By Matthew Gardner and Cristina Mendoza
Sustainserv

Massachusetts companies face a rapidly changing landscape of regulations mandating disclosures regarding their environmental, social and governance (ESG) performance. The US Securities and Exchange Commission (SEC), the European Union, and  states such as California are implementing sweeping and mandatory disclosures of data about the material risks climate change may pose to a company’s business operations and financial statements.

In the Fall of 2023, California Governor Gavin Newsom signed a first-in-the-nation law requiring companies to  disclose their carbon emissions. And in March 2024, the US SEC released regulations for greenhouse gas and climate disclosures. Although we’ve seen a series of lawsuits since those regulations were announced, companies are advised to be prepared for future implementation of these and similar disclosure rules.

A Global Movement to Mandate Climate Reporting

The California and SEC greenhouse-gas disclosure rules focus on U.S. companies and, in the case of California’s SB 253 and 261, on firms that also do business in California. However, these rules are part of a global movement towards new regulation that requires in-depth climate reporting from companies and financial markets within their borders – even if they’re not bad climate actors. Steps by local and regional governments in other countries will likely lead the way to align with these global climate goals, so it will be important for companies and investors to be familiar with the new regulations and their impact.

In the European Union, the Corporate Sustainability Reporting Directive (CSRD) is a new set of requirements for companies to assess and disclose various environmental and social risks. And, like the California rules, the CSRD requires these disclosures not just from EU-domiciled firms, but also any firm doing business within the EU above a certain threshold. We are now seeing many Massachusetts-based companies being swept up by these legislative actions, and now confronting these new requirements because of their business activity in Europe or in California.

The CSRD and the underlying ruleset, the European Sustainability Reporting Standards (ESRS), have strict sustainability disclosure requirements for compliance. For example, the ESRS mandates that companies adopt a “double materiality” perspective, meaning companies must report on their impacts on people, on the environment, and on the ways in which social and environmental issues create financial risks and opportunities for the company.

These are new perspectives that companies must consider in their compliance journey. As many firms in Massachusetts participate in global supply chains, it is essential that they come up to speed quickly on the implications of these rules and take the first steps to come into compliance.

Global Companies & Investors Should Take Action Now

As of now, companies across the EU and the United States have started to come into compliance with the ESRS and the corresponding disclosure requirements under the CSRD.

Forward-looking companies and ESG investors can get a head start by following some commonsense measures:

• Assess Materiality — Devote enough resources to a compliance strategy that starts with a rigorous materiality assessment, which needs to be the basis for reporting pertinent information to investors and other stakeholders. Securing the funding can take some time so it is important to get the process started early.
• Gather Good Data – Information on material ESG risks and opportunities must be rigorous and supported by verifiable data so investors (and ultimately auditors) can confidently sort through the glut of information. Companies already providing these disclosures will have a head start, but they will still have to broaden efforts to pinpoint and assess pertinent sustainability issues under the new disclosure rules.
• Make ESG Management Mainstream – Because of the increased regulatory scrutiny, companies should consider ways to increase their internal capabilities to comply with this rapidly shifting landscape. This may include moving ESG management close to mainstream functions within the organization, across the Board of Directors, Investor Relations, Finance, and Risk Management.

Corporate-level climate and related ESG actions will likely be dictated through this regulatory lens in the coming years, so preparation today is key. The more alignment, coordination and coherence that can be achieved will make regulatory schemes more acceptable and compliance with their requirements more efficient.

Dr. Matthew Gardner is Co-Founder and Managing Partner at Sustainserv, and he teaches sustainability at the Harvard University Extension School. Cristina Mendoza is a Director at Sustainserv where she leads projects in ESG reporting, GHG accounting and sustainability strategy development.