Until recently, companies could decide whether to share information about their greenhouse gas (GHG) emissions and how climate change might affect their business models. But that’s changing rapidly. A suite of new laws — most notably in the European Union and United States — will soon make “climate-related disclosures” mandatory across much of the global economy.
While the United States’ long-awaited disclosure rule, issued in March 2024, was less ambitious than originally proposed, it still signaled a critical shift from voluntary practices to mandatory requirements. It cemented for the world’s largest economy that climate risks can be financially “material” — and that when they are, they must be reported like any other risk to a company’s bottom line. Once all pending disclosure rules are in force, we estimate that they will cover nearly 40% of the world’s economy.1
But it’s not just that: Companies have long seen the global patchwork of disclosure frameworks as an impediment to reporting. But these are consolidating as regulators develop a better understanding of how climate change affects business performance. This is making reporting standards clearer and thus easier for firms, dispelling one of the key arguments against climate disclosures.
The bottom line is that climate disclosure has reached a tipping point. Mandates are becoming the norm. And where differences lie between more stringent and ‘weaker’ mandates, current trends point toward the stronger rules pulling ahead.
Major global firms should prepare to start reporting across more than one jurisdiction and meeting more robust requirements. Meanwhile, a greater number of smaller firms will be required to report which have not done so before. For all involved, preparation should begin now.
Why Are Climate-related Disclosures Such a Big Deal?
Climate-related disclosures are a key enabler for corporate climate action. After all, companies cannot reduce their planet-warming greenhouse gas emissions or build resilience to climate change impacts without robust information on where emissions and climate risks occur within their businesses. This transparency can be an important tool for holding companies accountable to setting up and meeting their climate goals.
But climate disclosures aren’t just a political tool. They’re good for companies, too. The transparency provided by disclosure helps companies to operate more efficiently by surfacing potential risks so that management can respond proactively. Risk disclosure also makes investors happy, because the more information they have, the better they are at avoiding bad investment decisions.
For their part, investors recognize that climate change presents real risks to companies. This includes the direct “physical risks” that climate impacts like heatwaves or sea-level rise pose to a company’s physical assets and supply chains. It also includes “transition risks,” which refer to the ways that reliance on fossil fuels could undermine a business as the world shifts away from them. For instance, a company that produces products such as cement or beef using carbon-intensive methods may become undesirable to consumers as preferences shift toward more climate-friendly options. This is a market risk.
Other types of transition risks could include policy and legal risks (if business practices contradict new climate policies or laws), technology risks (if a company does not keep pace with low-carbon technological advancement), and reputational risks (if the public perceives a company’s practices to be harmful to society or the environment). Such risks are considered “material” because they could affect companies’ financial conditions and therefore a reasonable investor’s decision to buy stock — for example, by having a demonstrable impact on share price.
Armed with this information, investors can allocate capital in a way that accounts for climate risks and protects their returns and those of their fiduciaries. In a report surveying 416 institutional investors, 51% said climate risk disclosure was as important as financial reporting, compared with 18% and 4% who felt it was less important or much less important, respectively.
More of this reporting ultimately benefits everyone by helping to manage financial and market stability. And it directs finance toward firms with responsible, low-carbon business practices that are better for people and the planet.
Mandatory Disclosure Requirements Are Ratcheting Up
Over the course of only a few years, disclosure mandates have been passed in jurisdictions on nearly every continent — not only Europe and the United States, but also in Switzerland, Hong Kong, Brazil and New Zealand, among others. Some of these rules are more stringent than others.
In the U.S., new climate disclosure rules from the Securities and Exchange Commission (SEC) were delayed two years before a watered-down version was announced in March 2024. Importantly, these rules dropped a clause requiring companies to disclose their “scope 3” emissions. Scope 3, which includes all emissions associated with a company’s value chain, including investments, accounts for around 75% of companies’ GHG emissions on average. This is particularly relevant for financial institutions: Although they may not produce significant direct emissions (scope 1) or indirect emissions associated with energy use (scope 2), they often invest in fossil fuel companies or firms otherwise exposed to climate risks (scope 3).
