Push and Pull Over Sustainability Disclosures: EU vs. US

As awareness grows over sustainability challenges like climate change, regulators and policymakers worldwide are exploring how to address these issues. One area receiving attention is expanding sustainability reporting requirements for companies. Significant differences have emerged in how such regulations develop in the United States and the European Union.

No national mandatory standards currently exist for sustainability disclosures in corporate reports in the US. The Securities and Exchange Commission has discussed potential climate disclosure rules but has yet to enact them. Nonetheless, momentum builds through other channels.

The recent ESG Disclosure Simplification Act proposed in Congress would direct public companies to report various environmental, social and governance (ESG) metrics. Additionally, California now mandates climate risk disclosure for many public and large private companies. These state-level moves could catalyse broader federal regulations in the future.

By contrast, the European Union has already implemented concrete sustainability reporting directives across all 27 member countries. Most notably, the Corporate Sustainability Reporting Directive (CSRD), taking effect in 2024, requires sustainability reporting from nearly 50,000 large public and private EU companies.

The CSRD significantly expands disclosure requirements beyond what companies currently provide in practice. Firms must share detailed sustainability data, Firms including

- The impacts of their activities on communities, wider society, workers, the environment, and human rights

- Their reliance and impacts on natural resources like biodiversity, water, land, materials, and energy

- Their strategies and expenditure shares aligned with EU sustainability classification systems

- Their sustainability governance, targets, key performance indicators, and multi-year comparison data

To meet these regulations, firms must significantly expand their sustainability measurement and reporting capabilities. Audits with third-party assurance will also become mandatory for reports, ensuring validity.

A key difference is that while the US lacks concrete federal sustainability disclosure laws, the EU has already crossed this bridge. EU regulations also take a more expansive, quantitative view regarding the sustainability topics and metrics to report. They also apply broadly, covering nearly all mid-size and more extensive public and private companies in the EU.

US state laws like California's still pale in comparison regarding breadth. However, if more states emulate California by enacting their requirements, this piecemeal approach could snowball into more unified federal laws.

Regarding reporting details, EU regulations drill down to quite granular levels, requiring spending ratios aligned with various sustainability taxonomy categories. They also balance quantitative metrics with narrative disclosures around strategy, targets, governance, and risk assessments.

By contrast, besides needing more actual regulations now, US guidance often focuses more narrowly on climate change when discussing sustainability reporting. Proposed legislation like the ESG Disclosure Simplification Act suggests including other sustainability factors but needs more breadth and depth in EU directives.

Regarding the scope of companies covered, EU regulations encompass public and private mid-size to large corporations and listed small companies. The threshold criteria balance multiple size metrics like staff counts, revenues, and balance sheet totals when determining mandatory inclusion for reporting.

US state laws like California’s have higher size cutoffs by revenue. But if more states follow, pressure would build to widen the net, including smaller public companies not currently captured. Again, this indicates the US is taking a more piecemeal rather than systematic approach for now.

In summary, the EU currently leads on sustainability reporting requirements. How currently leads on sustainability reporting requirements ever, activism amongst US policymakers, investors, consumers, and employees continues to grow to address sustainability issues. However, while a national system has yet to emerge, momentum indicates more expansive regulations are likely on the horizon, while a federal system has yet to emerge, momentum suggests that. The disparity between US and EU disclosure laws may narrow considerably in the years ahead.