SEC Climate Disclosure Rule vs CSRD: What’s the Difference?

The SEC’s final rules for the Enhancement and Standardization of Climate-Related Disclosures and the EU’s Corporate Sustainability Reporting Directive (CSRD), both released in the past two years, are taking on the challenge of creating regulations in an evolving and highly complex ESG reporting environment. 

The SEC’s climate rules and the EU’s CSRD aim to standardize corporate ESG and climate reporting for more reliable, transparent, and comparable data for investors and other stakeholders. The SEC focuses on climate-related risks and scope 1 and 2 emissions, while the CSRD includes broader ESG disclosure topics through double materiality. 

With decades of history in ESG reporting, and several handfuls of overlapping frameworks and guidelines, this space has quickly become burdensome – not only to reporting companies across jurisdictions, but also to stakeholders trying to comprehend these disclosures, compare across industries, and make investment decisions. It’s important to note that the SEC has voluntarily stayed its rules as litigation challenging the rule works its way through the courts, but we do not expect it to greatly impact the content of the rule or the timeline for adoption — organizations should plan to proceed with preparedness to ensure they are not caught off guard when the requirement comes into effect. 

This article will break down the SEC rules and the CSRD to give more clarity around the purpose, goals, and requirements of each regulation, as well as highlight key differences between EU and U.S. reporting approaches. 

Overview of SEC Climate Rules and CSRD

The SEC climate disclosure rules and the Corporate Sustainability Reporting Directive have become sweeping regulations for the corporate sector out of a need for more transparent environmental and social information for investors, as well as the growing need for corporate participation and responsibility in the climate movement. They provide consistent and comparable frameworks for public reporting that promote global efforts to pursue climate goals, such as carbon neutrality and a transition to a low-carbon economy, as well as promoting sustainable finance and incorporating climate risks into financial reporting practices. 

While ESG reporting frameworks have existed for decades, regulations on ESG reporting have solved some of the major issues that were present in a fractured and inconsistent space: selective, voluntary disclosures did not give the full picture, nor were the reports comparable or useful for investors; there was a complex landscape of overlapping disclosure frameworks and reporting guidance; and the information was not credible or reliable without regulatory compliance pressures and auditing practices. 

What Is the SEC Climate Disclosure Rule?

The United States Securities and Exchange Commission (SEC) is a federal agency responsible for enforcing federal securities laws and regulating the securities industry in order to maintain fair and efficient capital markets for investors and companies alike. On March 6, 2024 the SEC released its long-awaited climate disclosure rulings for publicly traded companies in the United States. These climate disclosure rulings build on previous requirements by the SEC by mandating material climate-related risk disclosures, and for some, Scope 1 and 2 emissions reporting. The purpose of this ruling is to standardize public company disclosures regarding GHG emissions, climate risks, and capital invested in the energy transition in order to provide comparable data to investors and other major stakeholders. 

High-level disclosures from the SEC’s new climate legislation include climate risks related to the business and business strategy, action on climate, and carbon emissions. 

• Climate Risks: All material potential climate-related risks on the business (strategy, business model, and outlook), and mitigation strategies/risk management processes to curb the potential effects and consequences of these climate-related risks should be included in the company report, as well as governance and oversight measures to manage and monitor these risks. 
• Action on Climate: Companies with climate-related targets and goals (such as Net Zero, stemming from the 2015 Paris Agreement), must highlight them in their report along with how these goals are likely to affect their business operations, strategy, and financials. Any capital expenditures related to climate goals should also be included under this disclosure requirement – these may include purchasing carbon offsets. 
• Carbon Emissions: After a public commenting period and feedback, the SEC drew back some of its initial emissions reporting requirements. As it stands, large accelerated filers (LAFs) and accelerated filers (AFs) will be required to report on material scope 1 and scope 2 emissions, while small companies (<$100m revenue) are exempt from this disclosure category. Scope 1 emissions refer to the direct emissions from the company’s owned and controlled assets, while scope 2 emissions refer to indirect emissions from purchased sources, like electric, heating, cooling, and steam. Scope 3 emissions — normally making up the largest percentage of a company’s emissions profile — are all other indirect emissions from the value chain. The rollback of scope 3 emissions is due to a concern over cost of acquiring this data, as well as its potential reliability. Another factor to consider in the carbon emissions disclosure category is “materiality.” Materiality normally refers to the fiduciary duty to investors; in this case, it is up to companies to determine what emissions are material to the business, creating ambiguity for reporting companies. 

