How Increasing Global Sustainability Reporting Requirements Are Impacting Corporates And Re/insurers – Corporate Governance – Corporate/Commercial Law

As thousands of organizations globally are increasingly required
to comply with mandatory sustainability reporting requirements,
what are the challenges for such organizations and their
insurers?
Over the next 12 months, following years of discussion, debate
and voluntary compliance, mandatory sustainability reporting
requirements will impact tens of thousands of businesses.
The risks of non-compliance with these requirements are relevant
not only for corporates but also their insurers. Those preparing
now – by ensuring their sustainability data is reliable and
by engaging stakeholders across the business via a holistic
approach to reporting processes – will stand in good
stead.
In this insight, we explore some of the latest key developments
in sustainability reporting, highlighting some of the risks and
ongoing uncertainties for all organizations, as well as specific
considerations for insurers.
Key developments in sustainability reporting
September saw the signing of a new law introducing climate
reporting obligations for in-scope entities doing business in
California. The law extends to both private and public companies
with specific revenue thresholds. Given California is the fifth
largest economy in the world by gross domestic product, the impact
of this legislation is significant.
Bill SB 291, as the legislation is known,
enacts several amendments to the Climate Corporate Data
Accountability Act (SB 253) and the Climate-Related Financial Risk
Act (SB 261), known as the Climate Accountability Package. The
disclosure of scopes 1, 2 and 3 greenhouse gas emissions and
submission of biannual climate-related financial risk reports will
now be a legal requirement for certain businesses.
Alongside California, the EU has also adopted mandatory
sustainability reporting requirements. In-scope companies, which
again are determined by factors including employee count, balance
sheet total and net turnover, are already preparing for the Corporate Sustainability Reporting Directive
(CSRD), with some reporting beginning in 2026 against 2025
activities.
Disclosures will initially be subject to limited assurance
(lower level of confidence), moving to reasonable assurance (high
level of confidence) in 2028 once the EU has published its
‘Reasonable Assurance’ standards. Challenges have arisen,
however, as not all EU member states have transposed the CSRD into
their respective national laws. Several member states, including
Germany and the Netherlands, are still at draft or consultation
stage. This has prompted the EU to send letters of formal notice,
which give such members two months to respond and complete the
transposition.
Minor deviations are also arising during the transposition
stage, creating challenges for companies in such jurisdictions.
Even where transposition has occurred, interpretative questions are
still emerging. In Ireland, for example, queries have been raised
over the definition of ‘Applicable Company’ and the
provision of exemptions for certain subsidiaries.
If your organization is in scope for CSRD, being familiar with
the requirements in the relevant member state jurisdiction is key.
While this can be challenging when drafts are still being
negotiated, we recommend organizations should continue to monitor
the relevant legislation and take part in final consultations and
feedback sessions to support their preparations for compliance.
Risks of sustainability reporting non-compliance
The repercussions for non-compliance with the new sustainability
reporting requirements are varied but onerous, demonstrating the
significance of the information organizations are disclosing. Aside
from reputational risk and corporation sanctions, there are other
legal implications and monetary fines that can come into play.
As CSRD amends other member state laws, it does not set specific
fines or penalties for non-compliance. Instead, CSRD requires
member states to provide for penalties within their own laws that
are ‘effective, proportionate and dissuasive.’ This means
each EU member state may have different fines and penalties and
enforcement can vary across jurisdictions.
Likewise, investor scrutiny, auditor liability, reputational
damage and civil or criminal liability may also arise as a result
of non-compliance.
Disclosure requirements in California also reference financial
penalties. However, the potential for further legal action due to
misstatements or omissions in such disclosures is considerable, not
least driven by the growth in greenwashing risk in the US.
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The inclusion of fines as a penalty for non-compliance will
raise separate questions about how far companies will be able to
insure against such fines, given the different requirements at
jurisdiction level about the insurability of fines and
penalties.
How can corporates and insurers respond to sustainability
reporting requirements?
Entities within scope should prepare now for their new reporting
obligations, though understanding, assessing and preparing to
disclose against these and other evolving reporting requirements
may prove challenging. Getting a holistic overview of how the
different jurisdictional requirements interrelate can help, along
with establishing a clear timeline of actions to ensure
compliance.
Where material, we also recommend insurers take steps to
understand the number of their policyholders in scope for these new
disclosures.
Where underwriters in potentially exposed lines of business are
aware which clients are subject to such disclosures, they can
better enable exposure management teams to carry out scenario
assessments and provide a feedback loop from claims teams to report
on the extent of any notifications relating to the new
requirements. This will help insurers by being aware of potential
exposure, while also enabling discussions with policyholders on how
they are preparing for these new areas of risk.
For specialist support understanding the risks which your
policyholders may be subject to, and how to manage such risks and
opportunities, get in touch.
Footnote
1. 100%’ Sustainable Claims Pose Mounting Legal
Risk for Companies
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should be
sought about your specific circumstances.
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