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How Your Organization’s Environmental Impact Affects SEC Compliance

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If your business falls under the scope of the SEC, it’s time to start thinking about your environmental impact on the planet. Environmental concerns are no longer just for eco-activists; there is new legislation that will require certain organizations to be accountable for how their business operations impact the environment.

This new legislation is called the Corporate Sustainability Reporting Directive (CSRD) and requires about 50,000 companies to report on sustainability. The main purpose is to create transparency for stakeholders and investors so they can better assess the internal and external risks associated with sustainability issues.

These new climate disclosure requirements are just one of many new trends that are changing the way businesses manage their sustainability reporting processes. The accounting world is constantly changing and it’s important to stay up to date. That’s why Workiva has conveniently compiled a summary of 2023 accounting and finance trends, including the SEC climate disclosure proposal.

Does your business need to comply with the CSRD?

If you run a large business that operates in the European Union, you’re probably required to document your company’s environmental impact under the CSRD. Although the majority of businesses that need to comply are located in the EU, this regulation applies to some additional companies. 

For example, you must comply with the CSRD mandate if your business has EU-based subsidiaries or securities on EU-regulated markets if the turnover is at least €150m.

What are the CSRD requirements?

There are two main purposes for the CSRD legislation: to protect investors and the environment. The end goal is to redirect investment money toward sustainable companies, which is why compliant sustainability reporting is vital for businesses that fall under the CSRD mandate. Under the CSRD, companies must regularly disclose information related to how their business operations impact the environment and society along with the potential risks climate change poses to their organization.

The hope is that by requiring organizations to conduct sustainability reporting, businesses will be encouraged to develop environmentally-responsible approaches to business.

It should be noted that the CSRD is an extension of, and replacement for the NFRD regulations that had similar mandates, but not as extensive. Under the NFRD, only public interest entities were required to submit reports and many companies omitted data stakeholders would find important.

This new legislation also applies to a larger number of companies, including non-public interest entities. For comparison, the NFRD applied to about 11,600 organizations, while the CSRD mandate applies to approximately 49,000.

What kind of data must be disclosed for the CSRD taxonomy?

To get more specific, organizations will need to create systems and strategies for collecting and documenting data related to their environmental impact, and some of those specifics will vary between businesses. However, some things will be common. For instance, most companies will need to document their policies and procedures related to sustainability, their environmental risks, compliance with all applicable environmental laws, and the costs incurred to remain compliant with the CSRD mandate.

Organizations will also need to document and disclose what specific sustainability risks their business poses to the environment along with how they are mitigating the negative impact on the environment.

Companies are still required to report policy, outcomes of policy, risks, and KPIs on the five dimensions from the NFRD:

  • Environmental protection
  • Social responsibility/employee treatment
  • Human rights
  • Anti-corruption and bribery
  • Diversity on company boards

However, the CSRD adds the following sustainability reporting requirements:

  • Sustainability risk to and from the environment
  • Impact on society
  • Process to select material topics for stakeholders
  • Targets and progress on those targets
  • Information on intangibles like social, human, and intellectual capital
  • SFDR-compliant and EU Taxonomy compliant reporting
  • And more

Another key part of the CSRD regulation is that all of this data must be made available in digital form.

What happens if a business doesn’t comply with the CSRD taxonomy?

Organizations that don’t comply with the CSRD can face serious consequences, including:

  • Fines and criminal penalties
  • Injunctions
  • Having securities delisted or suspended
  • Loss of investors
  • Reputational damage

Next to the financial consequences, one of the biggest risks of noncompliance is earning a bad reputation. People don’t trust businesses that try to hide their environmental impact. When a disclosure is legally required, it looks especially bad when a company won’t release their data and sustainability records.  

You need an environmental compliance program

If your business is affected by the CSRD, you need an environmental compliance program with policies and procedures designed to keep your company compliant with environmental data reporting responsibilities. The road to sustainability compliance can be confusing and tedious; don’t wait until the last minute. The best way to handle the CSRD rollout is to have a system in place and start getting compliant long before the required deadline.