The SEC’s new rules will be rolled out in a phased approach outlined helpfully in the SEC’s Fact Sheet, beginning with “Large Accelerated Filers” (LAFs) first; they will be required to begin disclosures for their fiscal year beginning in calendar year 2025. Small reporting companies (SRCs), EGCs, and NAFs will be required to begin disclosures for their fiscal year beginning in calendar year 2027. These disclosure requirements will be part of the company’s SEC annual reports, financial statements, and filings.

As of April 4, 2024, the SEC voluntarily stayed the effective date of these climate rulings pending a judicial review of litigation and other challenges to its validity and legality. The stay does not reverse the SEC’s climate rules or change any of the disclosure requirements; it is uncertain how long this judicial exercise will continue. Companies should continue preparing for the SEC’s climate rule disclosures; investor pressures will continue to drive these types of disclosures regardless of litigation outcome. Non-compliance, if and/or when these final rules are maintained can result in fines, sanctions, and even criminal charges by the SEC. 

What Is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) regulation that requires European companies, as well as certain other subsidiaries and non-EU companies, to disclose environmental, social, and governance impacts and actions. The CSRD builds upon the Non-Financial Reporting Directive (NFRD), which was the EU’s original ESG reporting framework. It significantly expands the scope and depth of reporting disclosures, as well as expands the umbrella of qualifying companies subject to this directive. 

The goals of the CSRD are to provide comparability and clarity, as well as more robust information, to investors and other stakeholders to evaluate a company’s sustainability performance and associated climate risks. In the long term, the EU hopes that the CSRD will enhance business resiliency and innovation, and encourage progress on the EU’s climate goals, such as their 2050 climate-neutrality target and other European Green Deal initiatives. 

The scope of the CSRD greatly expands on its predecessor, NFRD, to include a more holistic picture of sustainable business practices, sustainable development, and progress on climate goals. The CSRD is based on the concept of double materiality. Double materiality seeks to identify impact materiality, or the impact on people and planet, as well as financial materiality, or the sustainability matters impacting a company’s financials. This type of materiality assessment is much more complex and involved than the normal reporting process of singular materiality, and will require a large adjustment at the beginning of the CSRD process. Double materiality helps companies determine the scope of their reporting under the CSRD. 

The possible list of CSRD’s sustainability disclosure topics is comprehensive and includes data and transparency on environmental, social, and governance (ESG) topics such as:

Environmental: 

• Climate change mitigation and adaptation: This includes strategies and action plans to reduce GHG emissions, managing and mitigating climate risks, targets and goals for emissions reductions, performance measures, description of the impact of climate change on the company’s operations and financials, and energy transition risks and plans.
• Environmental protection: This broad topic includes the efficient use of resources, waste management, circularity, water use and conservation, pollution reduction, biodiversity improvements, ecosystem restoration, and land use and deforestation impacts. Companies will need to outline their specific initiatives, policies, due diligence, tracking, and enforcement. 

Social:

• Fair labor and treatment of internal stakeholders: This topic includes issues related to equal opportunities for employment, working conditions, health and safety, training and development, employee benefits, company culture, and diversity. Notably, the CSRD requires a detailed description of the board’s diversity in terms of gender, age, and race/nationality. 
• Social issues along the value chain: This topic addresses human rights throughout the value chain and internal policies, human rights due diligence and management, engagement with local communities and stakeholders, customer health and safety, responsible marketing, product labeling, supplier selection, and managing supply chain risks. 

