New Environmental Reporting Regulations: Data, Impact, and Compliance

The significance of climate change has prompted new regulations that demand greater accountability.

The European Union has already ushered in new regulations, compelling businesses of all sizes to divulge climate impact data and mitigation measures. Similar legislation looms on the horizon in the US, with the SEC considering parallel mandates.

Amid these shifts, an essential concern emerges: accurate data and carbon credit reporting. Reporting on Environmental, Social, and (Corporate) Governance (ESG) issues hinges on reliable information and reporting. As these new regulations cast a broader net, the need for precise data and the interchange, aggregation and disaggregation of environmental data intensifies.

Laconic stands poised with its SADAR^TM platform and Universal Environmental Identifier (LUEI) in providing accurate environmental intelligence that can assist investors in understanding the impacts of climate change on the companies in which they provide investment funding, by aggregating, disaggregating trusted data and verifying the data. By analyzing and cataloging data into a standard format, Laconic serves as a data aggregator for buyers and sellers of carbon credits (i.e. carbon just being one of the many credits that Laconic can mint). More importantly, Laconic provides the audit trail for carbon credits for every hectare under assessment.

Understanding the ‘Why’ Behind Environmental Regulations

The foundation of these regulations rests on a call for heightened transparency. Investors, individual or institutional, seek insight into businesses’ resilience amidst climate-related challenges. The financial ramifications of climate risks, from disruptions to increased costs, are tangible. Disclosing these risks is deemed crucial for informed investment choices and to accurately measure carbon credits.

Very few companies today give a transparent picture of the impact of environmental risks to their businesses. The few that do tend to speak about greenhouse gas emissions only. Additionally, there is no standardized format for these disclosures leading to varying reporting metrics. This in turn makes it difficult for investors (and for the public). What’s more, the carbon market itself is in need of a standardized accounting method that assures the carbon credits behind these disclosures is accurate – not double counted or already accounted for elsewhere.

The Environmental Regulations in Brief

Investors are encouraged to familiarize the proposed SEC regulations and the EU CSRD in full. For the purposes of this article, which aims to highlight the need for accurate environmental intelligence and carbon credit pricing as a result of these regulations, a brief description of the regulations are offered that pertain to the environmental data.

The European Union’s Corporate Sustainability Reporting Directive (CSRD)

Adopted in 2022 as part of the European Green Deal and to roll out between 2024 and 2028, the CSRD extends the scope of sustainability reporting. It compels companies to detail their business strategies’ alignment with sustainability goals, stakeholder interests, and risk mitigation measures. This initiative, a catalyst for sustainable investment, bolsters reliability in sustainability reporting. Specifically, it covers the following:

• A company’s business model and strategy including:
  • Resilience to risks and opportunities related to sustainability matters.
  • Plans, actions and investments to be compatible with a sustainable economy and with the limiting of global warming in line with the Paris Agreement.
  • How the company’s business model takes into account the interest of its stakeholders related to sustainability matters.
  • A description of the company’s policies and incentive schemes related to sustainability.
  • Description of the due diligence process, potential adverse impacts, and any actions to prevent, mitigate, remediate, or bring to an end adverse impacts and the results of any actions.
  • The sustainability risks, the company’s dependencies on sustainability, and how the risks will be mitigated.
• The above, when applicable, also includes a business’ supply chain.

Compared to previous ESG reporting requirements, the CSRD also expands sustainability reporting to a broader range of companies. For example, where before reporting only applied to companies with more than 500 employees, the CSRD applies to any company with 250 employees and/or annual turnover of €40M and/or €20M in total assets. Regardless of size and total assets, all publicly listed companies fall under the requirement. It is estimated that approximately 50,000 companies across the EU will now be required to adhere to detailed EU sustainability reporting standards.

Non-EU companies may also fall under the same CSRD reporting requirements. Any non-EU company that has branches or subsidiaries with an annual turnover of €150M or more within the EU are impacted although enforcement of the requirement may come at a later date.

SEC’s Proposed Regulations

The SEC’s proposed rule, awaiting finalization, mirrors the CSRD’s intent. Companies’ climate disclosures encompass Scopes 1, 2, and 3 greenhouse gas emissions. These scopes apply to direct emissions, purchased energy-related emissions, and supply chain emissions.

The SEC proposal covers publicly listed companies and includes foreign companies with operations in the US. The proposed rule would require SEC filings on:

• Greenhouse gas emissions for the most recently completed fiscal year based on scopes (described above) and the emission intensity in context (for example, carbon intensity per unit of economic value).
• The methodology, significant inputs, and assumptions used to calculate the GHG emission metrics. The proposed provision would require a business to disclose the extent and use of any third-party data when calculating emissions.
• The proposal has a provision for exemption of Scope 3 for smaller reporting companies and delayed reporting on Scope 3 emissions for all companies.

The SEC has yet to publicly move on the proposal and the public comment period has ended. In August 2023, more than 80 members of the US Congress sent a letter to the SEC strongly urging its passage. It is widely believed that some form of the proposal that requires broader climate-related impacts and reporting will pass.

The Challenge: Data, Compliance, and Assurance

Navigating these regulations hinges on accurate data and rigorous audits. Compliance extends beyond reporting software; the quality and pedigree of data in the reports are pivotal. Laconic’s SADAR platform, relied on by governments and institutional investors for environmental intelligence, is ready to meet these demands. Laconic’s LUEI – a standard coding system for environmental data – and the SADAR platform fills a gap in carbon credit data aggregation and accounting that, as a result of these new regulations, is now a critical piece in providing the financial markets the accurate disclosures it requires.

Contact us today to discuss how we can assist in preparing you for your upcoming reporting compliance.