Climate Change LawAdvocate Tanwar

Carbon Disclosure Requirements: The Evolving Legal Landscape for Corporate Climate Accountability

 

Introduction

Climate change law has evolved substantially in recent years, with carbon disclosure requirements emerging as a key regulatory tool for corporate climate accountability. As investors, consumers, and governments increasingly demand transparency about climate-related risks and emissions, a complex legal framework is taking shape across jurisdictions.

The Shifting Regulatory Framework

1.      United States Regulatory Developments

In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules requiring publicly traded companies to disclose climate-related risks and greenhouse gas emissions. These rules would mandate disclosure of:

  • Material climate-related risks and their impacts on strategy and outlook
  • Governance processes for managing climate risks
  • Scope 1 and 2 emissions (direct emissions and those from purchased electricity)
  • Scope 3 emissions (from value chain) for larger companies when material

While implementation has faced legal challenges and delays, the SEC’s initiative signals a significant shift toward mandatory climate disclosure in U.S. financial markets. The proposed rules build upon the SEC’s 2010 guidance on climate disclosure, which merely encouraged consideration of material climate risks under existing disclosure obligations.

2.      European Union’s Comprehensive Approach

The EU has taken a more aggressive stance with its Corporate Sustainability Reporting Directive (CSRD), which expands mandatory sustainability reporting to approximately 50,000 companies operating in the EU. The CSRD requires detailed reporting on:

  • Environmental impacts, including emissions, biodiversity, and circular economy metrics
  • Climate transition plans aligned with Paris Agreement goals
  • Double materiality assessments considering both financial and environmental impacts
  • Third-party assurance of reported information

The European Sustainability Reporting Standards (ESRS), which operationalize the CSRD, include specific requirements for disclosing Scope 1, 2, and 3 emissions alongside transition planning details. Full implementation will be phased in between 2024 and 2028.

3.      Global Convergence and Fragmentation

The International Sustainability Standards Board (ISSB) has developed global baseline standards for sustainability disclosure, with its first two standards focusing on general sustainability reporting and climate-specific disclosures. While these standards create potential for global harmonization, jurisdictional approaches continue to diverge in scope and enforcement mechanisms.

Enforcement Mechanisms and Litigation Risks

1.      Regulatory Enforcement Actions

Regulatory enforcement of climate disclosure requirements remains in early stages but is accelerating. The SEC has established a Climate and ESG Task Force specifically focused on identifying material gaps or misstatements in climate disclosures. Initial enforcement has targeted companies with demonstrably misleading climate claims rather than technical compliance failures.

In Europe, enforcement mechanisms are more developed, with administrative penalties for non-compliance with the CSRD potentially reaching €10 million or 5% of annual turnover. National competent authorities will oversee enforcement, creating potential for inconsistent application across member states.

2.      Private Litigation Exposure

Companies face increasing litigation risk related to climate disclosures, including:

  • Securities fraud claims based on misleading climate statements
  • Consumer protection actions targeting greenwashing
  • Investor claims regarding inadequate risk disclosure
  • Derivative suits alleging fiduciary duty breaches in climate risk management

The landmark case Commonwealth v. ExxonMobil Corp. (Mass. 2021) established potential liability for misleading investors about climate risk, while McVeigh v. Retail Employees Superannuation Trust (Australia, 2020) recognized potential fiduciary duty violations for inadequate climate risk assessment.

Key Legal Compliance Challenges

·         Materiality Determinations

The concept of materiality presents particular challenges in climate disclosure. While financial materiality (impact on enterprise value) has established parameters, “double materiality” frameworks also consider environmental and social impacts. Legal counsel must navigate evolving standards for determining when climate risks require disclosure.

The landmark case Natural Resources Defense Council v. SEC established that materiality assessments must consider both quantitative financial impact and qualitative significance to investors. Climate risks often present precisely this type of qualitative significance even when immediate financial impacts are uncertain.

·         Scope 3 Emissions Measurement

Scope 3 emissions—those occurring in a company’s value chain—present particularly complex measurement and disclosure challenges. Legal teams must determine

  • When Scope 3 emissions are material for disclosure purposes
  • Appropriate methodologies for calculating these emissions
  • The level of detail and uncertainty that must be disclosed
  • Safe harbor provisions that may apply to these disclosures

Current regulation generally acknowledges the inherent uncertainty in Scope 3 measurements while still requiring good-faith efforts at disclosure when material.

·         Forward-Looking Statements and Transition Plans

Climate disclosure increasingly includes forward-looking statements about emissions reduction targets and transition plans. These statements carry heightened legal risk, as they may later be challenged as misleading if not achieved or based on reasonable assumptions.

The EU’s CSRD specifically requires disclosure of climate transition plans, including specific targets and implementation measures. Companies must carefully balance investor demands for ambitious climate commitments against legal risks of overpromising.

Strategic Considerations for Legal Counsel

1.      Cross-Functional Governance

Effective climate disclosure requires breaking down organizational silos. Legal counsel should establish clear governance frameworks that:

  • Define board and management oversight responsibilities
  • Create cross-functional disclosure committees including sustainability, finance, and legal expertise
  • Establish documented processes for identifying and assessing climate risks
  • Implement controls for ensuring accuracy of reported emissions data

2.      Due Diligence Documentation

Given evolving standards and enforcement risk, careful documentation of the disclosure process provides essential legal protection. Companies should:

  • Document materiality assessments with clear rationales
  • Maintain records of methodologies used for emissions calculations
  • Preserve evidence of reasonable basis for forward-looking statements
  • Create audit trails for climate data collection and verification

3.      Disclosure Controls and Procedures

The SEC’s proposed rules would require companies to implement disclosure controls specifically for climate-related information. Even absent final rules, prudent legal practice suggests developing:

  • Specific controls for climate data collection and verification
  • Processes for updating climate disclosures as new information emerges
  • Procedures for reconciling climate information across different reports
  • Validation mechanisms for emissions calculations

Conclusion

Carbon disclosure requirements represent a rapidly evolving area of climate change law with significant implications for corporate governance and legal compliance. As mandatory disclosure frameworks mature across jurisdictions, companies face increasing pressure to provide comprehensive, accurate information about climate-related risks and emissions.

Legal counsel plays a crucial role in navigating this complex landscape—balancing compliance obligations with strategic considerations and litigation risk management. By establishing robust governance structures, implementing appropriate controls, and carefully documenting climate-related decisions, companies can meet evolving disclosure requirements while minimizing legal exposure.

As climate disclosure standards continue to converge globally, forward-thinking legal departments will move beyond minimum compliance toward strategic integration of climate considerations into corporate governance and risk management frameworks.

Contributed By: Hetu (Intern)