Governance: 

• Business ethics: This topic covers anti-bribery and anti-corruption policies and procedures, business and employee code of conduct, whistleblower protections, policies promoting corporate transparency, ESG reporting and communications, and data privacy and security. 
• Corporate governance: This covers the broad topics of board structure and role, board diversity and skills, executive compensation, and risk management (including the identification and management of ESG risks). 
• Stakeholder engagement: This topic covers the processes for addressing stakeholder concerns and feedback, as well as general engagement and identification of key stakeholders. 

Along with these ESG disclosure categories, CSRD-covered companies will need to align with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, which enhances comparability and clarity of sustainability and climate reporting. This alignment of the CSRD, SFDR, and the EU Taxonomy creates an integrated reporting framework that alleviates the reporting burden by streamlining regulatory requirements for reporting companies, and better contributing to the EU’s overall climate and sustainability goals. 

The CSRD more than triples the number of companies covered by its previous ESG regulation, the NFRD. Companies that are now subject to this kind of reporting under the CSRD include:

• Large EU companies which meet at least 2 of the following criteria:
  • More than 250 employees.
  • More than €40 million in net revenue.
  • More than €20 million in total assets.
• All companies listed on EU-regulated markets, with the exception of micro-enterprises (companies with less than 10 employees or revenue below €700,000).
• Non-EU companies with substantial business in the EU, specifically generating a net revenue of more than €150 million in the EU and having at least one subsidiary in the EU exceeding certain size requirements.

This EU–based climate regulation is set to be phased in, starting early 2025, and ending in 2029. Businesses that were already subject to the NFRD will have to report their 2024 fiscal year data by January 1, 2025. The last phase of reporting includes non-EU companies with subsidiaries in the EU, with a net revenue of €150M. EU member states adopting the CSRD will be required to have an investigative compliance entity to impose penalties and sanctions, which are judged based on the gravity and duration of CSRD compliance breaches. 

What Are the Differences Between the SEC Climate Disclosure Rule vs the CSRD?

One of the key differences between the SEC Climate Disclosure rules and the Corporate Sustainability Reporting Directive is the language that the U.S. and EU governing bodies used to describe these regulations, specifically “climate” and “sustainability”. While these terms are related and often used interchangeably, they have distinctive differences which show up in the regulations themselves. 

“Climate” refers to long-term weather patterns rather than short-term weather events, and in the context of ESG, normally focuses on climate change and environment-specific topics such as greenhouse gas emissions, climate change risks, and mitigation strategies. “Sustainability” has a much broader scope; it refers to the longevity of complete and holistic systems and incorporates all aspects of environmental, social, and economic factors.

Similarly, the CSRD takes on a much broader scope of reporting disclosure topics, covering social responsibility, a circular economy, and environmental topics, while the SEC’s climate regulations focus on climate-change-related risks and carbon emissions. 

Key Differences: 

• Coverage: The EU CSRD has a very low threshold for covered companies, which has expanded the reporting directive to cover most EU companies, companies listed on EU-regulated markets, and even some non-EU companies with substantial activity in Europe. The SEC Climate Regulations cover publicly traded companies in the US, not private companies. A key similarity within this coverage topic is that there are graduated requirements for disclosures as the size of companies increases.
• Scope of Reporting: The key difference in the scope of reporting, beyond generalizations made previously, is the requirement under CSRD to report on Scope 1, 2, and 3 emissions, while the SEC rules only require Scope 1 and 2 if companies deem them material. This reflects a more comprehensive approach to reporting by the CSRD and emphasizes a full value chain approach to managing sustainability impacts. 
• Materiality: The CSRD takes a double materiality approach, meaning it takes into account impact and financial materiality to determine the full scope of reporting, whereas the SEC rules focus primarily on financial materiality. This difference shows the targeted audience for each regulation; CSRD involves diverse stakeholders such as investors, regulators, consumers, and analysts, while SEC rules serve mainly investors. 
• Alignment With other Frameworks: The CSRD aligns with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, while the SEC rules align with the Task Force on Climate-Related Disclosures (TCFD) framework. The SFDR and EU Taxonomy focus on EU-specific environmental and social goals, while the TCFD prioritizes international standardization beyond U.S. boundaries. With such a fractured reporting system prior to these regulations, it is unsurprising that this global misalignment still shows up. 