The immediate future of the SEC’s rule may depend on the 2024 US Presidential election; the rules are currently on pause due to litigation and it will be up to the Justice Department to defend them or not from these challenges. Partisan tension over environmental, social and governance (ESG) considerations, which are closely related to climate disclosure, also makes national legislation requiring climate disclosures unlikely in the U.S.
However, taking a broader lens, many companies around the world are already going to begin higher-quality reporting than what the SEC rules will require.
First, legislation underway at the U.S. state level will have national and global implications. California’s Corporate Climate Data Act, for example, requires public and private companies to disclose their scope 1, 2 and 3 emissions to the state government. In July 2023, California also passed law the Climate-Related Financial Risk Act. This goes beyond the SEC proposals: Not only does it apply to any firm, foreign or domestic, that does business in California’s nearly $3 billion economy, but the legislation also includes penalties for companies who do not report or inadequately report. Around 10,000 companies will likely be in scope for California’s mandate; by comparison, just 4,900 companies globally follow voluntary reporting guidelines under the Task Force on Climate-related Disclosures (TCFD). Although not yet passed, New York State Bill 7704 contains similar measures.
Meanwhile, the European Union has three directives related to climate and sustainability: the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainable Due Diligence Directive (CSDD). The CSRD is perhaps the most complex and comprehensive climate disclosure mandate globally. It requires companies to assess and report on a wider range of risks than other frameworks, including social- and nature-related risks. Along with EU-based companies, this will have implications for larger firms (with over 500 employees or revenue above €50 million) operating but not headquartered in the EU. It is estimated that around 10,000 non-EU companies will fall under the CSRD mandate, including 3,000 U.S. companies.
As Frameworks Consolidate, Reporting Is Becoming More Standardized
Perhaps the most common objection to climate risk reporting is that it presents an undue burden to companies. The fractured reporting frameworks have been criticized as too confusing, unhelpful in creating comparable data and ultimately used as an excuse for not reporting.
It is true that reporting requires companies to collect and collate complex information. Adding to this concern is the fact that some multinational companies will fall into reporting scope in more than one place — for example, both California and the EU. If these jurisdictions have different reporting requirements, the company might appear to be presented with double the work.
However, a closer look reveals significant overlap in the information required by major mandatory disclosure frameworks. It may not be a cut-and-paste job, but it shouldn’t be double the work, either.
This is because as governments have announced mandated disclosures, legacy voluntary reporting frameworks have consolidated. In 2022, the International Financial Reporting Standards Board (IFRS) announced the launch of the International Sustainability Standards Board (ISSB) disclosure frameworks 1 and 2. These merged several legacy frameworks, including the Global Reporting Initiative and the Sustainability Accounting Standards Board. The Task Force on Climate-related Financial Disclosures, whose framework was used as a baseline for several jurisdictions’ disclosure mandates, has also wound down its oversight of the framework and passed the baton to the ISSB. It declared that the ISSB frameworks mark “the culmination of the work of the TCFD.”
Thanks to this consolidation, most reporting rules now rely on the same underlying ISSB framework as a foundation. The table below shows a sample of proposed or active mandates and their criteria for companies which fall within their reporting requirements.
Comparison of climate risk reporting mandates
| Scope | Reporting framework | Firm type | Threshold | Auditing | Penalties |
|---|---|---|---|---|---|
| EU-CSRD | Aligns with TCFD (ISSB), plus additional requirements | Operations in EU or listed | 500 employees, €50M revenue, €25M balance sheet | Requires third party verification | Determined by member-state |
| California | TCFD (ISSB) or other verifiable framework | Any firms with operations in CA | $500M | Requires third party assurance | $50,000 max |
| NY Bill | TCFD (ISSB) or other verifiable framework | US based, with any business operating in NY | $500M | Required third party verification | $50,000 max |
| Hong Kong | Based on ISSB/IFRS | Companies listed on HK Exchange | N/A | Not required | N/A |
| UK | ISSB/IFRS | UK registered & large companies | Non-UK: 500 employees or >£500M turnover | N/A | £2,500 to £50,000 |
Despite the perception that mandates are overwhelmingly complex, efforts have been made by framework developers and policy makers to ensure overlap in the various regulations. Moreover, U.S. state legislation is not prescriptive in its requirement for a framework; the rules call for the use of the TCFD or another verifiable framework.
