
The Parliament will publicly debate the proposals throughout the summer as it works through committees. Expect the Parliament to finalize their sustainability reporting proposal by mid-October. Trialogue negotiations will begin soon thereafter, with final votes in December.
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