Despite these changes, the Standards continue to lean heavily on industry-specific disclosure topics issued by the SASB and strongly align with the European Sustainability Reporting Standards (ESRS), Global Reporting Initiative (GRI), the Greenhouse Gas Protocol, and many more (see Figure 1 below). 

Companies, especially public U.S.-based companies, report on many ESG disclosures and follow many different formats or combinations of frameworks. There is no standardization to reporting yet, which makes it difficult for investors and stakeholders to compare the non-financial information disclosed by different companies. Even though ESG reporting has become the standard, some companies publish this information in different places too. For example, some companies release impact reports that may have a larger focus on their social impact and giving; some companies release sustainability reports with a larger emphasis on environmental sustainability; and others release DEI reports which separate out DEI initiatives and human capital information.

There is a growing movement toward more reporting and more transparency, standardization, and consistency in reporting. The Corporate Sustainability Reporting Directive (CSRD) and accompanying European Sustainability Reporting Standards (ESRS) as well as the SEC Climate Disclosure Rule are making this movement law. Companies must comply with EU reporting as laid out in the ESRS and continue to assess developing regulations from the SEC.

Fortunately, much reporting will align with the Taskforce on Climate Related Financial Disclosures (TCFD) framework, likely the same framework to be used by the SEC.

Reporting of Scope 3 emissions, as required by SB 253, will perhaps be the most difficult. Scope 3 emissions refer to indirect emissions originating from business operations by sources that are not directly owned or controlled by an organization, such as supply chain, transportation, product usage, or disposal. While calculations laid out by GHG Protocol are most widely used, mapping out and calculating emissions for large companies with revenues exceeding $1 billion should not be underestimated.

Given that the broad array of potential impacts from non-compliance with the CSRD may be far reaching — ranging from monetary fines to negative reaction of stakeholders — companies should discuss any potential non-compliance with legal counsel. Direct impacts may include a breach of certain contractual arrangements (including debt agreements) due to non-compliance with laws and regulations, and may also impact an entity’s ability to work with local, state, or national governments. In addition, companies should be aware that failure to comply may not only result in a qualified or adverse opinion on the sustainability report but may also impact the audit opinion on the financial statements. Auditing standards include requirements related to “other information” included in a document that includes an audit opinion. A material omission of information from the sustainability report would need to be disclosed in the financial statement audit opinion. In addition, intentional noncompliance with laws and regulations may have broader impacts on the audit of both the entity itself and its parent, if applicable. For example, noncompliance may impact the nature, timing, and extent of audit procedures, the auditor’s ability to rely on management’s representations, and the determination of whether there is a significant deficiency or a material weakness related to the control environment.