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Comparing sustainability regulation across the US, the EU and the world

By Madeleine Saghir

Amid numerous standards for non-financial ESG disclosures, new research highlights the challenges in creating uniform and comprehensive sustainability disclosure standards.

Consultancy ERM has analysed the recent US, European and international climate reporting standard proposals and highlighted differences in their enforceability, jurisdictional scope, substantive scope of coverage, and detailed requirements.

In a report titled ‘The Evolution of Sustainability Disclosure’ and co-authored with Persefoni, a company providing carbon accounting software, ERM looked at the approaches of the US Securities and Exchange Commission, the European Financial Reporting Advisory Group, and the International Sustainability Standards Board, comparing their approaches and potential impacts on the financial services sector.

Each organisation has been attempting to address growing investor demand for information concerning companies’ climate-related financial risks. Their efforts are also geared towards harmonising existing disclosure frameworks. 

But a focus on different stakeholders poses challenges to reaching this goal, says ERM chief executive Tom Reichert, as US policymakers are concerned with investor protection while the EU’s proposals look at companies’ broader responsibilities. “This does not put harmonization out of reach but reflects the complexity of building alignment among organizations with different authority who prioritize different stakeholders,” he says.

The ISSB, on the other hand, is developing resources to be used by regulators across jurisdictions. Alexander Burr, ESG policy lead at Legal & General Investment Management, says the ISSB’s proposal could act as a bridge between jurisdictions and provide one broadly adopted framework. He laments that, until now, companies and investors have had to rely on many, and proliferating, sustainability disclosure standards.

Burr believes that the ‘building block’ approach of the ISSB framework will be flexible enough to be adapted across countries with different approaches but at the same time create harmonisation of reporting standards as national and regional regulators could use those building blocks to develop their specific reporting requirements.

But practice lead at Pierpoint Financial Consulting Roy Zimmerhansl highlights that the regional differences in ESG priorities that have hampered standardisation may remain an obstacle in the future.

He notes that Europe has traditionally been more focused on the ‘E’ of ESG than the US, while the approach towards sustainability has varied across Asia. For example, India and China have chosen not to phase out coal in line with much of the rest of the world. “The focus for rules, regulations, penalties and therefore impact will almost certainly always vary over the coming years,” Zimmerhansl says.

Matthew Ayearst, director of sustainability at consultancy group CGI, says: “A single common approach is a little ‘pie in the sky’ when you consider the current paradigm shift globally to a much more fractured and divisive world, shifting power dynamics, and the formation of new blocks of political ideologies and alliances.” 

The proposals

In the US, the SEC’s climate-related disclosure proposal, unveiled in March, requires nearly all companies filing with the SEC to report on their climate-related risks, including greenhouse gas emissions and Scope 1 and 2 carbon emissions, with some provisions for Scope 3 carbon emissions too. 

Unlike the SEC’s focus on investor protection, Efrag’s proposal also considers how companies affect the environment and society. The report notes it has a wider remit than the SEC’s proposal, as it is contained within the EU’s Corporate Sustainability Reporting Directive, which applies to “a broader range of ESG issues extending beyond the SEC’s strict focus on climate”.

In April 2022, Efrag released guidance on a broad range of sustainability related disclosure requirements to the European Commission as part of its final drafting of the CSRD. 

According to Ayearst, the approach in the US will be softer than in Europe, at least initially, as the US is “overall less mature than the EU on all areas of sustainability and ESG”.

On an international level, the ISSB has released exposure drafts presenting detailed standards for climate-related disclosures. They require companies to provide additional detailed information describing the body or individual responsible for the oversight of climate-related risks and opportunities.

One common thread is that all three proposals reference to the Task Force on Climate-related Financial Disclosures, which released its recommendations in 2017.

Proposal differences

The ERM’s report also notes that Efrag’s disclosure requirements appear to be the most prescriptive, while the SEC has taken a “principles-based” approach leaving “significant discretion to the registrant to determine what information to disclose” in some areas.

In addition, the SEC approach is focused purely on climate, while Efrag’s cuts across all areas of ESG. The ISSB’s proposal includes a range of additional environmental disclosure provisions on top of climate change criteria, the report says.

“Thematically the rules should be similar in the EU and the US but there will definitely be nuance,” says Ayearst. “The spirit of the regulation will be the same and the themes should be the same but how punitive, enforceable, the timelines and the weighting of different areas – [they] will likely be different.”

“Some of the nuance will have jurisdictional and historical legal foundations. Other nuance will result from political will. A consideration of pre-existing regulations will also be required and that is jurisdictional.”

Despite hopes for international harmonisation, the significant variations in the approaches between policymakers are likely to remain a challenge, say experts.

All stakeholders, including investors, companies and consumers, would benefit from consistent and comprehensive sustainability disclosure. And they can also help shape policymakers’ work in this area. As the report says: “Regulators and standard-setters need to know what works and what needs improvement in order to effectively craft these requirements.”


A service from the Financial Times