On the other hand, the EU’s CSRD claims that no single currently available framework encompasses all of its required disclosures. These include reporting on social and human rights risks in addition to climate risks, for which TCFD guidance has served as a foundation.
Comparison of climate risk reporting frameworks
| Framework | Audience | Emissions | Focus | Materiality | Key points |
|---|---|---|---|---|---|
| ISSB S2 (Voluntary) | Investor | Scopes 1, 2 & 3 | Climate (material physical risks, transition risks) | Single |
Global baseline Consolidates SASB & GRI Connects financial statements |
| EU-CSRD (Mandatory) | Stakeholder |
Scopes 1 & 2 Scope 3, if material |
Environmental & social | Double |
Transition plans Nature, biodiversity, circular economy |
| U.S. SEC Rules (Paused) | Investor | Scopes 1 & 2, if material | Climate | Single | Codifies some voluntary practices |
These regional differences can certainly make reporting more challenging. However, multinational companies already comply with various requirements in different jurisdictions when it comes to things like taxes, registration and accounting standards. So environmental and social disclosures are not unique in this regard.
The Next Frontier for Climate Risk Reporting
While climate reporting frameworks are becoming progressively more unified, one new and important difference is emerging: how firms must assess materiality.
“Materiality” is a central concept for investors and businesses. It separates what matters to a firm’s bottom line from what does not.
Most current disclosure rules, including the SEC’s, California’s and voluntary frameworks like the TCFD, are built around the concept of “single materiality.” This means that the requirement to disclose a certain risk is triggered by that risk having a direct financial impact on the company at or above a given threshold.
For instance, take an insurance company that provides homeowners insurance policies for properties in coastal areas. The risks of climate change causing more frequent, intense storms and rising sea levels have a real impact on the company’s bottom line, as storm surges or sea level rise could cause an insurance company to have to make major payouts to policyholders. This is a material climate risk.
The next frontier is “double materiality.” This is the idea that, in addition to the ways climate change impacts the firm, the firm’s impacts on the climate, the environment, and society can also be material. Decision-making for identifying double materiality would ask:
- Does an environmental or climate impact translate into financial risks?
- Would a ‘reasonable person’ consider this business activity to have an impact on people or the environment?
A European Financial Reporting Advisory Group (EFRAG) working paper uses an example of a company that has cobalt in its products. The suppliers of the cobalt were found to use child labor for mining the mining. Here’s how that company might assess risk from a single and double materiality standpoint:
- Financial (“Single”) Materiality
- The use of child labor in supply chains increases reputational and legal risks for the company, which could impact its profitability.
- Impact (“Double”) Materiality
- Child labor is a negative social impact directly linked to the company’s supply chain.
- Cobalt mining results in high carbon emissions and loud blasting which can impact local communities and the climate.
Reporting frameworks based on double materiality would require the company to disclose all of these social, environmental and climate impacts — not just those risks which affect its own bottom line.
Continuing the pattern of being ahead of the U.S. in disclosures, double materiality is accepted by the EU and integrated into the CSRD mandates. Double materiality has been a tougher sell in the U.S., where fiduciary duty and materiality have been more narrowly constructed. But once thousands of companies begin reporting on it for the EU, it will likely be more easily accepted by all but hardline skeptics.
What Should Companies Be Doing Right Now?
Although most mandatory disclosures will not go into force for a few years, corporates should start preparing to report now. Those that fall into more than one jurisdiction regime should begin by finding interoperability, implementing processes to collect and analyze the necessary data and contracting a third-party verifier.
Because regions like the EU and California have more rigorous reporting requirements and firms incorporated outside their jurisdictions fall into scope, these mandates could become more accepted as more firms have to report. Further, as other jurisdictions develop their own reporting mandates, taking up the ISSB framework or adapting the CSRD, increasing instances of interoperability should appear. Meanwhile, trends point toward more disclosure rather than less. This would include firms reporting on risks related to nature and biodiversity as well as linking climate risk with human rights and social risk.
In short, as WRI Managing Director Janet Ranganathan recently put it, climate disclosure rules are expanding. And companies need to keep up.
1GDP calculations from IMF data. Countries included in the calculations include Brazil, Canada, Hong Kong, European Union states, New Zealand, Singapore, the United Kingdom and the United States.