New sustainability reporting and substantive compliance requirements have been adopted at a furious pace across many jurisdictions over the last few years. Some of these compliance requirements already have been pushed back, with more delays likely in the coming months. In this post, we focus specifically on CSR disclosure and due diligence requirements:
- U.S. SEC climate disclosure rules. In response to the lawsuit challenging its climate disclosure rules, the U.S. Securities and Exchange Commission has voluntarily stayed the rules pending the completion of judicial review by the Court of Appeals for the Eighth Circuit. The stay is discussed further in our post here.
- California greenhouse gas emissions and climate risk disclosures. On June 29, California Governor Newsom released a draft budget trailer bill that would push back by two years compliance with the Climate Corporate Data Accountability Act (Senate Bill 253) and the Climate-Related Financial Risk Act (Senate Bill 261). The draft trailer bill contemplates initial disclosures in 2028, rather than 2026 (with a commensurate two year pushback of other reporting and related assurance requirements), among other changes. SB 253 requires annual public disclosure of Scope 1, 2 and 3 greenhouse gas emissions. SB 261 requires biennial disclosure of climate-related financial risks in accordance with the recommended framework and disclosures published by the Task Force on Climate-related Financial Disclosures or an equivalent requirement, as well as the measures adopted to reduce and adapt to the disclosed climate-related financial risks. These Acts are discussed in more detail in our earlier post here.
- German Due Diligence in the Supply Chain Act (LkSG). In its 2025 budget and growth initiatives released earlier this month, the German government indicated it will be reducing the compliance bite of the LkSG, as part of its focus on economic competitiveness and reducing bureaucracy. On January 1, 2025, as part of the phased alignment of the LkSG with the recently adopted EU Corporate Sustainability Due Diligence Directive (discussed in detail in thi post), two-thirds of the approximately 3,000 companies currently covered by the LkSG will no longer be in scope. Companies also will be permitted to report under the EU Corporate Sustainability Reporting Directive, rather than under the stand-alone and arguably more onerous LkSG requirements. This follows on the German government's earlier announcement that subject companies will be given until the beginning of 2025 to submit their first reports under the LkSG. The government has indicated that it does not intend to apply the remaining CSDDD requirements until required (phase in begins on July 26, 2027).
- EU Deforestation Regulation. A few weeks ago, we posted here about growing calls to push back initial compliance with the EU Deforestation Regulation, which is set to take effect at the end of December. Since the time of that post, calls to push back the EUDR have grown even louder.
- EU CSRD and CSDDD. Germany has indicated that it will advocate to the European Commission that the reporting requirements under the CSRD be significantly reduced.There also have been media reports that the center-right European People's Party intends to seek to pause implementation of the CSRD and CSDDD, pending further review to reduce compliance burdens (for example, see this recent Euractiv story). These Directives would be revisited as part of the EPP's goal of enhancing the EU's economic competitiveness. The CSDDD hasn't even taken effect yet. That will not occur until July 25. However, as noted in this recent Ropes & Gray post, the adoption of the CSDDD was a near-run thing, so it's not surprising that there are constituencies already seeking to undue it.
But that's not all . . .
Many proposed CSR-related laws and regulations also are facing headwinds. For example, staying with disclosure, in its July 8 Reg Flex agenda, the SEC again pushed back rulemakings on human capital and board diversity disclosures (see this Ropes & Gray post). There also have been reports that Australia may push back proposed greenhouse gas emissions reporting.
Some commentators view these headwinds as an existential threat to the further adoption of CSR regulation. However, we don't think there is much of a story here, and view this as business-as-usual. Going back decades, only a small percentage of CSR-related laws and regulations ever get adopted. And, when they do get adopted, it is almost never on the original timeframe and there usually are significant changes from what was initially proposed.
What to make of all this?
On a daily basis, companies ask us how they should be managing this regulatory uncertainty. We offer the following six high-level observations and thoughts. The takeaway is that it's not pencils down on CSR disclosure and due diligence, although a thoughtful, measured approach is merited.
- CSR disclosure and due diligence requirements are not going away. Although some requirements may get rescinded or paused, there are many others that will continue in force or move forward. It's not whether there will be CSR disclosure and due diligence requirements, but rather where and on what timeframe.
- However, expect a new economic pragmatism, which is being driven by both macroeconomic factors and political shifts to the right in some countries. CSR disclosure and due diligence legislation that is perceived to be a drag on growth and competitiveness will likely face a high bar.
- But, economic pragmatism only goes so far. Once a rule is on the books, it rarely comes off. Modifications of existing requirements therefore are in most cases likely to be around the margins, rather than a fundamental change in approach. And, economic pragmatism may swing towards keeping regulations harmonized and inter-operable with voluntary framework and standards and requirements in other jurisdictions (more on that in the next bullet).
- Even if a particular CSR disclosure or due diligence requirement does not stand or gain traction, expect the ascendancy of the frameworks and standards underlying these types of regulations to continue. Over time, companies will need to manage to ISSB-, TCFD-, GRI-, UN Guiding Principles- and OECD MNE Guidelines-informed requirements across an increasing number of jurisdictions. Therefore, disclosure and compliance programs built on these instruments will continue to be necessary. They also will be scalable for the future. (Apologies, we also hate the ESG/CSR alphabet soup.)
- In some jurisdictions – in particular in the United States and Western Europe – a regulatory vacuum is likely to be filled by other stakeholders, such as investors, commercial customers and civil society. These constituencies will seek to exert the same transparency and value chain outcomes as legislation, as they already have been doing for many years.
- Regulation aside, companies will (and should) continue to devote time and resources to assessing and addressing many of the topics covered by CSR disclosure and due diligence legislation as part of prudent business practices.
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