CSRD and California Assurance Requirements: Paving the Way for ESG Reporting in the U.S. 

In recent years, Environmental, Social, and Governance (ESG) reporting has gained significant traction globally, but the landscape in the U.S. is not as robust as many other places in the world (we have a lot of catching up to do…). However, two pieces of legislation, the European Union’s Corporate Sustainability Reporting Directive (CSRD) and California’s Climate Corporate Data Accountability Act (SB 253), are emerging as game-changers in the ESG landscape in the United States. These regulations are setting new benchmarks for corporate transparency and accountability, compelling companies to disclose their environmental impact and sustainability efforts. 

The Corporate Sustainability Reporting Directive (CSRD) 

Adopted by the European Union in 2022, the CSRD marks a major step forward in sustainability reporting. While an EU regulation, its influence extends globally, including U.S. companies with significant operations in the EU. 

Key aspects of the CSRD include: 

  • Mandatory reporting on a wide range of sustainability metrics 
  • Disclosures on  business models, strategies, and sustainability targets 
  • Detailed reporting requirements on environmental matters, social affairs, and governance 
  • Third-party limited assurance from qualified CPA firms to validate sustainability data 

The CSRD’s reach is expansive, affecting approximately 50,000 companies in the EU and over 10,000 U.S. companies with EU operations. These businesses must adapt to stringent reporting standards, raising the bar for sustainability practices worldwide.  

California’s Climate Corporate Data Accountability Act (SB 253) 

While the CSRD influences U.S. companies from abroad, California’s SB 253 (part of the California Climate Accountability Package) is driving domestic change. Signed into law in October 2023, SB 253 requires large companies doing business in California to disclose their greenhouse gas emissions and SB 261 requires disclosure of climate risk. In September 2024, the Governor signed SB 219 into law, which consolidated SB 253 and SB 261 into a single law to streamline compliance. 

Key provisions of SB 219 include: 

  • Mandatory reporting of Scope 1, 2, and 3 emissions for companies with annual revenues exceeding $1 billion 
  • Independent third-party verification of emissions data 
  • Public disclosure on centralized a digital platform 

SB 219 is groundbreaking, as it’s the first state law to mandate such comprehensive emissions reporting. Given California’s status as the world’s fifth-largest economy, its influence is expected to have a ripple effect across the nation, setting a precedent for other states and potentially catalyzing federal action.

The Combined Impact on ESG and ESG Reporting in the U.S. 

Together, the CSRD and SB 219 are creating a powerful push for enhanced ESG practices and ESG reporting in the United States. Here’s how: 

  1. Raising the Bar for Transparency: Both regulations demand unprecedented levels of disclosure, forcing companies to be more transparent about their environmental impact and sustainability efforts. 
  2. Standardizing Reporting: These laws are helping to establish more uniform standards for ESG reporting, making it easier for investors and stakeholders to compare companies' sustainability performance. 
  3. Driving Innovation: To meet these new requirements, companies are investing in better data collection and analysis tools, spurring innovation in sustainability technology. 
  4. Influencing Investor Behavior: With more comprehensive and standardized ESG data available, investors are increasingly factoring sustainability into their decision-making processes. 
  5. Encouraging Proactive Measures: The prospect of public disclosure is motivating companies to take more proactive steps to reduce their environmental impact and improve their sustainability practices. 
  6. Setting a Precedent: California's SB 219 could inspire similar legislation in other states, potentially leading to a patchwork of regulations that could eventually spur federal action. 
  7. Global Alignment: The CSRD is pushing U.S. companies to align with global sustainability standards, potentially improving our competitiveness in international markets. 

Looking Ahead 

As these regulations take effect, we can expect to see a significant shift in corporate behavior and reporting practices in the United States. Companies will need to invest in robust ESG strategies and reporting mechanisms to comply with these regulations and meet growing stakeholder expectations. 

The CSRD and SB 219 represent a crucial step forward in the evolution of ESG in the United States. By mandating greater transparency and accountability, these regulations are not just changing how companies report on sustainability – they’re changing how companies think about and integrate sustainability into their core business strategies. As this trend continues, we can expect to see ESG considerations become an increasingly central part of corporate decision-making in the years to come. 

Contact Us

For more information on this topic, please contact a member of Withum’s Sustainability and ESG Outsourcing Services Team.