Future Trends and Anticipated Developments of SEC Climate Rules and CSRD

The evolution of ESG reporting requirements and regulations does not stop here; there will inevitably be major changes to how public companies are required to report sustainability and climate change-related initiatives, especially as the global economy begins to integrate climate goals and efforts. 

• Anticipated changes and updates to SEC and CSRD regulations: As of April 4, 2024, the SEC stayed its climate regulations due to litigation and petitions challenging it. While this is not the sole determining factor for where the SEC climate rules end up, it is an important factor to consider for future ESG-related regulations. There will be resistance to change and tighter compliance measures. Despite this, both the U.S. and EU are predicted to continue strengthening their reporting requirements and expanding the scope of disclosure topics. There will also likely be more global alignment as these regulations evolve and coexist. 
• Global trends in sustainability reporting: There will likely be more global standardization among ESG reporting regulations such as ISSB, which will address the complex environment for multinational corporations navigating the world of differing compliance obligations. There will also likely be more emphasis on double materiality, including both financial and non-financial information of equal importance. These material impacts look like a balanced approach to financial disclosures, environmental, social, economic, and governance topics. 
• Role of digital tools and platforms in compliance: With more non-compliance risks with growing federal regulations, companies will likely invest in digital ESG platforms and software systems focused on collecting and organizing data metrics, consolidating compliance measures, providing auditable records through blockchain technology, and utilizing AI to enhance data analytics. 
• Legal challenges for reporting companies: This is a very new regulatory environment, and the legal repercussions are still not fully clear for reporting companies. Navigating compliance across regulation boundaries, as well as calculating litigation risk, will be a challenging process. For regulatory bodies, establishing legal precedent for non-compliance consequences will be at the forefront of this anticipated development in ESG reporting regulations. 

Elevate Your ESG Program

The role of digital tools and software platforms in the future of compliance and reporting cannot be understated. Data collection, analysis, verification, and organization can be a drain on resources – time, labor, and capital. The right technology can help ease these challenges, and help reduce the risk of litigation. 

AuditBoard’s ESG management solution centralizes your ESG management system and reporting processes by streamlining data collection, enabling internal audit mechanisms, enhancing framework alignment, and helping to mitigate ESG risks. AuditBoard’s comprehensive platform allows your team to comply with overlapping frameworks and regulations and accelerate progress toward your sustainability goals. Schedule a demo today to position your organization for success amid these evolving global regulations.

Frequently Asked Questions About SEC vs CSRD

What is the SEC?

The U.S. Securities and Exchange Commission (SEC) is a federal agency responsible for enforcing federal securities laws and regulating the securities industry in order to maintain fair and efficient capital markets for investors and companies alike.

What is the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) regulation that requires EU companies, as well as other subsidiaries and non-EU companies, to disclose environmental, social, and governance impacts and initiatives. The CSRD is built off of the Non-Financial Reporting Directive (NFRD), which was the EU’s original ESG reporting framework. 

What are the differences between SEC vs CSRD?

The Corporate Sustainability Reporting Directive (CSRD) takes on a much broader scope of reporting disclosure topics, covering social responsibility, a circular economy, and environmental topics, while SEC’s climate regulations focus on climate change-related risks and carbon emissions. Other key differences include coverage, scope, materiality, and alignment with other frameworks.