Introduction

This report compares key sustainability disclosure frameworks: the European Sustainability Reporting Standards (ESRS), International Financial Reporting Standards (IFRS S1/S2), the U.S. Securities and Exchange Commission (SEC) Climate Rule, and California’s Senate Bills 253/261. As sustainability regulations evolve, businesses must navigate multiple frameworks, presenting operational and financial challenges. The report stresses the importance of interoperability between frameworks to reduce reporting burdens and costs, while improving accuracy.

Overview of regulations and standards

The ESRS, adopted under the Corporate Sustainability Reporting Directive (CSRD), applies to EU-based companies and large non-EU companies operating in Europe. It requires disclosures across 12 standards, covering environmental, social, and governance (ESG) factors. IFRS S1 and S2, effective from 2024, apply internationally, supporting climate-related and general sustainability disclosures. The SEC’s Climate Rule, finalised in 2024, focuses on U.S. public companies, requiring disclosure of climate-related financial risks, although it excludes Scope 3 emissions. California’s SB 253 mandates disclosure of Scope 1, 2, and 3 greenhouse gas (GHG) emissions for companies operating in the state, while SB 261 requires financial risk reporting related to climate risks, aligned with the Task Force on Climate-Related Financial Disclosures (TCFD).

Comparison of key metrics

Key differences between these frameworks lie in their scope, materiality assessments, and enforcement. The ESRS uses double materiality, meaning companies must disclose both the impact of their activities on sustainability and the financial risks they face due to sustainability factors. IFRS S1 and S2 follow a financial materiality approach, focusing on the impact of sustainability on company finances. The SEC rule requires disclosure of climate risks, including physical and transition risks, but only mandates Scope 1 and 2 GHG emissions. In contrast, California’s SB 253 goes further by requiring Scope 3 emissions, which impact businesses across the supply chain. Non-compliance penalties vary across these frameworks, from administrative fines in California to EU member state-imposed penalties under the CSRD.

Overview of climate-related disclosures

All frameworks stress the importance of climate-related disclosures. For example, the ESRS and IFRS S2 require the disclosure of climate risks, GHG emissions, and governance. California’s SB 253 sets a stricter requirement for reporting Scope 3 emissions by 2027. The report highlights that aligning disclosures with the TCFD recommendations can reduce complexity, as most frameworks incorporate these standards. Scenario analysis is encouraged by both ESRS and California’s SB 261, though the SEC only requires it for companies identifying material risks.

Conclusion

As sustainability regulations proliferate, companies face increasing pressure to comply with multiple frameworks. The report suggests conducting a gap analysis to identify compliance requirements, developing a transition plan, and establishing robust governance structures. Companies should invest in data collection systems capable of handling complex sustainability data, and engage with external stakeholders to improve transparency. By adopting these practices, companies can turn regulatory compliance into a strategic advantage, enhancing both sustainability performance and business value.