Stern IR News and Events


September 13, 2023

ESG Regulation in the US and EU: Direct and Indirect Impacts on Companies

Blink and you might miss an update—the environmental, social, and governance (ESG) regulatory landscape is rapidly evolving. This year has seen ground-breaking legislation, enhanced guidance and increasing consolidation of regulatory requirements. Biotech and life sciences executives in the EU must grapple with a transition from the Non-Financial Reporting Directive (NFRD) to the Corporate Sustainability Reporting Directive (CSRD), while their US counterparts strive to discern from thousands of comment letters on the SEC’s proposed Climate Disclosure Rule what to expect when final rules are unveiled this fall.

It is important, but challenging, for companies to monitor ESG regulations worldwide to anticipate how changes may impact their operations and those of the companies in their value chain. Due to economic globalization, business legislation in one jurisdiction can carry over to impact the operations of a company in another country indirectly. Against this advancing regulatory backdrop, biotech and life sciences companies should begin preparing now, regardless of geography.

It is easy for companies to get lost in the sea of alphabet soup, public comment letters, and different geographic requirements. In this article we provide a concise overview of ESG regulations in the US and EU, explaining key acronyms, providing necessary context, discussing ESG standards and guidance releases and exploring the different direct and indirect implications for companies.

Country-specific ESG Reporting Mandates

European Union

The CSRD was passed in late 2022 in response to the European Green New Deal, a set of policies aimed at reducing harmful greenhouse gas (GHG) emissions and pollution, incentivizing clean products and technology, and aiding in a just and inclusive transition to a green energy economy[1]. As an expansion of the former NFRD, the CSRD serves to broaden the criteria of covered companies and expand consideration of ESG topic areas, with emphasis on more comprehensive environmental disclosures. By 2026, the CSRD will increase the number of companies required to report from 11,000 under NFRD to more than 50,000 and will similarly increase the number of data points required for reporting[2].

The European Financial Reporting Advisory Group (EFRAG), an independent governing body of the EU, was tasked with developing comprehensive standards to provide companies concrete disclosure guidance for high quality, consistent, comparable, and auditable ESG data. This guidance ultimately became the European Sustainability Reporting Standards (ESRS)[3]. On July 31, 2023, the European Commission, the executive body of the EU, formally adopted the ESRS[4]. This passage of this legislation signals to the markets that legislators are serious about elevating the rigor of non-financial disclosure requirements, despite significant political pushback.

While the CSRD mandates that companies report on a broad range of ESG issues, the ESRS defines exactly what and how companies need to report.

  1. What does the CSRD require of companies?[3]
  • The CSRD expands the scope of ESG metrics in place under the NFRD and significantly builds upon environmental performance metrics. Additionally, the directive mandates an audit of ESG data by an independent auditing firm to instill confidence in the stakeholder community that what is being disclosed is accurately measured and portrayed.
  • The CSRD is informed by the concept of double materiality, which means examining how business operations and strategy will be impacted by ESG issues happening externally and how their own business actions could impact society and the environment at large. This lens requires companies to go beyond financial impact to their own operations alone and consider those directly and indirectly impacted by the company’s day to day actions.

2. What guidance does the ESRS provide?[3]

  • The ESRS covers a wide range of ESG topics from climate change and biodiversity to human rights and business conduct and include robust guidance on the concept of double materiality as the foundation of the standards.
  • The standard includes detailed requirements and guidance on a vast array of qualitative and quantitative disclosures and key performance indicators (KPIs) across the following areas:

3. Who is required to report under the CSRD and on what timeline?[5]

United States

The SEC’s proposed Climate Disclosure Rule has been not only heavily awaited, but also heavily debated since well before its original proposal in March 2022. After significant delays and extended comment periods, the SEC has recently announced that the final vote on the Proposed Rule will take place by the end of October 2023, at the latest[6]. Though the original proposed scope and timeline will likely be scaled back, the exact changes will not be known until the rule is finalized. The following section summarizes the scope and applicability of the proposed rule.

  1. What would the SEC’s proposed Climate Disclosure Rule require of companies?[7]

The proposed rule would require the following disclosures:

2. What guidance does the SEC’s proposed Climate Disclosure Rule provide?

  • Unlike the CSRD, currently no specific standard has been released to provide additional reporting guidance for the Proposed Rule. However, the SEC’s proposed requirements are similar to those under recognized standards and frameworks such as the Greenhouse Gas Protocol and newly released International Sustainability Standards Board (ISSB) Sustainability standards.

3.  Who would be required to report under the SEC’s proposed Climate Disclosure Rule and according to what timeline?

  • The SEC’s proposed rule would apply to all publicly listed US companies, SEC registrants, regardless of industry, market cap, or number of employees. If the rule is approved, mandatory compliance for reporting and assurance will be phased in over a defined timeline, with exceptions on assurance and scope 3 emissions reporting for non-accelerated filers, and smaller reporting companies, respectively.
United States Vs. EU

Apart from the obvious difference that EU regulations are finalized, and SEC’s proposed Climate Disclosure Rule is not yet, key differences exist. CSRD is built around the concept of double materiality (outside-in and inside-out impacts), and its disclosure requirements cover a broad set of ESG topic areas. By contrast, the SEC’s proposed rule covers only climate topic areas and focuses primarily on outside-in impacts on the company and its operations[8]. Both disclosure rules require external assurance, but the level of assurance and timeline vary.

ESG Standards & Guidance Releases

In addition to federal regulations, various non-governmental bodies and organizations have published guidance to assist companies in collecting, reporting, and assuring non-financial ESG data to the level of rigor required for financial disclosures.

ISSB [9]

The International Sustainability Standards Board (ISSB) is an arm of the International Financial Reporting Standards (IFRS) Foundation, which has produced widely used financial accounting standards. The ISSB was formed to develop sustainability-related financial reporting standards with an investor focus. The standards have purposeful and significant overlap with the Sustainability Accounting Standards Board (SASB) industry-specific guidance and Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, the monitoring responsibilities of which will be assumed by the ISSB upon full implementation.

In June 2023, the ISSB released the final version of their Sustainability Standards: The General Standard (IFRS S1) and the Climate Standard (IFRS S2). IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2: Climate-related Disclosures sets out the requirements for disclosing information about an entity’s sustainability and climate-related risks and opportunities, respectively. The standards include disclosures related to the processes for identifying, monitoring, managing, and governing sustainability and climate related risks and opportunities and the entity’s performance in relation to these. The standards also require companies to report their progress towards voluntary targets and applicable regulatory requirements.

Assurance Standard [10]

The need for consolidated assurance standards is pressing given the significance of external assurance requirements within existing and proposed ESG regulations. The International Auditing and Assurance Standards Board (IAASB) recently released a proposed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. The standard provides comprehensive assurance guidance for the full scope of reported sustainability information prepared under multiple leading frameworks. Stakeholder comment period ends December 1st, 2023, and the final standard is expected to be issued before the end of 2024. The release of this standard reflects the need for independent oversight and objective review of sustainability information. Consistent external assurance standards will increase the market’s confidence in ESG disclosures as a basis for decision-making.

COSO [11]

The Committee of Sponsoring Organizations of the Treadway Commission (COSO), which serves as the leading framework for establishing effective financial internal controls, recently released a report specific to ESG controls[12]. The report provides guidance to companies seeking to establish robust and effective internal controls over ESG information.

This interpretive guidance reinforces the idea that elevating sustainability information to the quality and rigor or financial information is crucial to enhancing investor confidence through quality and reliable disclosure of information.

Trickle-Down Reporting Implications

Even though the CSRD is an EU initiative, this directive may be applicable to or indirectly impact US-based companies while we await the SEC’s final decision in variety of ways.

It is now more important than ever to monitor regulatory developments closely and understand not only the applicability to your company but also more broadly to those in your company’s value chain. Value chain pressure from pharma partners, vendors, CROs, and customers, is one channel through which the CSRD may influence US-based companies’ ESG reporting. Either due to the impact reduction tactics of other entities in the value chain or required disclosure of material upstream and downstream climate risk metrics, the pressure for greater transparency by US companies will continue to increase. Phase-in periods sometimes provide companies additional time to build proper systems and communication to support reporting, but companies who do not prepare in advance will still have a difficult time complying. As the responsibility for meeting global sustainability regulations continues to trickle down the value chain, not being responsive now could become a core business risk soon.

Our globalized economy means that regulation anywhere is motivation for action and reason enough not to wait to implement a sound ESG program, no matter your company’s structure status or jurisdiction. Those who invest in ESG without delay will reap benefits sooner, better prepare themselves for inevitable regulatory changes, and increase resilience in their value chain.


Erin Markey, CPA (she/her/hers)












[12] “Achieving Effective Internal Control Over Sustainability Reporting (ICSR): Building Trust and Confidence through COSO Internal Control- Integrated Framework”